Target selling pharmacy, clinic businesses to CVS Health

Updated: 4:55 p.m. | Posted: 6:45 a.m.

Target is selling its in-store pharmacies and clinics to the drugstore chain CVS in a $1.9 billion deal aimed at helping CVS expand its customer base and draw more shoppers to Target stores.

If regulators approve the deal, CVS signs will go up at 1,660 pharmacy departments inside Target stores. Target's 80 clinic locations will be renamed CVS MinuteClinics.

In a conference call with analysts, Target CEO Brian Cornell said shifting control of the retailer's pharmacy operation to the nation's number two drugstore chain will allow Target to focus on the core parts of its business.

But Cornell admitted that Target did not excel in the pharmacy business. CVS had $139 billion in revenue last year, nearly double Target's sales.

"They bring scale; they bring cost efficiency," Cornell said. "They bring expertise that we just could not bring to a space where we were operating as a subscale player."

Target employs more than 14,000 people in its pharmacies and clinics. In a separate conference call, CVS president and CEO Larry Merlo said his company plans to bring them on board.

Selling the pharmacies will result in a $4 billion hit to Target's revenue. But Cornell said relinquishing control of the relatively small-scale operation will improve profit margins as it is expensive to operate.

The move is the latest in a series of bold steps Cornell has taken to terminate underperforming operations. However, it extricates Target from part of the "wellness" product category that is one of his top priorities.

But Cornell said getting out of the pharmacy business lets the company focus efforts on delivering products and experiences that are complementary to health care services.

Retail consultant Carol Spieckerman said the move is brilliant. She said pharmacies are essential traffic drivers for mass-market stores like Target.

"Increasingly, one part of that one-stop shop has to be services," Spieckerman said. "It can't just be cool products and fashion and home goods. As hard as it is to be in the pharmacy business, it's really hard not to be in it."

The pharmacy business is tough, with thin profit margins and many regulations that vary by location, said Brian Kilcourse, a retail consultant for Retail Systems Research.

As a larger company that is focused on pharmacy, CVS has large enough volume to be profitable, said Kilcourse, who spent a decade as chief information officer at Long's Drugs — a West Coast chain that CVS bought in 2008.

He said another key advantage for CVS is that, besides being a drug store chain, it also is the nation's No. 2 pharmacy benefit manager. That allows CVS to handle prescriptions and negotiate drug prices for many employer health plans.

Kilcourse said that built-in customer base is enormous — and a major opportunity for Target to attract new shoppers.

"For example, CVS can take the employees of IBM, the employees of 3M and the employees from all these other big companies and they can say, 'Now you can get your prescriptions filled at your local Target store,'" Kilcourse said.

Cornell said CVS will continue Target's offering of $4 and $10 generic drugs, but customers will have to pay cash. It is not clear whether CVS will offer as many generic medications at those low prices as Target does.

Morningstar retail analyst Ken Perkins said it's in the interest of both chains to make the sale as smooth as possible and avoid massive layoffs.

"I think for the most part there'll be opportunities there," Perkins said. "Disrupting the entire business in a transition like this doesn't make sense and would cause a lot of hiccups."

Officials for Target and CVS say they don't expect much opposition from the Federal Trade Commission. They hope to close the deal by the end of the year.

Cornell said Target will use some of the sale's proceeds to buy back shares of stock.

Investors appear to like the deal. On a down day for Wall Street, Target closed up 1.25 percent at 80.45 a share.