Rite Aid's Earnings Beat, Shares Surge

Zacks

Driven by the introduction of high margin generic drugs and increased prescriptions at its pharmacy counters, the drugstore chain operator, Rite Aid Corp. (RAD) posted a quarterly profit for the second consecutive quarter and a first-yearly profit since 2007. Following this, the company’s shares hit a new 52-week high of $2.15 in yesterday’s trading hours before closing at $2.12, up 18.4% from the closing price on Apr 10.

Rite Aid’s fourth-quarter fiscal 2013 adjusted earnings of 21 cents per share fared better than both the year-ago comparable quarter’s loss of 17 cents as well as the Zacks Consensus Estimate of break-even earnings. After reporting a loss for 6 consecutive fiscals, the company posted adjusted earnings of 24 cents per share in fiscal 2013, surpassing the Zacks Consensus Estimate of a loss of 41 cents.

The positive earnings in the quarter and fiscal also benefited from the rise in adjusted EBITDA and lower LIFO charge. This Zacks Rank #2 (Buy) company, which competes with China Nepstar Chain Drugstore Ltd. (NPD), continues to benefit from 9 straight quarters of improved adjusted EBITDA and same store prescription count.

Quarterly Details

Rite Aid's fourth-quarter revenue of $6,455.2 million declined 9.7% compared with $7,146.8 million in the year-ago comparable period. The decline in the top line was attributable to the impact of the introduction of low cost generics on pharmacy same store sales and one lesser comparable week in the quarter. However, total revenue swept past the Zacks Consensus Estimate of $6,436.0 million. Same-store sales were down 2.0% compared with the year-ago period, driven by lower pharmacy sales, offset slightly by a rise in front-end sales.

During the quarter, front-end sales improved 0.3%, while pharmacy sales decreased 3.1% due to the introduction of new generic drugs that adversely impacted the sales by 659 basis points (bps). Besides, prescriptions filled at comparable stores augmented 3.0% from the year-ago quarter. Prescription sales constituted about 66.5% of total drugstore sales, while third party prescription revenues represented 96.6% of the pharmacy sales.

Rite Aid's gross profit elevated 14.9% year over year to $2,047.8 million, with gross margin expanding 680 basis points to 31.7%, primarily driven by new generic drugs introductions. Selling General and Administrative expenses decreased 4.3% to $1,682.3 million, while as a percentage of sales it expanded 150 bps to 26.1%.

Rite Aid reported adjusted EBITDA of $340.3 million, up 24.0% from $274.3 million in the prior-year quarter. As a percentage of sales, it improved 150 bps to 5.3%, gaining from higher pharmacy gross margin driven by new generic introductions and strong prescription count growth, partially offset by one lesser comparable week.

Balance Sheet and Cash Flow

At fiscal-end, Rite Aid had cash and cash equivalents of $129.5 million and long-term debt of $5,904.4 million. The company ended the fiscal with $1.03 billion of liquidity, consisting of $1.014 billion in credit facility and $16 million of invested cash. Rite Aid had $665.0 million borrowing outstanding under its senior credit facility, while the company had $115 million of outstanding letters of credit.

During the 52-week period, the company generated a cash flow of $220.4 million from operating activities, while it expended nearly $394.2 million (gross) toward capital expenditures. In fiscal 2014, the company expects to incur capital expenditure of $400.0 million.

Transformation at Rite Aid stores continues as it relocated 4 stores, remodeled 112 locations and shuttered 10 outlets during the fourth quarter. The company also completed wellness remodels at about 797 stores as of the end of the fiscal. As of Mar 2, 2013, Rite Aid operated about 4,623 stores.

Fiscal 2014 Guidance

Rite Aid, which trails only Walgreen Co. (WAG) and CVS Caremark Corp. (CVS) in size, forecasts revenues for fiscal 2014 in the range of $24.9 billion to $25.3 billion, based on same-store sales ranging from a decline of approximately 0.8% to an increase of 0.8%.

Further, the company anticipates its fiscal 2014 adjusted EBITDA to range from $1.075 and $1.175 billion. Currently, net income is expected to be in the range of $45.0 to $200.0 million or earnings per share of 4 cents to 20 cents. The current Zacks Consensus Estimate stands at 6 cents per share, which is at the lower end of the company’s guidance range.

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