U.S. Markets closed
  • S&P 500

    -36.33 (-0.87%)
  • Dow 30

    -473.66 (-1.36%)
  • Nasdaq

    -12.43 (-0.09%)
  • Russell 2000

    -5.71 (-0.26%)
  • Crude Oil

    +0.53 (+0.82%)
  • Gold

    +0.80 (+0.04%)
  • Silver

    +0.25 (+0.92%)

    +0.0019 (+0.1580%)
  • 10-Yr Bond

    +0.0220 (+1.37%)
  • Vix

    +2.18 (+11.09%)

    +0.0022 (+0.1570%)

    -0.2430 (-0.2233%)

    +1,278.57 (+2.31%)
  • CMC Crypto 200

    +1,278.00 (+526.62%)
  • FTSE 100

    -175.69 (-2.47%)
  • Nikkei 225

    -909.71 (-3.08%)

Edited Transcript of RAD earnings conference call or presentation 25-Jun-20 12:30pm GMT

·59 min read
  • Oops!
    Something went wrong.
    Please try again later.

Q1 2021 Rite Aid Corp Earnings Call Camp Hill Jul 16, 2020 (Thomson StreetEvents) -- Edited Transcript of Rite Aid Corp earnings conference call or presentation Thursday, June 25, 2020 at 12:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Byron Purcell Rite Aid Corporation - Senior Director of Treasury Services & IR * Daniel Dean Robson Rite Aid Corporation - President of Elixir * Heyward Rutledge Donigan Rite Aid Corporation - President CEO & Director * James Joseph Peters Rite Aid Corporation - COO * Matthew Schroeder Rite Aid Corporation - CFO & Executive VP ================================================================================ Conference Call Participants ================================================================================ * Bryan Cecil Hunt Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst * Carla Casella JPMorgan Chase & Co, Research Division - MD & Senior Analyst * George Robert Hill Deutsche Bank AG, Research Division - MD & Equity Research Analyst * Glen Joseph Santangelo Guggenheim Securities, LLC, Research Division - Analyst * Karru Martinson Jefferies LLC, Research Division - Analyst * Lisa Christine Gill JPMorgan Chase & Co, Research Division - Senior Publishing Analyst * Robert Patrick Jones Goldman Sachs Group, Inc., Research Division - VP * William Michael Reuter BofA Merrill Lynch, Research Division - MD ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by and welcome to the Rite Aid Corporation FY '21 Q1 Earnings Conference Call. (Operator Instructions) I would now like to hand the conference over to your speaker today, Byron Purcell. Thank you. Please go ahead, sir. -------------------------------------------------------------------------------- Byron Purcell, Rite Aid Corporation - Senior Director of Treasury Services & IR [2] -------------------------------------------------------------------------------- Thank you, and good morning, everyone. We welcome you to our fiscal 2021 first quarter earnings conference call. On the call with me today are Heyward Donigan, President and Chief Executive Officer; Jim Peters, Chief Operating Officer; Dan Robson, President of Elixir; and Matt Schroeder, Chief Financial Officer. On today's call, Heyward will provide introductory comments concerning business trends and our strategy. Jim will provide an update on the retail business. Dan will provide an update on the pharmacy services business. Matt will provide an update on our first quarter results, and then we will take questions. As we mentioned in our release, we are providing slides related to the material we'll be discussing today. These slides are provided on our website, www.riteaid.com, under the Investor Relations Information tab. We will not be referring to them in our remarks, but hope you find them helpful as they summarize some of the key points made on the call. Before we start, I'd like to remind you that today's conference call includes certain forward-looking statements. These forward-looking statements are presented in the context of certain risks and uncertainties that can cause actual results to differ. These risks and uncertainties are described in our press release in Item 1A of our most recent annual report on Form 10-K, and other documents that we file or furnish to the Securities and Exchange Commission. Also, we'll be using certain non-GAAP measures in our release in our accompanying slides. The definition of the non-GAAP measures, along with the reconciliation to the related GAAP measure are described in our press release and the slides. With these remarks, I'd now like to turn it over to Heyward. -------------------------------------------------------------------------------- Heyward Rutledge Donigan, Rite Aid Corporation - President CEO & Director [3] -------------------------------------------------------------------------------- Thanks, Byron, and thanks to everyone for joining us. And this was a quarter like no other. The resolve of our Rite Aid associates and the communities we serve is being tested by the unprecedented challenges of COVID-19 and the events surrounding a crucial dialogues about diversity and racial justice. First, I couldn't be more proud of how our Rite Aid team has responded to these challenges. The events surrounding the death of George Floyd have sparked important conversations within our organization about how we can do better and the actions we can take to be a part of the solution in our local communities. Meanwhile, our teams has been on the front lines of health care during the COVID-19 crisis, showing up every day to fulfill our purpose of serving our communities during this time of great need, including the expansion of COVID testing to 97 stores. And all of this, while working together to advance in new strategies that will position us to serve our communities at an even higher level. In my eyes, although this work is far from over, our team is more than passing this test and it gives me great confidence that we can continue to fulfill our important role in health care, elevate our role going forward and be an agent for positive change in our communities. In terms of the results for Q1, COVID-19 was the headline. And the crisis impacted our business in a number of unprecedented ways. At first, in our retail pharmacies, we experienced very favorable results as customers visited our stores for advanced maintenance medications and essential items. Basket size was up significantly and still is, and our team executed at the highest of levels. With only a few exceptions, we kept all of our stores open with all of our usual hours, quickly implemented needed safety measures and kept our supply chain moving and shelf stock as much as was possible, and we know that was a challenge. As a result, and Jim will speak to this later, front end sales, excluding tobacco, grew 16%. We also gained front end market share from our competitors during this time and saw a surge in e-commerce activity. As the quarter went on, we began to see a significant decline in acute prescriptions, as doctors' offices close and elective surgeries were postponed. And we also incurred increased costs necessary in making essential and critical investments to keep our associates and our customers safe. Taking into account the increase in front end sales, the reduction in acute scripts and those incremental expenses, COVID-19 had a $30 million net negative impact on adjusted EBITDA for the quarter. So now turning to our Pharmacy Services Segment, I'm pleased to announce that we have completed the recruiting and hiring of our entire new leadership team at EnvisionRxOptions, which is soon to be renamed Elixir. Our new team includes just the right combination of experience EnvisionRxOptions leaders with extensive organizational knowledge, and new leaders who bring a fresh perspective along with strong pharmacy services market expertise. Together, this team delivered strong results under challenging circumstances in Q1. Revenue was up significantly over prior year, primarily driven by an increase in Medicare Part D membership. And adjusted EBITDA grew $18 million from increased gross profit related to improvements in pharmacy network management. And all of this, on top of our efforts to rebuild this organization, including the launch of a new brand, the integration of our assets within Elixir and the integration between Elixir and Rite Aid, all of which is resulting in strong synergies. We're also investing in our sales team and our new digital experiences, which