Rite Aid Corp. reported its first quarterly profit since May 2007, thanks largely to generic drug sales that bolstered gross margin as well as improved front-end sales.

Rite Aid, third quarter, fiscal 2013, revenues, profit, earnings, same-store sales, comparable-store results, front end, pharmacy, prescriptions filled, comparable stores, Walgreens, Express Scripts, drug store sales, John Standley, Frank Vitrano, prescription count, wellness+, sales forecast, immunization program, guidance

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Inside This Issue - News

Big stride made in turnaround at Rite Aid

January 7th, 2013
by Bill Parness

CAMP HILL, Pa. – Rite Aid Corp. reported its first quarterly profit since May 2007, thanks largely to generic drug sales that bolstered gross margin as well as improved front-end sales.

The bottom line for the 13-week fiscal 2013 third quarter ended December 1 swung to a net profit of $61.9 million, or 7 cents per share, from a net loss of $54.5 million, or 6 cents per share, in the prior-year period. Analysts polled by FactSet had expected a loss of 3 cents per share, on ­average.

Revenues, however, edged downward 1.2% to $6.24 billion from $6.31 billion in the fiscal 2012 quarter. The decline in revenues reflects 10 fewer stores in operation year-over-year as well as a 1.5% drop in same-store sales.

Although front-end comparable-store results grew 1.1%, that improvement was overwhelmed by a 2.7% drop in pharmacy sales, which lost about 924 basis points from new generic drug introductions.

The number of prescriptions filled in comparable stores rose 3.6%, reflecting a benefit from the dispute between Walgreen Co. and Express Scripts Inc. (ESI), which has since been resolved. The pharmacy generated 67.8% of total drug store sales, while third-party prescriptions drove 96.5% of the pharmacy’s top line.

During a conference call chief financial officer and chief administrative officer Frank Vitrano noted that Rite Aid’s retention of business from the Walgreens-ESI impasse remains strong.

“New incremental ESI script benefit in the quarter is estimated to be $18 million to $22 million,” he told analysts. “We continue to believe we received our fair share of new ESI scripts through September 15 and are now retaining the lion’s share of those new patients, even after Walgreens reentered the ESI network. December month-to-date same-store scripts remain strong due to continued high ESI retention and an increase in flu-related prescriptions.”

In addition to the improved gross margin, bottom line results for the quarter were aided by the absence of a LIFO charge instead of $27.5 million a year ago. Moreover, although lease termination and impairment charges surged 24.5% to $14.4 million, interest expense edged downward 1.2% to $128.4 million, while the company booked a 188.3% increase in asset sale gains to $6.26 million.

Stripping away the effects of those and other items, adjusted EBITDA (earnings before interest expense, taxes, depreciation and amortization, LIFO and various special items) soared 33.3% to $295.3 million, or 4.73% of sales, an increase of 122 basis points from a year ago. That figure included an $18.1 million benefit from the settlement of interchange fee litigation, which was not included in the company’s guidance. Even without that gain, adjusted EBITDA would still have jumped 25.1% above prior-year levels.

Gross margin expanded 256 basis points to 29.04%, while FIFO gross margin escalated 213 basis points to 29.04%. The margin improvement was somewhat diluted, however, by selling, general and administrative expense, which swelled 77 basis points to 25.85% of revenues as SG&A dollars edged up 1.8% to $1.61 billion.

With that, results before income taxes moved into the black with a $62.6 million profit compared with red ink of $51 million a year ago.

“We have reached a significant milestone in our turnaround efforts by returning to profitability,” said chairman, president and chief executive officer John Standley in a statement. “We have now increased adjusted EBITDA and same-store prescription counts for eight consecutive quarters.”

During the conference call Standley elaborated on the impact of generics, which were the main driver of gross profit growth during the quarter.

“Our generic penetration during the quarter crossed through the 80% threshold, as patients sought these lower-cost options for their medication therapy,” he said. “At the same time, the new generics negatively impacted our pharmacy same-store sales by approximately 924 basis points. This is a key factor behind the 2.75% decrease in pharmacy same-store sales and our 1.5% decrease in total same-store sales.”

Standley also emphasized the importance of Rite Aid’s immunization program to bolstering same-store script growth. To date, the chain’s pharmacists have administered more than 1.8 million flu shots, and they are on track to achieve Rite Aid’s goal of administering 2 million shots this year.

He also pointed to the role of Rite Aid’s wellness+ customer loyalty program in retaining ESI patients who had been Walgreens customers.

“We’ve also been successful in sending targeted special offers to these patients and communicating the value of remaining a loyal Rite Aid customer,” he added.

With the third quarter profit, the net loss for the 39 weeks shrank 94% to $12.9 million from $214.8 million a year ago. Sales inched down 0.2% to $18.94 billion from $18.97 billion, while adjusted EBITDA climbed 17.9% to $788.1 million, or 4.16% of sales, up 64 basis points from the fiscal 2012 span.

Year-to-date gross margin grew 142 basis points to 27.83% while FIFO gross margin expanded 121 basis points to 27.98%. Echoing results for the quarter, the margin improvement was countered by an increase of 81 basis points in SG&A expense to 25.97% of sales.

The third-quarter results were a pleasant surprise to Wall Street, and Rite Aid management raised its guidance on net results for fiscal 2013.

Earnings are expected to come in between a net loss of $38 million, or 5 cents per share, and net profit of $33 million, or 3 cents per share. Management’s prior forecast called for a loss of $69 million to $196 million, or 9 cents to 23 cents per share.

The average estimate of analysts who were polled by FactSet called for a loss of 15 cents per share on revenue of $25.36 billion.

Meanwhile, the drug chain's management tightened its sales forecast for fiscal 2013. The company now expects revenues to come in between $25.15 billion and $25.3 billion, compared with prior guidance of $25.1 billion to $25.4 billion. Same-store sales are predicted to decrease between 0.9% and 0.3%, down from management’s previous range of a 1% decrease to an increase of 0.25%.