What CVS’s major store closures mean for retail
AAt first glance, it would seem that CVS (NYSE: CVS) have a pretty good year. The drugstore chain’s share price is up about 41% from a year ago, and recently it posted better-than-expected earnings according to its quarterly earnings report.
While the COVID-19 pandemic may have hit retailers across the board, CVS has emerged as a critical stop for testing as well as vaccines. This has undoubtedly generated a lot of traffic in CVS stores this year and helped the pharmacy giant – and its shareholders – enjoy a strong third quarter.
But despite its success, CVS plans to close many of its stores. And that could be very bad news for real estate investors.
Image source: Getty Images.
Reduce your footprint
Over the next three years, CVS plans to close 900 stores, or about 10% of its total footprint. And given that CVS has made a name for itself as a vaccination center, this is somewhat surprising.
On the other hand, in many markets, CVS stores have the potential to compete with each other. So part of the company’s recent strategy is to close locations to avoid too much overlap.
But there’s another reason the company is looking to close stores. Some CVS pharmacies are in such bad shape that closing them may seem like a simpler and more cost-effective alternative to renovating them.
Should Real Estate Investors Be Worried?
CVS shareholders should breathe easy after the company’s latest earnings report. But real estate investors may be less than thrilled with the idea of CVS closings.
CVS typically serves as an anchor point for shopping malls, attracting consumers and enticing other tenants to sign leases to benefit from proximity to a well-known brand. If too many CVS stores close, business owners could end up with a string of vacancies to fill. And considering how many malls are still grappling with vacancies in the wake of the pandemic, that’s not a good thing.
The silver lining, however, is that while CVS may be closing some less desirable and underperforming locations, it recently launched its first virtual primary care service. This could attract more people to its remaining stores as patients track the care they receive online.
CVS is also planning to remodel some of its existing stores to include more healthcare service offerings. And if he is very successful at attracting people, he might look to expand his footprint once he identifies which services seem to be gaining the most traction.
Finally, like it or not, COVID-19 booster shots could become an annual event, similar to how flu shots are given every year. And that, too, is likely to help CVS maintain a constant flow of foot traffic, helping to ensure that its remaining locations remain relevant. In fact, the shopping center vacancy crisis could end up resolving itself somewhat if CVS sees enough volume to justify expanding some of its existing stores and taking back space that other tenants seem. not want.
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Maurie Backman does not have a position in any of the stocks mentioned. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.
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