will be rolled out this fall. So overall, for Rite Aid, even with all of this change, revenue increased more than 12% with strong growth in both segments, and we delivered adjusted EBITDA from continuing operations of $107.4 million compared to $110.3 million in the prior year period. I am encouraged by these results, and I remain bullish about our future. While COVID does create uncertainty, the fundamentals of our business were strong before the crisis, and I believe we are now even better prepared than many to emerge from COVID in a positive way. Our team is doing an extraordinary job of delivering operational excellence. In fact, because of this great work, we remain on schedule with the execution of our bold new RxEvolution strategy. Through this strategy, we are committed to redefining our industry by becoming a dominant mid-market PBM, unlocking the value of our pharmacists and revitalizing our retail and digital experiences. We are also committed to being a destination for whole being health, where traditional medicine meets alternative remedies to support our customers' mind, body and spirit. We are dialed in on meeting the needs of our new target consumer, millennial and Gen X women who care for multigenerational households, including children, parents and pets. It's an approach I call buy 1 one, get 5 free because these consumers drive and influence the purchasing habits of all those they care for. We have seen a modest increase in the percent of our front-end sales that are attributable to this new growth target shopper, which is really encouraging, given that we're in the beginning stages of our remerchandising initiatives and have not yet launched our new brand. The COVID crisis has proven just how essential pharmacies are to the communities we serve. And the important role pharmacists have in providing care at the top of their license. In the case of COVID, we are administering testing. We're focused on elevating the roles of our pharmacists and freeing up time, their precious time to provide levels of consumer engagement never be foreseen in health care. And all of this is being supported by our new merchandising and an exciting new brand. As of this call, we have completed 25 store exterior facade updates with our new logo, our new signs and a fresh new look, and we're on track to implement our new merchandising in concert with our brand launch this fall. And as a reminder, by the end of this year, all of our store exteriors will be completely redone. In addition, and on top of this, we have strong liquidity, expect to generate free cash flow this year and continue taking critical steps to address our debt maturities as reflected by our bond exchange announced this morning. And we continue doubling down on areas where we have momentum, shifting resources to invest in key growth opportunities while reducing corporate expenses and realizing synergies through integration activity at Elixir. A whole new Rite Aid is coming to life, and we're excited about our vision for the future and the important progress we're making. At the same time, I am amazed by the passion and spirit of our more than 50,000 associates who have come to work every day to serve our customers and clients and demonstrate the crucial role that pharmacy plays on the front lines of health care. So with that, I'd like to introduce Jim Peters. Jim is going to give you some additional updates on our Q1 performance and the exciting details about our strategic progress on the retail pharmacy side. Jim? -------------------------------------------------------------------------------- James Joseph Peters, Rite Aid Corporation - COO [4] -------------------------------------------------------------------------------- Thank you, Heyward. As Heyward mentioned, our team was challenged in unprecedented ways during the first quarter. I am so proud of our associates' remarkable response to an unfathomable situation, bravely, tirelessly serving our communities amidst the uncertainties and perils of a global pandemic and civic unrest, all while pushing forward to deploy the RxEvolution strategy. To me, this quarter proved that we can execute at the highest level and signal that decisiveness and nimbleness will continue to emerge as competitive advantages for us. Our associates led the way by swiftly developing and implementing new procedures to keep our stores safe and sanitary, collaborating across the organization and with our supply chain to stay in stock, maintaining store hours wherever possible and managing e-commerce demand that peaked at over 10x historical levels. And while we realized there is much more important work to do in turning our company around, I am more confident than ever before that we can and will achieve our vision of becoming the destination for whole being health and a growing differentiated thriving organization. In terms of the quarter, the COVID-19 prices put our pharmacy business in unchartered territory. With all of the factors that Heyward mentioned earlier, we were able to grow same-store prescription count by 40 basis points. And this came despite a nearly 15% reduction in acute prescriptions. While it's simply too early to tell if these trends will hold with the uncertainty surrounding COVID-19, we're beginning to see some positive trends as additional parts of the country continue to reopen. A key area of success was the growth of our prescription delivery business, which we expanded to all stores during the quarter as we began providing free home delivery. And as a result, prescription deliveries increased 86% in Q1 compared to our baseline, and we look forward to continuing to leverage this service to meet the needs of our customers. Immunization rates dropped during the quarter, not surprisingly, as the CDC issued guidance to defer adult immunizations to minimize exposure to COVID. The CDC has recently updated its guidance to resume immunizations according to its immunization schedule put forth by its advisory committee on immunization practices, and we have directed our field leadership and store teams to resume vaccinating with robust protocols. We're looking forward to helping our customers protect themselves from the flu once the vaccine hits the market later this summer. While stay-at-home orders affected traffic to our stores, we drove heightened engagement with customers at home through clinical services like medication therapy management. Customers were more willing to engage with their trusted Rite Aid pharmacists, and we, in fact, experienced 3 record weeks for MTM during this quarter. I spoke earlier about strong execution and nowhere was that more apparent than our rapid and successful launch of 97 COVID testing sites at Rite Aid stores. Through our partnership with the United States Department of Health and Human Services, we now have the capacity to conduct more than 48,000 tests each week to help our customers during a time when they need us most. Our response highlights the key evolving role our pharmacists can play as clinical extensions of our customers' care teams. Our Rite Aid pharmacists continue to prove they are fully prepared and capable of expanding their role in ways that help our customers, communities and key health care stakeholders. As you know, pharmacy is at the heart of our new strategy, which is designed to fundamentally change Rite Aid's role in health care. As I've mentioned before, consumers visit Rite Aid stores up to 30 times per year, and we believe there is a significant opportunity to leverage these everyday type interactions to activate and engage consumers in their own health and support health plans and health care providers as true partners on the front lines in the communities they serve. We believe Rite Aid will play an increasingly important role in helping to guide consumers' decisions in between doctors' visits and serve as a conduit to better health outcomes and lower costs. Moving forward, we will continue to aggressively build a more robust set of capabilities that supports a connected care experience and whole being health solutions that include prescriptions, products and services. In our retail business, we had a strong quarter with front end