Weak October Comps for Rite Aid

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Drugstore chain retailer, Rite Aid Corporation (RAD) recently reported disappointing same-store sales (comps) result for the four weeks ended October 27, 2012 primarily due to fall in pharmacy comps. Hurricane Sandy boosted the company’s pre-storm front-end comps and prescription count, which partially offset the weakness in pharmacy sales.

As Sandy has gone away, all the business houses are evaluating their damages and Rite Aid is no exception. The company has found out that eight of its stores have been substantially damaged, and is searching other locations that could have been possibly damaged during the storm. Moreover, during this calamity, some of the company’s stores on the east coast were either shuttered or operated without power, which is expected to hurt its November comps.

October Comps Performance

Rite Aid’s overall comps for October 2012 inched down 1.1%. Pharmacy comps for the month declined 2.3%, including a negative impact of around 971 basis points (bps). Per the company, the year-over-year fall in pharmacy comps was primarily due to the introduction of new generic drugs, which are much cheaper than the branded ones.

On the other hand, front-end same-store sales for the month registered an improvement of 1.5%, while prescription count at comparable stores climbed 4.7%. Of the total rise in front-end comps and prescription count, 1.1% and 0.2% was primarily derived from the pre-storm sales.

Rite Aid reported total drugstore sales of $1.918 billion in the month under review, with prescription sales accounting for 68.2% of drugstore sales and third-party prescription sales making up for 96.5% of pharmacy sales. The company’s October sales represent a decline of 1.8% from the year-ago level of $1.954 billion.

Year-to-date Comps Performance

Year-to-date i.e. for the 34-week period ended on October 27 2012, the company’s comps were up a modest 0.7%, while net sales stayed flat year over year at $16.463 billion. The increase in comps mainly came from a 2.1% increase in front-end comps, a 0.1% increase in pharmacy comps and a 3.7% increase in prescription count at comparable stores.

Prescription sales comprised 68.0% from total sales. Additionally, third-party prescription sales represented 96.6% of pharmacy sales.

Peer Performance

Walgreen Company (WAG), which competes head-to-head with Rite Aid, also reported a decline in its overall comps performance for the month of October. Walgreen’s overall comps declined 5.9%, primarily due to declines of 7.5% and 2.9% in pharmacy and front-end comps, respectively.

The year-over-year decline in pharmacy comps was the result of the introduction of new generic drugs while front-end comps were hit by a 5.2% dip in customer traffic. Moreover, Hurricane Sandy has also negatively impacted Walgreen’s sales as nearly 750 of the company’s 1,400 stores in the affected area remained closed during that period.

Our Recommendation

Demand for generic drugs in the U.S. is increasing and hence, Rite Aid has decided to expand its generic drugs portfolio. We believe that this decision of the company will boost its top line as well as market share.

Moreover, the company has been focusing on improving store-level performance, as part of its turnaround strategy, through initiatives like remodeling wellness stores with new features. The newly renovated wellness stores have been designed in such a manner that the customers spend more time to select their personal care products, thus resulting in increased sales.

Further, in an effort to expand its pharmacy and clinical services, Rite Aid has applied additional resources, such as the ‘Wellness+’ program for diabetes as well as ‘Flu Immunization’ program. We believe these programs and initiatives will enable the company to increase its customer base as well as long-term profitability.

However, declining pharmacy sales due to a longer FDA approval process, drug safety concerns and loss of individual health insurance remain the matters of concern. Wal-Mart Stores Inc.’s (WMT) foray into the retail generic drug market is exerting pressure on Rite Aid’s pharmacy margin. In addition, a higher debt burden puts the company at a competitive disadvantage relative to its peers with lower debts.

Currently, Rite Aid has a Zacks #3 Rank, implying a short-term Hold rating. Moreover, we are maintaining a long-term Neutral recommendation on the stock.

Headquartered in Camp Hill, Pennsylvania, Rite Aid is the third-largest retail drugstore in the U.S. on the basis of revenues and number of stores. The company operates in 31 states across the country and in the District of Columbia. As of October 29, 2012, the company operated 4,637 stores as compared with 4,688 stores in the comparable period last year.

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