Rite Aid Corp. jumped a key financial hurdle by reporting net income for its fiscal 2013 third quarter, marking the company's first quarterly profit in over five years.

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Rite Aid turns profit in third quarter

December 20th, 2012

CAMP HILL, Pa. – Rite Aid Corp. jumped a key financial hurdle by reporting net income for its fiscal 2013 third quarter, marking the company's first quarterly profit in over five years.

Rite Aid on Thursday posted net earnings of $61.9 million, or 7 cents per diluted share, for the 13-week third quarter ended Dec. 1, compared with a net loss of $52 million, or 6 cents per diluted share, a year earlier.

The quarterly profit wasn't expected by financial analysts. On average, analysts estimated Rite Aid's third-quarter earnings per share (EPS) at a loss of 3 cents, with their projections running from a low of a loss of 5 cents per share to a high of breaking even, according to Thomson Financial.

Rite Aid had last reported a quarterly profit for the period ended in May 2007. The drug chain attributed the earnings mainly to a rise in adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) and a lower LIFO charge.

Adjusted EBITDA for the 2013 third quarter came in at $295.3 million, or 4.7% of revenue, up from $221.5 million, or 3.5% of revenue, a year earlier. Rite Aid said adjusted EBITDA increased because of gains in front-end sales and prescriptions filled, along with an improvement in pharmacy gross margin from generic drug introductions. Also included in adjusted EBITDA was an $18.1 million benefit from the settlement of interchange fee litigation, which Rite Aid said wasn't included in the company's guidance.

"We have reached a significant milestone in our turnaround efforts by returning to profitability," Rite Aid chairman, president and chief executive officer John Standley said in a statement. "We have now increased adjusted EBITDA and same-store prescription counts for eight consecutive quarters. Our third-quarter performance is the result of our entire team's continued efforts to fundamentally improve our business."

"Our record adjusted EBITDA was driven by strong prescription count growth, an increase in front-end same-store sales and higher pharmacy gross margin resulting from the introduction of new generic medications," Standley added. "While we are pleased with our third-quarter results, we remain focused on sustaining our positive momentum and achieving long-term success."

In morning trading Thursday, Rite Aid shares were up 14 cents, or 13%, to $1.18.

"Rite Aid reported better-than-expected fiscal third-quarter results, driven primarily by higher gross margin. Specifically, the company reported a third-quarter FIFO gross margin of 29%, which handily exceeded the 27.8% consensus forecast as generic drugs costs have come in better than management's expectations," William Blair & Co. analyst Mark Miller wrote in a research note Thursday.

"Rite Aid anticipates the generic uplift to gross margin will continue to be strong in the February quarter as well. In addition, the company noted that prescription drug trends have been favorable so far in December," Miller stated. "Also of note, Rite Aid did not disclose its retention rate of Express Scripts customers but indicated that it was pleased with its results to date.

Third-quarter sales at Rite Aid dipped 1.2% year over year to $6.2 billion from $6.3 billion, primarily from the impact of generics — which carry lower prices but higher margins — on pharmacy same-store sales, as well as store closings, Rite Aid said.

Same-store sales for the third quarter were down 1.5% in third quarter, reflectin a 1.1% gain in the front end and a 2.7% decline in the pharmacy.

Pharmacy sales included a negative impact of 924 basis point negative from new generic drugs, according to Rite Aid. Prescription count in same stores rose 3.6% over the prior-year period, which the company said includes the benefit of additional prescriptions resulting from the Walgreens/Express Scripts contract dispute. Prescription sales represented 67.8% of total drug store sales in the quarter.

During the third quarter, Rite Aid relocated three stores, remodeled 114 stores and closed 10 stores. As of Dec. 1, the chain operated 4,633 drug stores overall, including 687 locations remodeled to its "wellness store" format.   

Looking ahead, Rite Aid raised its fiscal 2013 earnings guidance, now expected to range from a net loss of $38 million, or 5 cents per diluted share, and net income of $33 million, or 3 cents per diluted share. In late September, the company had projected a fiscal 2013 net loss of $69 million, or 9 cents per diluted share, to $196 million, or 23 cents per diluted share.

The consensus analyst estimate is for Rite Aid to post a net loss of 15 cents per share for fiscal 2013, with projections ranging from a low of a loss of 18 cents per share to a high of a loss of 10 cents per share, according to Thomson Financial.

Rite Aid also narrowed its sales guidance for the fiscal year, with revenue pegged at $25.15 billion and $25.30 billion, compared with a previous forecast of $25.1 billion to $25.4 billion.

Fiscal 2013 comparable-store sales are projected to be between a decrease of 0.9% and a decrease of 0.3%. Capital expenditure guidance has been raised to $360 million from $300 million previously.

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