same-store sales increasing by 16% when excluding tobacco items. This growth was driven by general cleaning products, sanitizers, wipes, paper products, over-the-counter products, liquor and summer seasonal items. In addition, own brand penetration increased to 19.56%, an increase of 119 basis points, as we continue efforts to launch additional own brand items that support whole being health. We're also seeing strong progress in our offering of own brand items through the Amazon marketplace, which we feel is a testament to the quality of the products and the demand of the marketplace. But most importantly, the outstanding execution of our team drove some notable gains in front-end market share as our associates work passionately to serve our customers during the COVID-19 crisis. According to IRI reports, which exclude tobacco, cigarettes and greeting cards, our in-store front end retail sales and unit market share increased by 270 basis points within the drugstore channel in Q1. These important market share gains were delivered across all major business segments, including health, beauty, consumables, general merchandise and liquor. And these market share gains were delivered across all of our major markets, with California and New York City markets among key contributors to the increase. We know we're going to have to work hard to continue these trends going forward, but rest assured that we are recognizing our associates for this success so that they can see the results of their dedication, commitment and perseverance. This gives us critical momentum as we continue to overhaul our merchandising assortment to fully live up to the elevated health and wellness standard that will differentiate Rite Aid from the competition. In terms of marketing, we're very excited to be building assets that support our front-end fresh new brand in preparation for a full-scale new brand launch this fall. As Heyward mentioned, as we sit here today, the first wave of store exterior refreshes is actively underway with 25 already completed. Over the next several months, our communities will begin to notice our fleet being updated as facades are cleaned and pylons and signage replaced with ones reflecting our new brand identity. Commencing this work is an exciting milestone for our Rite Aid team and an outward signal of exciting changes to come as we build up to our official brand launch this fall. We are laser-focused on meeting the needs of our new growth target consumer, millennial and Gen X women, who take care of themselves, their children, their parents and their pets. And as mentioned earlier, we are already beginning to see growth in front-end sales that are attributable to this new growth target shopper, which is encouraging, given that, as Heyward mentioned, we are still in the early stages of our remerchandising initiatives and have not yet even officially launched our new brand. Through rigorous primary research, we have identified key areas she needs help with, to get her thriving, including sleep, immunity, stress and integrated beauty, where the idea is that beauty starts from within. And to reach this target consumer, we continue to shift resources away from the print circular to focus on digital engagement and sales. We are as committed as ever to deliver an elevated omnichannel experience to grow target consumer demands. Of course, our e-commerce and digital channels are key components of that. And now with the team that is fully focused on this experience, we are aggressively moving to deliver a best-in-class frictionless experience across all touch points to ensure that our customers have access to our products and service whenever and however they want them. And as I've noted in prior calls, we had already begun taking important steps to strengthen e-commerce just before COVID-19 hit as part of our RxEvolution strategy. And then we rapidly accelerated these efforts in a direct response to the unprecedented demand spike we've experienced during the quarter's COVID-19 crisis. In a matter of 3 weeks, the team worked tirelessly to increase our fulfillment capacity by 700%. It was all hands on deck, and we learned a lot about where we need to invest and what our infrastructure will look like to support continued digital growth at scale. This is only the beginning. We have more to do with efficiency gains, and we will not let up. We're now in a position to use the levers we have to optimize demand, profitability and share of wallet. You will see us testing and adjusting more frequently as we optimize and pivot in real time. In addition to e-commerce, we provided a new convenient outlet for customers this quarter by launching a new nationwide partnership with Instacart, allowing customers to conveniently order and receive essential health care and grocery items delivered directly from our stores to their homes. And this quarter, we expanded Instacart delivery from a limited number of markets to our more than 2,400 locations with early signals of success. In addition to same-store basis revenue growth, we saw overall increases in average order value at plus 87%, and units per transaction at plus 43% from last year. In addition, we recently completed the successful expansion of pay-and-go to all stores Pay-and-go significantly expedites prescription pickup, both in-store and at the drive-thru, and we've been receiving excellent feedback from our customers and our pharmacists. In response to COVID-19 and the spike in demand for telehealth, we accelerated the launch of Rite Aid Virtual Care. And looking ahead, we are making progress in rolling out a new buy online pick up in-store offering, which will be shaped by new consumer preferences emerging from COVID-19, including enhanced drive-thru and curbside pickup options. Before I turn it over, I'd like to sincerely thank our entire Rite Aid team for all they have done, all they are doing and all they will do, as they tirelessly serve our communities during the COVID-19 crisis, all while not missing a beat in executing according to plan our RxEvolution strategy. Our associates have done amazing work to make important progress while recognizing the critical work we have ahead of us to fully realize our vision for the future. I look forward to continuing these efforts with such a passionate and dedicated team, as together, we look to help our customers not just get healthy, but to get thriving. And with that, I'd like to now turn it over to Dan Robson for an update on Elixir. Dan? -------------------------------------------------------------------------------- Daniel Dean Robson, Rite Aid Corporation - President of Elixir [5] -------------------------------------------------------------------------------- Thanks, Jim. Before we update you on our key initiatives, it is important to talk about how COVID-19 has impacted our business. From a business continuity standpoint, we have encountered no disruption to operations. The team has performed well over the last 3 months. For the quarter, our increase in Mail business was partially attributable to COVID 19. In addition, we saw an increase in maintenance medication utilization in the retail network. We are seeing a moderate downturn in membership, as employers are rightsizing their workforces. Moreover, script volume is down somewhat due to the deferral of doctor office visits, elective surgical procedures. Although these trends have not had a material impact on our business, moving forward, we will continue to keep a close eye on these trends. Regarding Elixir's execution on key initiatives. We are making significant progress, especially now that our leadership team is in place. And as Heyward mentioned, our new team includes just the right combination of experienced EnvisionRxOptions leaders with extensive organizational knowledge as well as new leaders who bring a fresh perspective along with strong pharmacy services market expertise. Integration within Elixir and between Elixir and Rite Aid is moving forward as planned. We have taken action as recently as yesterday to realize immediate operational synergies and eliminate unnecessary expense. This process will continue in coming quarters as our leadership team continues to