If we told you that the largest pharmacies chains in the U.S., CVS Caremark (CVS) and Walgreens (WAG), planned to sell more groceries and produce, would you believe us? If so, you would be right. CVS Caremark plans to double the size of its food section and revamp about 20% of its 7,000 stores to better cater to groceries and quick check outs, and Walgreens started to satiate its appetite for the nation's trillion-dollar food budget by announcing last year that it would add up to 500 food items including salads, sandwiches, frozen meats, soups, juices, yogurts and even sushi to its offering.

How Do Consumers Benefit?

CVS Caremark (CVS), a drugstore chain that competes with Rite-Aid Corporation (RAD), Walgreen Company (WAG), and Wal-Mart Stores, Inc. (WMT), is acting in a boring way this afternoon. My screen shows, at the time of this writing, the stock down 44 cents, or 1.2%, to $36.64.

That's not too bad for the kind of trading session we're having. I bet CVS would have been up today following its Q1 report had the market action been different. But the tape is the tape, you can do nothing about that. According to Bloomberg BusinessWeek, the company made, on an adjusted basis, 60 cents per share, which was two pennies ahead of estimates.

CVS Caremark (CVS), which competes with Walgreen (WAG), Rite Aid (RAD), and Wal-Mart (WMT), posted fourth-quarter data on Monday. Sales increased 7%, and adjusted earnings per share from continuing operations (excluding, in addition, a penny per share relating to a tax benefit) came in at 78 cents -- good for a growth rate of over 11%. That bottom-line performance matched analyst projections, according to our earnings preview.

As we all know, matching expectations is sometimes the death of a stock. The market has no conscience when it comes to mercilessly punishing an equity for not going beyond the call of the analysts. However, CVS actually did pretty well yesterday, rising 5% by the end of the session; the move was backed by healthy volume.

Walgreen (WAG), a drugstore chain that competes with CVS Caremark (CVS) and Rite Aid (RAD), issued fiscal Q1 numbers on Monday. The growth rates were impressive.

Total sales were up 9.5%. Net income increased almost 20% to 49 cents per diluted share. Operational cash flow was higher by over three times. According to our earnings preview, analysts were expecting 48 cents per share. Of course, since there were restructuring charges included in the above per-share profit stat (equal to 3 cents per share), the beat is better than it looks. This was indeed a good quarter.

Rite Aid (RAD), whose colleagues include CVS Caremark (CVS) and Walgreen (WAG), reported third-quarter results on Thursday. Although they did show improvement, I think most investors would be better off staying away from the stock.

According to this summary at Reuters, top-line sales decreased a little under 2%, and the loss per share came in at 10 cents. This was a lot better than the 30 cents per share lost in the comparable quarter. Expectations were for the red ink to be closer to 18 cents per share.

CVS|Caremark (CVS - option chain) shares are rising today on news that the company won a new $1 billion contract with the Teacher Retirement System of Texas to provide pharmacy benefits for two years, with four optional one-year renewals. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on CVS.

CVS opened this morning at $31.80. So far today the stock has hit a low of $31.80 and a high of $32.43. As of 11:55, CVS is trading at $32.20 up 70 cents (2.2%). The chart for CVS looks bullish and S&P gives CVS a positive 4 STARS (out of 5) buy ranking.

Rite Aid (NYSE: RAD), which competes with Walgreen (NYSE: WAG), CVS Caremark (NYSE: CVS), and Wal-Mart (NYSE: WMT), saw a big increase in volume on Wednesday after it reported earnings for the first quarter. In fact, as Douglas McIntyre observed, shares of Rite Aid were up 5% at one point during yesterday's session. However, the shares ended up losing their green status by the close of trading. Rite Aid actually lost 3% when all was said and done. What does it all mean?

Well, Rite Aid did beat analyst forecasts by a wide margin. The call was for a loss of 13 cents per share. Rite Aid lost only 6 cents per share once adjustments are made. Revenues dipped a little over 1%, and same-store sales, after excluding the effect of the Brooks Eckerd acquisition, increased 1.5%. Interestingly, the mix of this increase is as follows: the pharmacy sales went up 3.1% on a comparable basis, and the non-pharmacy sales went down 1.4% on the same basis.

