Rite Aid Tops, Revises Outlook

Zacks

Drugstore chain operator Rite Aid Corp. (RAD) posted first-quarter 2012 adjusted earnings per share of 1 cent, which bettered both the prior-year loss of 7 cents a share as well as the Zacks Consensus Estimate of a loss of 4 cents a share. The company’s results mainly benefited from same store sales growth, improved gross margin, higher adjusted EBITDA, lower depreciation and amortization expenses and lower lease termination and impairment charges.

On a GAAP basis, Rite Aid reported first-quarter net loss of $28.1 million or 3 cents per share, including a $17.8 million loss on debt modification related to the completion of a previously announced refinancing and a $20.9 million charge related to a proposed settlement of a series of wage and hour class action lawsuits.

Quarterly Details

Rite Aid's revenues came in at $6,468.3 million, up 1.2% compared with $6,390.8 million in the prior-year period. The improved revenue resulted from growth in same-store sales, partially offset by store closings. Same-store sales for the quarter increased 2.5% due to the positive impact of wellness+ and positive prescription count. Moreover, total revenue edged past the Zacks Consensus Estimate of $6,467 million.

Pharmacy same-store sales grew 2.4%, despite the negative impact of 326 basis points (bps) from the introduction of new generic drugs. Prescriptions filled at comparable stores increased 3.0% from the year-ago quarter. Besides, front-end same-stores sales climbed 2.7% during the quarter.

During the quarter, the company continued to see substantial progress in wellness+ customer loyalty program as well as its Wellness store format. During the period, the company witnessed solid growth in same-store prescription counts.

Other than prescription drugs, Rite Aid sells a wide assortment of merchandises, termed as "front end" products, including over-the-counter medications, health and beauty aids, personal care items and cosmetics.

Rite Aid's gross profit increased 3.4% year over year to $1,748.8 million, with gross margin expanding 50 bps to 27.0%. Gross margin for the quarter expanded mainly on account of higher sales as well as increased pharmacy gross margins due to higher generic prescriptions. SG&A expenses as a percentage of sales expanded by 130 bps to 26.1%.

Rite Aid recorded an approximately 29.3% decline in lease termination and impairment charges to $12.1 million, primarily driven by lower store closures in the reported quarter. Rite Aid reported adjusted EBITDA of $274.2 million compared with an adjusted EBITDA of $262.9 million in the prior-year quarter, primarily due to favorable sales and script trends and increased gross profits, offset by an increase in litigation expense related to the future class action settlement.

Balance Sheet and Cash Flow

At quarter-end, Rite Aid had cash and cash equivalents of $214.8 million and long-term debt of $6,025.7 million. The company ended the first quarter with $1.151 billion of liquidity, including $102 million of invested cash. There was no borrowing outstanding under its revolver credit facility while the company had $125 million of outstanding letters of credit. The company generated a cash flow of $363.6 million from its operating activities.

In fiscal 2013, the company expects to incur capital expenditure of $300 million, mostly on store remodels and prescription file buys.

Guidance

Rite Aid lowered its fiscal 2013 revenue forecast to be between $25.3 billion and $25.7 billion based on same-store sales ranging from a decline of 0.5% to an increase of 1.0% year over year. The lowered sales and comps guidance is mainly due to projected negative impact of 520 to 600 basis points in the new generic introductions on pharmacy same store sales.

However, Rite Aid upped the lower end of its 2013 EBITDA forecast, bringing the guidance to $950 - $1.025 billion. Currently, net loss is expected to be in the range of $103 - $248 million (or 13 cents to 29 cents per share).

The company competes with retail drugstore chains, independently owned drugstores, supermarkets, mass merchandisers, discount stores, dollar stores, and mail order pharmacies. Competitive pressure in the industry is unlikely to subside with continued consolidation, new store openings, and increased mandatory mail orders. The company's direct competitors are Walgreen Co. (WAG) and CVS Caremark Corporation (CVS).

Currently, Rite Aid maintains a Zacks #3 Rank, which translates into a short-term Hold rating. However, we retain a long-term Neutral recommendation on the stock.

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