drive integration through all aspects of daily operations. Our rebranding is also well underway. We have a plan in place to complete this initiative prior to the end of 2020, and we are making big strides with investments in our improved integrated technology infrastructure. Also, Elixir will be implementing a best-in-class digital experience, which is differentiated, engaging and streamlined for customers. These products will establish new capabilities, consolidate portals into one platform and establish a foundation for winning new business. All of these initiatives will enhance our value proposition to target markets as we move into the 2022 selling season. I am pleased with our results. Given that this is a long-term project and all that is happening in our world today, first quarter results were strong, with adjusted EBITDA increasing by $18.1 million or 68.6% compared to the first quarter of the prior year. This increase was primarily driven by continued focus on improving margin, including our significant efforts to optimize our network strategy. Revenue was favorable, the prior year by $411 million or 26.2%. This increase in revenue was principally due to an increase in Medicare Part D membership. While growth in the Medicare Part D membership is exciting, we are turning our focus to strengthening our enterprise EBITDA within this Medicare Part D space. Also at Elixir Pharmacy, mail order revenues are up 23% year-over-year due to both Medicare Part D utilizing members and COVID-19. Specialty revenues are up 12% year-over-year due to the increased utilization by our commercial as well as Medicare Part D members. Elixir's PBM business continues to see strong client retention rate of approximately 95% for the 2021 selling season. Elixir will no longer waive early refill limits on 30-day prescriptions for maintenance medications on a state-by-state guidance for reopening. Many of these edits have already occurred as of June 1, 2020. Most other States will have early refill too soon edits reimplemented by July 1, 2020. Due to COVID, we are seeing RFPs being deferred. In light of that, we are highly focused on the 2022 selling season and capitalizing on our opportunity to win new business with employers as well as with national, regional and provider led health plans. We are also excited about our opportunity to be the only mid-market independent PBM that is owned by a pharmacy, which we believe is a differentiator to our clients. Finally, our position as a strong independent mid-market PBM is resonating as an essential option in the marketplace for health plans, health systems, self-insured employers and units. With that, I'll now turn it over to Matt for some comments on our Q1 financial performance. Matt? -------------------------------------------------------------------------------- Matthew Schroeder, Rite Aid Corporation - CFO & Executive VP [6] -------------------------------------------------------------------------------- Thanks, Dan, and good morning. On this morning's call, I will walk through our first quarter results, provide some details on the bond exchange that we announced this morning and also discuss the potential impacts of COVID-19 on the business for the remainder of the year and our rationale for withdrawing our fiscal 2021 guidance. Revenues for the quarter were $6 billion, which were up approximately $655 million or 12.2% from the prior year's first quarter. We saw strong revenue growth in both our Pharmacy Services and Retail Pharmacy Segments. Net loss for the quarter was $72.7 million or $1.36 per diluted share compared to a loss of $99.3 million or $1.88 per diluted share in last year's first quarter. Adjusted net loss in the current quarter was $2 million or $0.04 per diluted share versus an adjusted net loss of $7.5 million or $0.14 per diluted share in the prior year quarter. The improvement in our adjusted net loss was due primarily to higher gross profit and a decrease in interest expense partially offset by an increase in SG&A expenses due to COVID-19 related investments. Adjusted EBITDA was $107.4 million in the current quarter compared to $110.3 million in the prior year quarter. The quarter benefited from strong performance at Elixir, but was negatively impacted by the impacts of COVID-19 on the retail segment in the current quarter and a reduction in WBA TSA fee income from the prior year. We have completed the sale of the last distribution center to WBA in May and have completed our obligations under the TSA agreement. Retail Pharmacy segment revenue for the quarter was $4.1 billion, which was $258 million higher than last year's first quarter. Our increase in Retail Pharmacy Segment revenue was driven by an increase in same-store sales of 6.6%. Front end same-store sales were up 16% after excluding cigarette and tobacco sales. Pharmacy same-store sales increased by 2.2%, with same-store prescription count up 40 basis points on a 30 day-adjusted basis, driven by growth in 90-day maintenance prescriptions offset by a reduction in acute prescriptions of 14.8% in the quarter, resulting from the postponement of doctors office visits and elective surgical procedures in connection with the COVID-19 pandemic. We will continue to focus on driving script growth through our broad immunization and medication adherence interventions as well as aggressively pursuing prescription file buys and by working to gain further access to new networks in markets where we have strong market presence. Total retail Pharmacy Segment gross profit dollars in the quarter was $51 million better than last year's first quarter, and gross margin was 43 basis points worse as a percent of revenues. During the quarter, we recorded a onetime restructuring charge of $26 million to establish an inventory reserve on product lines we are exiting and will no longer carry as part of our rebranding initiative. This charge is not included in adjusted EBITDA. Adjusted EBITDA gross profit was favorable to last year's first quarter by $58 million and 28 basis points worse than prior year as a percent of revenues. Our increase in adjusted EBITDA gross profit was driven by improvements in our front end sales. The 28 basis point decline in adjusted EBITDA gross margin is due primarily to higher markdowns on increased sales volume to our wellness+ members. Also, as a temporary show of appreciation to our associates, we offered higher discounts on front end merchandise in the first quarter, which had a negative impact on our gross margin. Retail Pharmacy Segment SG&A expense for the quarter was $37.7 million higher and 82 basis points lower as a percent of revenues to last year's first quarter. Our adjusted EBITDA SG&A was $79.2 million and 37 basis points worse than last year. The increase in adjusted EBITDA SG&A was primarily due to COVID-19 related expenses, which included our Hero Pay and Hero Bonus programs, pandemic pay, and store cleaning and sanitation measures to keep our associates and customers safe. While most of these expenses were related to temporary programs, we do expect our expenses to clean and sanitize our stores to add an additional $5 million per quarter to SG&A expense going forward. Prior year SG&A results also benefited from $13 million in TSA fee income that we no longer have, as we have exited the TSA. Our Pharmacy Services Segment Elixir, had revenues of $2 billion, which is an increase of $411 million or 26%, primarily due to an increase in our Medicare Part D revenues as we continue to grow our membership. Adjusted EBITDA for the Pharmacy Services Segment of $44.4 million was $18.1 million better than last year's first quarter adjusted EBITDA. Pharmacy Services Segment adjusted EBITDA benefited from increased revenues and improvements in pharmacy network management and good cost control. While we did see some reduction in commercial plan membership due to layoffs associated with COVID-19, they did not have a material impact on the quarter results. Our cash flow statement for the quarter shows the use of cash from operating activities of $118 million in the current year quarter compared to a use of cash from operating activities of $51 million in the prior year quarter. The cash from