Rite Aid (NYSE: RAD), whose competitors include Walgreen (NYSE: WAG), CVS Caremark (NYSE: CVS), and Wal-Mart (NYSE: WMT), reported Q4 numbers today, and when you read through the release, you sort of come away with a decent feeling. You hear about improvements in this metric and that metric. You wonder if a turnaround might be in the offing. Then you look at the stock price and, even though it is currently being bid higher (it's up over 14% as I write), you come back down to earth and reality hits you in the face. Anything trading under a buck has to give you pause. Rite Aid is no different.

For the quarter, Rite Aid posted a 1.7% decrease in the top line. On an adjusted basis, the drugstore chain reported a loss of $0.14 per share. According to this source, Wall Street thought Rite Aid might lose $0.105 per share. The company is still adjusting to the Brooks Eckerd acquisition. Excluding that effect, same-store sales increased 0.8%. Including the asset, comps decreased 0.1%.

Walgreen (NYSE: WAG ) knows that people want all kinds of options to meet their healthcare needs. Walgreen also knows that it needs to grow and keep up with competitor CVS Caremark (NYSE: CVS) and the pharmacy department at Wal-Mart (NYSE: WMT). And, yes, I suppose Rite-Aid (NYSE: RAD) is technically a competitor, too, although you wouldn't know it by that drugstore chain's stock price. Well, according to The Wall Street Journal, Walgreen plans to promote an initiative called "Complete Care and Well-Being" to employers. The goal here is to give corporate, as well as government, employees and their families access to healthcare services such as preventive medicine and dental examinations in off-hour time periods. Walgreen will use a network of in-store clinics and health centers to provide these services. That's pretty cool, right? Well, one of the bigger benefits to Walgreen is the synergy it can promote by leveraging this program.

CVS Caremark (NYSE: CVS - option chain) stock is declining sharply this morning after the company forecast a fiscal-2009 EPS of $2.53 to $2.61, well below analysts' estimates of $2.74. The company cited lower sales of prescription drugs for the forecast. If you think this stock won't be rising too far in the coming months as a result of this news, then it could be a good time to look at a bearish hedged play on CVS.

This morning, CVS opened at $27.00. So far today the stock has hit a low of $25.50 and a high of $27.09. As of 12:45, CVS is trading at $25.84, down $3.50 (-11.9%). The chart for CVS looked bullish up until today and S&P gives CVS its highest 5 STARS (out of 5) strong buy ranking.

For a bearish hedged play on this stock, I would consider a February bear-call credit spread above the $30 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 11.1% return in six weeks as long as CVS is below $30 at February expiration. CVS would have to rise by more than 16% before we would start to lose money. Learn more about this type of trade here.

CVS hasn't been above $30 by more than a few cents since November and shown resistance around $29.50 recently.

Brent Archer is an options analyst and writer at Investors Observer.

DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in CVS.

Rite-Aid Corporation (NYSE: RAD) is the drugstore you should avoid. You can consider CVS Caremark (NYSE: CVS). You can take a look at Walgreen Company (NYSE: WAG). Rite-Aid? It's definitely not the cure for an ailing portfolio.

The troubled pharmacy chain is no stranger to losses and its public stock sits well below a buck a share. The third quarter numbers don't look too appealing. On an adjusted basis, Rite-Aid lost $0.15 per share. That may have been better than what analysts were calling for, namely a loss of $0.17 per share, but you have to look at the overall picture. Rite-Aid is closing stores, and that will hamper sales going forward (not to mention its brand equity, as well). Some will argue that it's all part of the turnaround. Sure, turnarounds can be ugly and painful, granted, but that doesn't mean you have to participate, hoping for the best. Why hop on this low-priced equity when integration of the Brooks Eckerd assets doesn't seem to be going very well?

According to the press release, there are a few positive statistics. Management says that overall same-store sales were up 1.4%, EBITDA increased over 8%, and operational cash flow was positive over the last three quarters (by comparison, cash was used for operations in the year-ago similar period). But the guidance isn't good, and I have no confidence in this management team to improve its GAAP performance. The company has to juice its sales, but with competition from stronger foes like CVS Caremark and Walgreen, I just don't see any silver lining to the Rite-Aid story. Turnaround specialists can make whatever argument they want. As for me, I'm going to make like the galaxy in Star Wars and stay far, far away from Rite-Aid's stock...

Disclosure: I don't own any company mentioned; positions can change at any time.

Walgreen (NYSE: WAG), a drugstore chain which competes with CVS Caremark (NYSE: CVS) and Rite Aid (NYSE: RAD), dropped the ball in the fourth quarter, at least as far as analyst estimates are concerned. On a GAAP basis, Walgreen increased its earnings per share by a nickel, coming in at 45 cents.

