Rite Aid Corp. saw its shares surge after reporting fiscal 2014 fourth-quarter earnings that exceeded Wall Street's estimate and announcing the acquisition of health clinic operator RediClinic.

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Rite Aid's 4Q earnings top Wall Street's forecast

April 10th, 2014

CAMP HILL, Pa. – Rite Aid Corp. saw its shares surge after reporting fiscal 2014 fourth-quarter earnings that exceeded Wall Street's estimate and announcing the acquisition of health clinic operator RediClinic.

Rite Aid also said Thursday that sales edged up for both the fourth quarter and full year ended March 1. Fiscal 2014 earnings also increased year over year and were in line with analyst estimates.

As of Thursday morning trading, Rite Aid shares were up about 12% to $7.16 from $6.40 at yesterday's market close.

Rite Aid said that it completed 405 wellness store remodels during fiscal 2014.

For the fourth quarter, Rite Aid's net income totaled $55.4 million, or 6 cents per diluted share. compared with $123.1 million, or 13 cents per diluted share, a year earlier. The company noted that net earnings included a LIFO charge of $44.1 million from pharmacy inflation and that prior-year net income included a LIFO credit of $175.4 million resulting from significant generic deflation.

The increase in LIFO expense was partially offset by an increase in adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), no loss on debt retirement in the current year (versus a $122.7 million loss on debt retirement in the prior year) and decreases in interest expense and lease termination and impairment charges.

The drug chain said that excluding the LIFO charge, fiscal 2014 fourth-quarter net income was $99.5 million, or 10 cents per diluted share, and that without the LIFO credit and loss on debt retirement, prior-year net income was $70.4 million, or 7 cents per diluted share.

On average, analysts projected adjusted earnings per share (EPS) of 4 cents for the fiscal 2014 fourth quarter, with estimates ranging from a low of 3 cents to a high of 7 cents, according to Thomson Financial. 

Adjusted EBITDA came in at $356.3 million, or 5.4% of revenue, for the fourth quarter, up from $340.3 million, or 5.3% of revenue, a year earlier. Rite Aid said adjusted EBITDA improved because of an increase in pharmacy gross profit, driven by improvements in pharmacy sales and purchasing efficiencies, offset partially by a rise in selling general and administrative expenses.

Fourth-quarter sales rose 2.2% to $6.6 billion from $6.5 billion in the year-ago period. The gain stemmed mainly from increased same-store sales, according to Rite Aid.

Comparable-store sales for the fourth quarter grew 2.1% year over year, reflecting a 0.7% dip in the front end and a 3.5% gain in the pharmacy. Rite Aid said comparable pharmacy sales included a 123-basis-point negative impact from introductions of new generic drugs, which carry lower prices but have higher margins.

Prescription count in comparable stores fell 1.8% in the fourth quarter, with 1.3% of the decline attributable to a decrease in flu-related prescriptions and flu shots, according to Rite Aid. Prescription sales represented 67.5% of overall drug store sales in the quarter.

On Thursday, Rite Aid said it has acquired RediClinic, a Houston-based operator of 30 retail health clinics. Financial terms of the transaction weren't disclosed. Plans call for RediClinic to operate as a Rite Aid subsidiary. The deal marked Rite Aid's second health care-related acquisition this month. Last week, the company said it has purchased Health Dialog Services Corp., a Boston-based provider of health care coaching and analytics services.

"Thanks to the strong teamwork of our dedicated Rite Aid associates, we delivered strong fourth-quarter and fiscal 2014 results, including new company records for fourth-quarter and full-year adjusted EBITDA. These accomplishments reflect the significant progress we’re making in executing key initiatives and delivering on our promise to actively work with our customers to keep them well," Rite Aid chairman and chief executive officer John Standley said in a statement.

"Our recent acquisitions of Health Dialog and RediClinic, our expanded partnership with McKesson and our continued commitment to investing in our store base have positioned us to transition our strategy from turnaround to growth as we more aggressively pursue opportunities to become a growing retail health care company," Standley added.

For the fiscal 2014, Rite Aid's sales were up 0.5% to $25.5 billion from $25.4 billion in 2014, lifted mainly by increased same-store sales.

Comp-store sales for the year gained 0.7%, including a 0.2% decrease in the front end and a 1.2% uptick in pharmacy sales. Pharmacy sales included a 232-basis-point negative impact from new generics. Prescriptions filled in comparable stores dipped 0.3%. Prescription sales accounted for 67.9% of total drug store sales.

Net income for fiscal 2014 totaled $249.4 million, or 23 cents per diluted share, compared with $118.1 million, or 12 cents per diluted share, a year earlier. Contributing to the increase in net income, Rite Aid said, was an increase in adjusted EBITDA and lower interest expense, a loss on debt retirement of $62.4 million (versus $140.5 million in the prior year), and lower lease termination and impairment charges. Partially offsetting those improvements was a LIFO charge of $104.1 million in the current year compared with a LIFO credit of $147.9 million in the previous year.

Analysts, on average, had forecast adjusted EPS of 23 cents for fiscal 2014, with estimates running from a low of 20 cents to a high of 28 cents, according to Thomson Financial.

Fiscal 2014 adjusted EBITDA was $1.325 billion, or 5.2% of revenue, compared with $1.128 billion, or 4.4% of revenue, in 2013.

During the fiscal year, Rite Aid remodeled 405 drug stores — bringing the total number of the chain's "wellness store" locations to 1,215 — as well as relocated 11 stores, acquired one store, expanded four stores and closed 37 stores. As of March 1, the company operated 4,587 stores overall.

Looking ahead to fiscal 2015, Rite Aid said it expects to benefit from its ongoing wellness store remodels, wellness+ customer loyalty program, new sourcing arrangement with McKesson and other initiatives to grow sales and drive operational efficiencies. The company said other factors for 2015 include planned wage and benefit increases, more new generics in the second half of the year, generic drug price hikes and a challenging reimbursement rate environment. Capital expenditures are projected to be $525 million, excluding the purchases of Health Dialog and RediClinic.

Rite Aid forecasts fiscal 2015 sales of $26 billion and $26.5 billion and a same-store sales gain of 2.5% to 4.5%. Net earnings for fiscal 2015 are pegged at $313 million to $423 million, or 31 cents to 42 cents per diluted share.

On average, analysts estimate Rite Aid's fiscal 2015 adjusted EPS at 35 cents, with projections ranging from a low fo 28 cents to a high of 43 cents.