operating activities in the quarter was negatively impacted by the growth in our calendar 2020 Medicare Part D receivable, timing differences in the receipt of our monthly capitation payment from CMS and a temporary build in pharmacy inventory to hedge against any disruptions in the generic supply chain, partially offset by reductions in front-end inventory as we continue to execute on our inventory management initiatives. Our debt balance net of cash was $3 billion at the end of the first quarter, and our leverage ratio was 5.7x adjusted EBITDA. Our liquidity of approximately $1.7 billion is very strong. And with no debt maturing until 2023, we have the flexibility and the runway needed to execute our strategic initiatives. We do expect our leverage ratio to get worse in the second and third quarters of fiscal 2021, as the 2020 CMS receivable grows, but then expected to improve in the fourth quarter when we securitize that receivable. Today, we announced a transaction that furthers our ongoing efforts to address our debt maturity profile. We are offering to exchange up to $750 million of our 6% and 8% senior notes due in 2023 for a combination of $600 million in new secured notes due in November 2026 and cash. This transaction will improve our debt maturity profile while maintaining ample liquidity and minimizing the overall impact to interest expense. I'll now spend a few minutes providing an update on how COVID-19 continues to impact our business. Our front-end revenues continue to benefit from increased demand, with front end same-store sales, excluding cigarettes and tobacco, increasing 7.2% through the first 3 weeks of June compared to the same period in the prior year. Same-store prescription counts increased 80 basis points in the first 3 weeks of June compared to the same period in the prior year due to a lessening impact of acute prescription declines, which were down 11.7%. Regarding supply chain, our current supply of brand and generic drugs is good, and we have substantially improved our in-stock levels on high demand, essential front end merchandise, so that we are back in stock on a regular basis. Given the potential protracted nature of COVID-19 pandemic, we have identified several potential opportunities and risks to our business. Our opportunities include, but are not limited to, increased demand for immunizations with recently issued CDC guidance that stresses the importance of flu shots in the fall, we are expecting an increased demand for these immunizations; continued increased demand for our front-end products; and continued expansion of our COVID-19 testing capabilities. The potential risk related to our business related to COVID-19 include, but are not limited to, the potential for a second wave of COVID-19 related shutdown activities, which could result in continued softness in acute prescription demand; slower returned to pre-COVID outpatient visit; and elective surgery levels, which could continue to depress acute prescription demand. The potential -- the impact of a potential protracted economic recession; potential supply shortages with certain generic drugs; increased cleaning and sanitation costs; potential reductions in membership at Elixir; and a soft Elixir 2021 selling season. Given the significant amount of uncertainty around the pandemic, the potential volatility in our business related to the opportunities and risk as previously outlined, and the related short and mid-term macroeconomic impact. At this time, we are not in a position to accurately forecast the future impacts of these items in our business. And consequently, we are withdrawing our guidance. We expect to generate free cash flow in fiscal 2021 and are taking the following steps to do so. We are continuing to closely manage and reduce costs. As we stated in our release this morning, we have eliminated 254 corporate office positions across both our retail pharmacy and Pharmacy Services Segments. We have also taken steps to reduce other expenses such as shrink, advertising, rent, travel and call center expenses. We expect these initiatives to result in savings of over $40 million in fiscal '21 that were not included in our original guidance and an annualized savings of $55 million. We will continue to pursue our initiative to reduce our inventory investment using lean methodologies and expect these initiatives to generate a working capital benefit of over $150 million in fiscal 2021. We continue to execute on our brand relaunch, which would be completely done in the fall and our Store of the Future initiative. We now plan to remodel 45 stores in our new format in fiscal 2021, down from our original plan of 75 due to a slowdown in permitting and construction activity caused by COVID-19. The remainder of those planned remodels will move into the beginning of fiscal 2022. We are also deferring some other capital expenditures originally planned for fiscal '21 into fiscal 2022, and are, therefore, reducing capital expenditures from our previously announced fiscal 2021 guidance of $350 million to $275 million. As we have said previously, reducing our debt and improving our leverage ratio is critical, and we are taking steps to ensure that we achieve this goal, even in the face of unprecedented uncertainty. This completes my portion of the presentation. And with that, we will now be opening the phone lines for your questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And our first question comes from the line of Lisa Gill from JPMorgan. -------------------------------------------------------------------------------- Lisa Christine Gill, JPMorgan Chase & Co, Research Division - Senior Publishing Analyst [2] -------------------------------------------------------------------------------- Matt, I just want to go back to the risks that you talked about and why you're pulling the guidance. So first off, you all have done a great job of keeping front end well stocked, and your same-store sales are well above what we were anticipating, especially here in the beginning parts of June. So as we think about the potential for that second wave and economic downturn, I generally think of pharmaceuticals as being pretty inelastic that, ultimately, right, you're going to come back at some point and you're going to have that prescription build. Is there any impact that you're seeing to shift to mail order in some of those risks that perhaps people have utilized mail, and they're not coming back to the store from that perspective would be my first question. And then secondly, you made a comment around the selling season. Can you just talk about what the retention level for Elixir has been for the selling season? I understand is that unusual selling season and you probably don't have the opportunity to win on a new business, but what's the retention level been like? -------------------------------------------------------------------------------- Heyward Rutledge Donigan, Rite Aid Corporation - President CEO & Director [3] -------------------------------------------------------------------------------- Lisa, it's Heyward. I'm going to jump in for a minute because some of these questions, I think I'd like to answer. And then Matt can talk about the guidance situation. Yes, we're really having very strong sales results. And we have not -- we believe that will continue, and we believe traffic will continue to increase as well, not the basket size. We don't worry too much about a recession impacting our retail pharmacy business. Although if it was deep and long, certainly, we'd have to look back to 2008 and reflect on that. But because of all the stimulus going on right now, we're really not anticipating that this year, but it's still a risk that I think we all have to be aware of. But we're seeing really strong sales results and market share. And we think that will actually continue to improve as we roll out our new merchandise. With regard to mail order, we actually view pharmacy as a very multi-distributed business. And so we're seeing a significant migration now to delivery. We're seeing the benefits of an increase in mail order on the Elixir side of the business. We are offering buy online, pickup in store. We're offering