Target sells pharmacies and clinics to CVS Health for $1.9 billion

Target Corp. aims to make its business healthier by selling its pharmacies and clinics to CVS Health Corp.

The two companies, which often compete against one another, announced a $1.9 billion deal Monday morning in which CVS would take over Target's 1,660 pharmacies and 80 in-store clinics. The transaction is contingent on regulatory approval, and its closing date is still uncertain.

The move is one of the latest ways that the Minneapolis-based retailer, under the leadership of chief executive Brian Cornell, has zeroed in on its core business of selling cheap-chic apparel and goods while shedding less profitable operations.

It also will help the company meet a financial performance goal it is working toward, chiefly through a reduction in its outstanding shares. Target expects the after-tax proceeds from the transaction to be about $1.2 billion, which it will partly use for share repurchases.

By having CVS run the pharmacies and clinics, Target still benefits from one of the main reasons it offers those services in the first place: to drive traffic and sales to other parts of the store while customers pick up a prescription or get a flu shot.

Cornell said he hopes that teaming up with CVS will bring in even more customers to Target stores by offering better services.

"They bring scale, they bring cost efficiency, they bring expertise that we just could not bring to a space where we were operating as a subscale player," Cornell told analysts in a conference call.

While Target's pharmacy business currently brings in about $4.2 billion, or about 6 percent of its $73 billion in annual revenue, executives acknowledged that it has not been profitable in recent years.

At the same time, the deal aligns with one of Target's strategic priorities to elevate the category of wellness, which includes everything from having cleaner food labels to selling the latest in wearable fitness technology. Cornell said the transaction will help free up resources and manpower so Target can focus on other strategic investments, such as overhauling its grocery department.

"This allows Target to focus on what they're good at," said Amy Koo, a retail analyst with Kantar Retail.

In addition, CVS will make rent payments to Target of between $20 million and $25 million.

CVS said it would offer comparable positions to the 14,000 employees who currently work in Target's pharmacies and clinics. But the deal likely will lead to some layoffs at Target's headquarters, where more than 2,000 jobs already have been shed this year.

A Target spokeswoman noted that much of the health care work is shared across many areas, and so Target will "evaluate the business impact and the support needed moving forward at headquarters."

Larry Merlo, the president and CEO of CVS Health, told investors Monday that the deal will allow his company to expand to new markets such as Seattle, Denver and Portland, Ore., as well as to enhance its presence in the Twin Cities, St. Louis and Milwaukee. And it can do so at a fraction of the cost of building the equivalent number of CVS stores.

He noted that the health care industry is rapidly changing, especially as more people have become insured through exchanges and the expansion of Medicaid and are seeking out health care services in stores.

"We are seeing a rise of health care consumerism, what we have been calling this retailization of health care," he said.

The move will also strengthen CVS' position in the pharmacy and drugstore world, where it is already the market leader. According to the research firm IBISWorld, CVS, which operates 7,800 drugstores, already has a 54 percent market share in the industry, compared with 31 percent for Walgreens.

According to a filing with the U.S. Securities and Exchange Commission, CVS will have the exclusive right to operate pharmacies and clinics in Target stores, and CVS will be precluded from operating pharmacies or clinics within certain unnamed Target competitors.

While it's not unusual for retailers to outsource their in-store clinics, it is rare for retailers to do so for their in-store pharmacies, said Tom Charland, CEO of Shoreview-based Merchant Medicine, a retail clinic research and consulting firm. Wal-Mart and Cub Foods are among those who run their own pharmacies.

"This is a big deal," he said of the Target and CVS deal. "This is very unusual on that front."

In recent years, he added, Target has seemed to be somewhat ambivalent about how committed it was to clinics, as evidenced by how slowly it was rolling out new locations. As part of the deal, CVS will open 20 new clinics inside Target stores over the next three years.

The sale of the pharmacies comes as Target is re-evaluating every part of its business. In the 10 months since Cornell arrived as CEO, Target pulled the plug on its money-losing Canadian stores and jettisoned other noncore operations such as its streaming-media business and its interior-design business, Target Commercial Interiors.

"There's a whole new perspective at what Target should be focusing on," Charland said.

Another interesting aspect of the deal is that Target can leverage some of CVS' expertise in opening smaller-format stores in urban areas. The two companies will codevelop five to 10 TargetExpress stores over the next two years that will be plucked out of locations already in CVS' pipeline.

The pact with CVS has raised some questions about whether Target might be hunting for similar ways to cede other parts of its business. But Cornell quashed that line of thinking on Monday, saying this was a unique deal and he didn't expect similar transactions.

One thing that won't change is either retailer's approach to tobacco sales. CVS stopped selling cigarettes last year. Target did so about 20 years ago.

Kavita Kumar • 612-673-4113