CVS Health Corporation (CVS - Analyst Report) reported first-quarter 2015 adjusted earnings per share (EPS) of $1.14, up a solid 11.8% year over year. The bottom line also outshone the Zacks Consensus Estimate by 5.6% and exceeded the company-provided guidance range of $1.06 to $1.09 per share.

The adjustments exclude intangible asset amortization related to acquisition activities in the reported quarter and the same period a year ago. Without the one-time adjustment, reported EPS in the first quarter increased 12.6% to $1.07.

Quarter Under Review

Net revenue in the first quarter improved a robust 11.1% year over year to $36.33 billion, and steered ahead of the Zacks Consensus Estimate of $35.92 billion. This year-over-year improvement came primarily on the back of balanced growth in both Pharmacy Services and Retail Pharmacy segments.

The Pharmacy Services segment’s revenues increased 18.2% to $23.9 billion in the quarter. The segment gained from growth in specialty pharmacy business and increased volume in pharmacy network claims.

Pharmacy network claims processed during the quarter were up 11% to 230.8 million, backed by net new business and growth in Managed Medicaid and public exchanges. Moreover, growth in specialty claim volume and increased claims associated with the continued adoption of Maintenance Choice offerings, brought the Mail Choice claims processed to 20.3 million, up 2.7%.

Revenues from CVS’ Retail Pharmacy improved 2.9% year over year to $17 billion. Same-store sales increased 1.2%, while front-end same-store sales declined 6.1% year over year. Front-end same-store sales decline was attributed to softer customer traffic, partially offset by an increase in basket size. According to the company, excluding tobacco and the estimated associated basket sales from the year-ago period, front-store same-store sales would have been approximately 800 basis points (bps) higher.

Pharmacy same-store sales increased 4.2% in the reported quarter. Despite generic introductions and implementation of Specialty Connect affecting sales by 280 bps and 190 bps respectively, CVS posted pharmacy same-store sales growth. Moreover, Pharmacy same-store prescription volumes rose 5.1% on a 30-day equivalent basis.

The generic dispensing rate (the proportion of all generic prescriptions to total number of prescriptions dispensed) soared 150 bps to reach 83.5% in the Pharmacy Services segment and 84.4% in the Retail Pharmacy segment.

Although gross profit increased 3.7% to $6.16 billion, gross margin contracted 121 bps to 16.9%. Operating profit for the Pharmacy Services increased 14.7% while the same for the Retail Pharmacy segment declined 1.3% to $1.72 billion. Total operating margin during the quarter contracted 32 bps to reach 5.9% due to a 2.9% increase in operating cost.

CVS exited the first quarter with cash and cash equivalents and short-term investments of $1.63 billion, down from $2.51 billion at the end of 2014. Net cash provided by operating activities for the quarter was down 8.8% to $1.98 billion.

During the first quarter, CVS opened 38 retail drugstores and closed 10 existing ones. Further, the company relocated 12 retail drugstores.

As of Mar 31, 2015, CVS operated 8,006 locations, which include 7,850 retail drugstores, 17 onsite pharmacies, 24 retail specialty pharmacy stores, 11 specialty mail order pharmacies, 4 mail service dispensing pharmacies, 86 branches for infusion and enteral services and 6 centers of excellence for infusion and enteral services in 47 states, as well as the District of Columbia, Puerto Rico and Brazil.

Guidance

On exiting the first quarter of 2015, CVS raised the lower end of its earlier-provided guidance for full year 2015. The company currently expects the year’s adjusted EPS in the range of $5.08−$5.19 compared to the earlier band of $5.05−$5.19. The current Zacks Consensus Estimate of $5.15 remains above the midpoint of the guidance range. Meanwhile, free cash flow guidance is still expected to remain in the range of $5.9−$6.2 billion while cash flow from operations is projected within $7.6−$7.9 billion.

For the second quarter of 2015, the company expects to report adjusted EPS in the range of $1.17−$1.20. The current Zacks Consensus Estimate of $1.25 exceeds the range.

Our Take

CVS Health posted yet another solid quarter with both earnings and revenues exceeding the respective Zacks Consensus Estimate by decent margins. The Pharmacy Services segment benefited from growth in specialty pharmacy growth in the Specialty Pharmacy business while the Retail Pharmacy segment gained from increased same store sales.

The company’s exit from the tobacco business positively impacted Retail Pharmacy business sales during the quarter. Moreover, the company is already poised to witness a strong 2016 PBM selling season.

Currently, the stock carries a Zacks Rank #2 (Buy). Some of the top-ranked stocks in the broader Medical sector are Hospira Inc. (HSP - Analyst Report), LeMaitre Vascular, Inc. (LMAT - Snapshot Report) and SurModics, Inc. (SRDX - Analyst Report), all carrying a Zacks Rank #1 (Strong Buy).