pharmacy delivery services. We're shipping pharmacy. So there's a whole myriad of different ways you can get prescriptions. The risk for us isn't that people aren't going to get prescriptions filled because they're worried about going to the store. We can get prescriptions to them in any which way they want. The risk is really related to the doctors and hospitals not having been opened for business. And so therefore, not prescribing acute scripts. And we are seeing doctors and hospitals opening for business again. We're seeing it in different ranges in different markets. The question really is, will they open at the 100% level that they had been across every market? Or will there continue to be ups and downs as the COVID pandemic surges, resurges, dies down, flares back up? So that's really the thing to watch. And then with regard to Elixir, we are projecting a 95% retention rate. So the retention rates are really good for the reason that we talked about. People are not so interested in making changes right now because they -- why would you in the face of a pandemic with everything else going on? But it's having the sort of reverse effect on us, which is that because they're not making changes, we're not seeing as much new sales activity in this particular cycle as we normally would have. And Matt, do you want to say any -- sorry. -------------------------------------------------------------------------------- Lisa Christine Gill, JPMorgan Chase & Co, Research Division - Senior Publishing Analyst [4] -------------------------------------------------------------------------------- No, I was just going to say, Heyward, that's all really helpful. I guess for me, when I just think about the original guidance and then how well you did in this quarter, I actually expected, like I said, for your front-end sales to have really declines, right, like you would have seen the surge. The fact that you're able to hold on to that, we are seeing reopenings. I understand the risk of either potential second wave or people not going to the doctor, but even during this period of time, and you talked about the first 2 weeks of June, where we've seen limited openings, you still had prescription volumes that were up 80 basis points. So I guess I'm just trying to understand, is this just caution on your side? Or are you seeing things because, obviously, you're much closer to it than the seats we're all sitting in? Are you seeing things that are starting to materialize here towards the end of June that would be different than what you saw in the first couple of weeks of June? -------------------------------------------------------------------------------- Heyward Rutledge Donigan, Rite Aid Corporation - President CEO & Director [5] -------------------------------------------------------------------------------- Yes, Matt, I'll let you handle that. -------------------------------------------------------------------------------- Matthew Schroeder, Rite Aid Corporation - CFO & Executive VP [6] -------------------------------------------------------------------------------- Yes, Lisa, we're -- I would -- I mean, we're not seeing -- the first weeks of June are basically through the end of last week. So I think the trends there are what they are. There's no reason to believe that they're going to change in the end of June, although we're certainly going to keep an eye on things. I think there's the reason for pulling guidance, Lisa, is there's just such a wide range of outcomes here. I think that based upon the risk factors that I laid out and given the variability in those types of outcomes and I think kind of the unknown of what we're going into here, we're just in an environment where it's very difficult to predict kind of which way these certain outcomes are going to go. So I think from the standpoint of pulling guidance, we think it's the right thing to do from the standpoint of not giving kind of a fall sense of our ability to forecast those outcomes in a range that we think the investment community would find helpful. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- Our next question comes from the line of George Hill from Deutsche Bank. -------------------------------------------------------------------------------- George Robert Hill, Deutsche Bank AG, Research Division - MD & Equity Research Analyst [8] -------------------------------------------------------------------------------- I guess, just to look at things that aren't COVID related. It looks like you guys have bumped up the cost savings guidance to a number closer to $95 million now, finding another $40 million this quarter. I guess, Heyward, given what's going on with COVID, I guess, how are you guys doing able to kind of turn over the rocks in finding the cost savings? And I guess the question I'm going with is, you targeted $55 million, you found an incremental $40 million, how much more do you think there could be? And then I just want to make sure I had the question right, which was the $30 million for COVID costs in the quarter. We're expecting that to be kind of a onetime item, not a run rate item, and that's included in continuing results, right? -------------------------------------------------------------------------------- Heyward Rutledge Donigan, Rite Aid Corporation - President CEO & Director [9] -------------------------------------------------------------------------------- Well, two things, and then I'll let Matt jump in on the last question. The first thing is you're turning over the rocks is great a way of thinking about this. As I dig into this organization and turnover said rocks, we find more and more opportunity to become more efficient. The call center is a stellar example. And we are identifying savings in many parts of the organization. And what's beautiful about this is that we in our most recent cost-cutting initiative didn't have to cut into the field at all. So it didn't have to cut into the stores, the pharmacy business, our sales teams, our merchandised, anything that's really critical to our go-forward business and making our customers delighted. So what we're really seeing is a continued ability for us to save money while still advancing the business and invest in the business for our customers. And I anticipate that we will continue to uncover opportunities to do so. And then with regard to the onetime COVID, some of that is onetime, and I'll let Matt talk about it, but there are going to be some ongoing cleaning costs that we will see during the balance of the year. Matt, you want to comment on that? -------------------------------------------------------------------------------- Matthew Schroeder, Rite Aid Corporation - CFO & Executive VP [10] -------------------------------------------------------------------------------- Sure. As I said in my script, George, we're expecting cleaning costs to add about $5 million per quarter in our run rate on SG&A. And the only thing I would -- other thing I would say is that I would look at kind of the cost savings that we did last year versus this year is kind of steps in the process. So we had a pretty significant reduction in force at the beginning of last fiscal year that was really focused on the retail. The back office is supported the retail business. This second wave of cost reductions is about moving forward our stated objective to really integrate both the back offices of the various Elixir businesses as well as integrate some of the back-office functions between Rite Aid and Elixir overall. And that's -- as Heyward said, just part of a continuous process. And then there's also just continued opportunities in some of our other spend, advertising. As we get more efficient and go more to digital, that has the advantage of also being a better way to reach our customers, but also allowing us to be more cost-effective with the cost of paper and print and distribution and those types of things. So as Heyward said, we're going to continue to look for opportunities here. -------------------------------------------------------------------------------- Heyward Rutledge Donigan, Rite Aid Corporation - President CEO & Director [11] -------------------------------------------------------------------------------- And we're continuing to advance an earnest our lean work, which will continue to result in reductions in working capital tied to inventory as we also advance our merchandising, and we are seeing some really great outcomes from our lean work which is still in deployment on our pharmacy side of the business. Thanks, George. