Ongoing softness in front-of-store business likely will rein in sales growth for drug retailers next year, according to a 2010 U.S. retail outlook report released this week by Fitch Ratings.

Fitch Ratings, drug retailers, sales growth, retail outlook, drug stores, pharmacy, 2010, holiday season

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Drug retail sales forecast sees modest growth for 2010

November 20th, 2009

NEW YORK – Ongoing softness in front-of-store business likely will rein in sales growth for drug retailers next year, according to a 2010 U.S. retail outlook report released this week by Fitch Ratings.

The rating agency forecast top-line growth at drug stores to "remain steady or improve modestly" in 2010. It pegged overall prescription sales growth at about 2% annually, noting that front-end weakness will partially offset pharmacy sales gains.

"The wild card for drug retailers is what the outcome will be from the health care reform initiatives in Congress," the report pointed out. "Should reform be enacted, the possibility for reimbursement pressure exists, although this could be partially or fully offset by volume increases on increased drug utilization."

Fitch added that Congress also continues to examine average manufacturer pricing (AMP) in reimbursing pharmacies for Medicaid prescriptions, which could impact drug retailers financially. The chain drug industry has called on lawmakers to fine-tune the AMP definition to create a more equitable formula.

As in recent years, big shifts in market share aren’t likely in 2010 given that three chains — CVS Caremark Corp., Walgreen Co. and Rite Aid Corp. — represent roughly 32% of total drug retailing business and large-scale acquisition opportunities are limited, according to Fitch.

"Therefore, share gains will depend on generating above-average organic growth, store closings or share losses by weaker independents and regional chains, and small market fill-in acquisitions and prescription file buys," the report said.

Among leading chains that Fitch covers, CVS Caremark is expected to continue to drive share gains given its industry-leading retail same-store sales growth, according to the report. "But recent contract losses on the PBM side will temper sales and earnings growth in 2010," Fitch noted.

Earlier this month, in a conference call with financial analysts on CVS Caremark's third quarter results, chairman and chief executive officer Tom Ryan said the company expects disappointing results for its pharmacy benefits management business next year, based on the loss of a net of $4.8 billion in contracts.

Executives at Rite Aid, meanwhile, should be able to concentrate on boosting the chain's business performance now that the company has wrapped up a comprehensive refinancing plan, according to Fitch.

"Rite Aid's profitability remains challenged by weak pharmacy comparable-store sales as the company is highly leveraged and has been capital-constrained for most of the last decade. However, with refinancing activity completed for the next three years, Fitch anticipates management can turn its full focus on improving core operations, and rating movements will largely depend on Rite Aid's top line and profitability," the report stated.

However, Fitch noted, "Rite Aid's ability to appropriately invest in its stores given its current free cash flow levels and indebtedness remain a concern as Fitch views the projected $250 million in capital spending for fiscal 2010 below levels required to remain competitive."

For overall retail industry sales, Fitch predicted flat to modest gains in 2010, with easy same-store comparisons likely through next September. Value-focused retailers stand to outperform other formats as many consumers continue to face economic challenges, the report added.

And nearer-term, during the holiday season, Fitch said sales could be "mildly positive" for retailers due to weak comparisons to last year's results, when many chains were forced to clear inventory at deeper-than-anticipated discounts.

"Promotional activity is expected to be heaviest around Black Friday and close to Christmas, but Fitch expects more front-loaded promotions as retailers try to create buzz and reinforce their price message with consumers as well as capture more consumer dollars early," the outlook report said. "However, Fitch does not expect the level of clearance-type promotions seen in 2008, as inventory positions are significantly lower this year."