» Its gross margins have improved in the last year on account of the rising proportion of generic drug sales.
» Rite Aid added about $70 million to its top line as customers shifted from Walgreen (post its dispute with Express Scripts) to Rite Aid in order to continue filling prescriptions under their existing plans.
» Rite Aid’s loyalty programs such as the Wellness+ program has helped improve it front-end as well as pharmacy sales in the last few quarters.
» It recently launched its Wellness65+ program aimed at senior patients who are known to be higher spenders in the pharmacy category.
» Its debt refinancing plan, completed in July 2013, is expected to have a positive effect on the company’s bottom line in this financial year.
However, Rite Aid’s continued efforts to revive profits resulted in net income of $118 million in fiscal 2013, its first profitable year in five years, and the positive trend continued in Q1 2014 as well. In the last few quarters, the company has closed its under-performing stores and remodeled many of its existing stores. The expanding member base for its Wellness+ card-based loyalty program and its strategic alliance with GNC has also contributed to the positive market sentiment around the company.
1. Improving Gross Margins Due To Higher Proportion Of Generic Drugs
Rite Aid’s gross margins improved from 26% in fiscal 2012 to 28.8% in fiscal 2013 and 28.9% in Q1 2014. Though the rising proportion of lower priced generic drugs put pressure on Rite Aid’s top line, they offer higher margins compared to branded drugs, over 50% higher. ((Rite Aid’s Impressive Stock Run Should Continue To Gain Steam, Seeking Alpha, August 23, 2013))
The total generic dispensing rate, which implies the percentage of generic drugs in a consumer’s prescription, grew to 78.5% in 2012, from 74.1% and 71.5% in 2011 and 2010, respectively. The rise in generic penetration has enabled Rite Aid to become more profitable in spite of lower sales.
Over the next five years, around $80 billion worth of drugs will lose patent protection opening them to competition from generics. As more drugs come off patents, sales will decline, but profits are expected to continue rising.