That would be pretty cool if there were no adjustments to be made. Unfortunately, there is one. It relates to an adjustment for vacation-time accrual, which added almost $80 million to the bottom line. Take that away, and you get no earnings growth, as earnings per share would have been 40 cents, meaning non-GAAP number missed expectations by 5 cents.

I think Walgreen is a strong brand in its space. However, with the economic meltdown continuing its dire course, I would imagine that the chain is going to become affected by it, strong brand or not. Drug prescriptions certainly might be considered a defensive element in such an environment, but keep in mind that Walgreen doesn't just make its money on prescription sales. It sells a whole host of items in every location. And I'd have to imagine that the consumer is going to be scaling back. Yep, get ready for the good ole negative wealth effect.

Rite Aid (NYSE: RAD), a drugstore brand that competes with Walgreen (NYSE: WAG) and CVS Caremark (NYSE: CVS), reported results for the second quarter on Thursday. Unfortunately, they did not meet the expectations of analysts. Revenues were basically flat at $6.5 billion. The net loss more than doubled to $0.27 per diluted share, compared to $0.10 per diluted share one year ago. According to this item, Wall Street was hoping that Rite Aid might be able to deliver a loss of $0.15 per diluted share. Furthermore, that news source states that guidance for the fiscal year is worse than the consensus. The consensus believed that Rite Aid might bleed about $0.51 per share in red ink. The loss will at least be $0.56 per share, according to management. It might even go as high as $0.67.

So, I just gave out all the nasty stuff. Is there anything encouraging from the release? Let me put on my look-on-the-bright-side glasses. Net cash from operations was positive during the quarter. Over $96 million was generated. Last year, operations required almost $140 million. I dig cash, no doubt about it. But I really love free cash flow. If you add back sale-leaseback transactions, there was some free cash, but I can't say it changes my general stance on Rite Aid. I mean, overall same-store sales are weak, and the stock is currently priced at less than a buck. It's done horribly year-to-date according to the AOL Finance snapshot taken at the time of this writing. Down 67%. Not encouraging.

Rite Aid's shares aren't so much stock certificates as they are lottery tickets. Do you like playing the lottery? If so, go buy one of those scratch-off deals. You might have better luck with them than you would with Rite Aid.

Disclosure: I don't own any company mentioned; positions can change at any time.

CVS Caremark (NYSE: CVS) will begin testing an upscale beauty store concept this year under the less than creative name "Beauty 360", with the first locations set to open up right next to existing CVS locations. "Beauty 360" will offer 32 lines of skin care and cosmetics along with various fragrances, according to Reuters.

Can you say flop? The problem is that people hate CVS. Googling the phrase "hate CVS" yields 17,900 results, and the chain has experienced success with decent prices on prescription drugs and an expansion strategy that has obliterated most of the mom and pop stores. I can't even imagine why anyone would choose to go to CVS to buy expensive skincare products.

Plus the name "Beauty 360" is really, really, really insipid.

CVS's only hope of having any success with this concept would seem to be making the stores nothing like CVS, and hoping consumers won't notice that there's any connection. Opening them next door won't accomplish that.

CVS Caremark (NYSE: CVS), a big competitor of both Walgreen (NYSE: WAG) and Rite Aid (NYSE: RAD), released its Q1 earnings last week. They were very good, and they reminded me that I probably need to throw a drugstore chain's stock in my core portfolio as a long-term play on the increasing health-care needs of the baby boomers (and every other demo, for that matter).

Looking through the reported growth rates, you can see that we're talking best-of-breed here. Revenues were up over 60%, and adjusted earnings per share increased over 18%, coming in at $0.55. The Caremark merger has obviously proven to be a good move. Same-store sales rose 3.9%, benefited in part by the early appearance of Easter in March.

According to earnings.com, CVS Caremark basically matched earnings expectations. That's okay, though, I don't think you can hold it against this big brand name. As of this writing, CVS is near a 52-week high. Buying at the 52-week high is always a dicey thing, but if you plan on holding for years, it wouldn't be that much of a concern. Shorter-term traders would need to wait for a pullback. But I like the first quarter results for CVS, and I think the stock is poised to do well over time. And like I said at the beginning, this really may be a stock for the core portion of an individual's investment program -- a true buy-and-hold idea.

Disclosure: I don't own shares in any company mentioned here; positions can change at any time.