"Rite Aid followed its Q2 earnings blow-out with a relatively solid September sales result. Total comps of 1.9% beat consensus of 1.0%, as pharmacy and front-end both exceeded expectations. An increase in flu shots and improving script growth drove a pharmacy comp of 3.1% (vs. consensus of 2.4%). While the front-end comp was -0.5%, RAD still beat consensus of -1.2% despite a competitive retailing environment. We continue to rate RAD Outperform and raise our target price to $6 (from $5). While we expect some decline in 2H EBITDA as the generic benefit wanes, rate pressure continues, and drug inflation applies some pressure, growth should reaccelerate in 2014 with the next generic wave, ACA, and continued slow progress in the underlying turnaround."
Key Takeaways: "(+) Total SSS of 1.9% beat our estimate of 1.2% and consensus of 1.0%. (+) The pharmacy comp of 3.1% beat consensus of 2.4% and our estimate of 2.7%. Script growth of 0.9% improved sequentially by 110bps and the two-year stack accelerated to 5.3% from 4.3% last month. (+) One year after the ESRX-WAG resolution, RAD continues to retain 75% of customers won during the dispute. (+) While the front-end comp was down 50bps, it still exceeded our estimate of -1.5% and consensus of -1.2%. The primary driver of front-end weakness was a tough OTC comparison vs. last year's allergy season. (+/-) The company indicated the promotional environment remains intense, but stable."