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- Our next question comes from the line of Robert Jones from Goldman Sachs. -------------------------------------------------------------------------------- Robert Patrick Jones, Goldman Sachs Group, Inc., Research Division - VP [13] -------------------------------------------------------------------------------- I guess maybe just on the front end market share gains that you talked about in the quarter. I mean, I guess maybe what specifically do you feel like your actions were that allowed you to gain that market share? And then probably more importantly, what can you do to retain some of those customers as we hopefully progress out of the current situation? -------------------------------------------------------------------------------- Heyward Rutledge Donigan, Rite Aid Corporation - President CEO & Director [14] -------------------------------------------------------------------------------- Yes, I'll let Jim answer that. -------------------------------------------------------------------------------- James Joseph Peters, Rite Aid Corporation - COO [15] -------------------------------------------------------------------------------- Sure, Heyward, thank you. Look, I would say, first of all, our in-stock position was very strong. Pre during the COVID-19 event, it's been stronger than our peers in the drug channel, according to the information that we get from IRI, so that's part of it. And category management and supply chain on our teams took action to maintain that supply, especially on those items that were in high demand during the pandemic, things like paper and first aid, hand sanitizer, mask, even liquor and are clearly evident in the sales increases as well as the market share gains. They did things like maintain constant dialogue with suppliers to anticipate pending shortages, continuously sought alternative sources of supply, expedited delivery methods. And literally, our team's category management and supply chain on the fulfillment side, our leadership literally held standing war room meetings every other day to manage these kind of daily changing supply priorities. So on the front end, as you asked, we really had outperformed our peers as a result. We also largely maintained operating hours, during which our store associates executed extremely strongly as they urgently deployed safety protocols, replenish shelves and serve customers. So net-net, it was really a partnership between category management, supply chain, field and store associates with outcomes we're proud of. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- And our next question comes from the line of Glen Santangelo from Guggenheim. -------------------------------------------------------------------------------- Glen Joseph Santangelo, Guggenheim Securities, LLC, Research Division - Analyst [17] -------------------------------------------------------------------------------- Heyward, I just want to dig in on this $30 million number a little bit more. I mean, we've talked a fair amount about the impact that COVID has had on the SG&A. But in the release, you say that COVID impacted your adjusted EBITDA by $30 million, it didn't suggest that you had $30 million in incremental expenses. You obviously got a big bump on the revenue and gross profit, particularly on the front end from some of the COVID sales. So I'm trying to really triangulate on SG&A and sort of figure out how much incremental expenses you incurred in the quarter? And if I heard you correctly, it sounds like $5 million of that will be for cleaning costs on a go-forward basis. I think what we're all trying to assess is those temporary programs you had in place like Hero Pay, like how should we think about those costs as we migrate into fiscal 2Q and 3Q and the rest of the year? -------------------------------------------------------------------------------- Heyward Rutledge Donigan, Rite Aid Corporation - President CEO & Director [18] -------------------------------------------------------------------------------- Sure. It's -- yes, many of those costs were onetime. The Hero Pay, for example, the bonuses, we do continue to obviously have people quarantining, so we're going to continue to have, for some period, the cost of people calling out for good reason. Matt, why don't you just do a little bridge for us on that? -------------------------------------------------------------------------------- Matthew Schroeder, Rite Aid Corporation - CFO & Executive VP [19] -------------------------------------------------------------------------------- Sure. So Glen, the $30 million is definitely a net number. And I think the 3 main impacts there are an estimate of the increased volume from front end driven by COVID, an estimate of the script, the reduction of what we would expect our script trends to be due to the acute prescription declines in COVID and then the incremental SG&A expense. If you -- I would take a look at what our adjusted SG&A, EBITDA SG&A variance was for the quarter and kind of consider a couple of things. First of all, there is about a $13 million number for that benefited us in last quarter from the WBA TSA fees is not in this quarter. There is about $5 million or so in the quarter that we think is really kind of incremental cleaning cost. And then really, the rest of that SG&A variance is due to the cost of Hero Pay. It's due to the cost of a Hero Bonus. It's due to some impact of just front end, where you have to ramp up staffing. And then I would say that while we expect cleaning expenses in -- to continue between the accelerated cleaning that we had to do during kind of the most intense parts of the COVID activity in some of our hotspots plus the cost of putting in some shields and buying PPE and things like that for the stores, there's probably a surge in a type of cleaning expenses that in the first quarter, that doesn't all replicate through the rest of the year. So hopefully, that's helpful and kind of wrapping your head around the SG&A impact. -------------------------------------------------------------------------------- Glen Joseph Santangelo, Guggenheim Securities, LLC, Research Division - Analyst [20] -------------------------------------------------------------------------------- No, no, that's really helpful. Maybe if I could just ask one quick follow-up on the balance sheet. So if you're successful sort of restructuring this next $750 million piece, what does that leave us left with in 2023? And what's the goal as it relates to 2023, you're trying to ultimately restructure everything out of that year. And as I think about the interest expense, I appreciate you don't want to give guidance on full year interest expense. But is there anything else that would be moving that interest expense number meaningfully from what we were thinking about outside of this debt restructuring? -------------------------------------------------------------------------------- Matthew Schroeder, Rite Aid Corporation - CFO & Executive VP [21] -------------------------------------------------------------------------------- Yes. If we if we get the full $750 million that we're shooting for in the exchange, we would have about $400 million left at this April 2023 notes. And Glen, the goal would certainly be to get out of those over a period of time. I don't want to pin us down to an exact time frame. I think we do have some time to work with it, but you can see we're pretty focused on trying to get our way out of that maturity altogether. This current exchange really won't have a material impact on our annual interest expense. I expect it to increase interest expense on an annual basis by about $5 million. And really nothing else going on in -- from a standpoint of looking at our additional -- our original interest expense guidance as there are guidance, if anything. If LIBOR rates continue to stay as low as they have been over the past couple of months, we could probably get some type of benefit from that. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- Our next question comes from William Reuter from Bank of America. -------------------------------------------------------------------------------- William Michael Reuter, BofA Merrill Lynch, Research Division - MD [23] -------------------------------------------------------------------------------- I just have two. So the first one, you noted that you've seen a little bit of lower commercial plan membership. It didn't impact the first quarter, but it sounds like maybe it will be impacting 2Q, 3Q, et cetera. Is there any way you can comment in terms of what types of reductions you've seen in terms of lives and what the impact on revenue or EBITDA could be in the next couple of quarters? -------------------------------------------------------------------------------- Matthew Schroeder, Rite Aid Corporation - CFO & Executive VP [24] -------------------------------------------------------------------------------- Yes, Bill. This is Matt -- okay, Heyward -------------------------------------------------------------------------------- Heyward Rutledge Donigan, Rite Aid Corporation - President CEO & Director [25] -------------------------------------------------------------------------------- Yes, go ahead, Matt. -------------------------------------------------------------------------------- Matthew Schroeder, Rite Aid Corporation - CFO & Executive VP [26] -------------------------------------------------------------------------------- I would say -- I would characterize that risk is something we're keeping our eye on, but probably not something to put a number to and/or something that's even had a material impact on our business yet. -------------------------------------------------------------------------------- Heyward Rutledge Donigan, Rite Aid Corporation - President CEO & Director [27] -------------------------------------------------------------------------------- I think we want to keep an eye on it, William, because if there -- if unemployment escalates and all of a sudden, people are not only just furloughing people, but taking them out of their benefit plan. That's just a risk along with the recession risk that I was talking to, Lisa, about. It's a -- it's not, in my mind, immediate, and we're not seeing any significant or even material erosion right now. But as a caution, should that happen, should the recession be long standing. The commercial book of business, unlike Medicaid, which would grow. The commercial book of business is the one that I think everyone's keeping their eye on because it's based on employment. Makes sense? -------------------------------------------------------------------------------- William Michael Reuter, BofA Merrill Lynch, Research Division - MD [28] -------------------------------------------------------------------------------- That does make sense. And then as my follow-up, in terms of the maximum 6.125%, you're going to be tendering to exchange, how did you come up with the number of $750 million? -------------------------------------------------------------------------------- Matthew Schroeder, Rite Aid Corporation - CFO & Executive VP [29] -------------------------------------------------------------------------------- Probably don't want to get too much in the weeds on that. I think as we do these things, we're always trying to balance trying to obviously extend this maturity out while not having too much of a negative impact on our cost of debt. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- Your next question is from Karru Martinson from Jefferies. -------------------------------------------------------------------------------- Karru Martinson, Jefferies LLC, Research Division - Analyst [31] -------------------------------------------------------------------------------- Just in terms of the CapEx reduction, does that include any change to your file buys here? Or is that just all from the remodel shifting? -------------------------------------------------------------------------------- Matthew Schroeder, Rite Aid Corporation - CFO & Executive VP [32] -------------------------------------------------------------------------------- I'll jump in. Nothing from the file buys, Karru. We're still pretty focused on trying to do as many file buys as we can, candidly. They're a great source of return. Most of it's from the deferring the 30 remodels that I talked about. There's a couple of other items that, while important, were not necessary to fit into fiscal '21 that we were able to defer as well. -------------------------------------------------------------------------------- Heyward Rutledge Donigan, Rite Aid Corporation - President CEO & Director [33] -------------------------------------------------------------------------------- Yes. I just want to emphasize that we are very aggressively pursuing file buys. One of our key strategic goals is to increase our script revenue in our markets that we serve. And so that's one very important tool in our arsenal as we look to do that. -------------------------------------------------------------------------------- Karru Martinson, Jefferies LLC, Research Division - Analyst [34] -------------------------------------------------------------------------------- And then with GNC filing, does that change the relationship or are there co-locations in your store? And how does that play out? -------------------------------------------------------------------------------- Heyward Rutledge Donigan, Rite Aid Corporation - President CEO & Director [35] -------------------------------------------------------------------------------- Jim, can you comment on that? -------------------------------------------------------------------------------- James Joseph Peters, Rite Aid Corporation - COO [36] -------------------------------------------------------------------------------- Sure. First, GNC has been a terrific partner for us for over 2 decades. And we expect them to continue operating during this restructuring period and to continue to partner with us as we provide their products to our customers. So no real insight into anything other than we're continuing on, and we have no reason to believe that, that will change. In fact, one of the things that may happen that they've actually said publicly is that they will decrease their own kind of retail front door stores, which would intuitively drive more to kind of wholesale business in places like Rite Aid. -------------------------------------------------------------------------------- Karru Martinson, Jefferies LLC, Research Division - Analyst [37] -------------------------------------------------------------------------------- Okay. And just lastly on housekeeping. With the sale of the DC to Walgreens in May, how do those proceeds flow through? Are they being reinvested in the business? Are they excess proceeds? How are those being treated? -------------------------------------------------------------------------------- Heyward Rutledge Donigan, Rite Aid Corporation - President CEO & Director [38] -------------------------------------------------------------------------------- Matt? -------------------------------------------------------------------------------- Matthew Schroeder, Rite Aid Corporation - CFO & Executive VP [39] -------------------------------------------------------------------------------- They'll be reinvested in the business, Karru. -------------------------------------------------------------------------------- Operator [40] -------------------------------------------------------------------------------- Your next question is from Carla Casella from JPMorgan. -------------------------------------------------------------------------------- Carla Casella, JPMorgan Chase & Co, Research Division - MD & Senior Analyst [41] -------------------------------------------------------------------------------- The CMS receivable, can you give us the amount that it was at the end of the quarter? -------------------------------------------------------------------------------- Heyward Rutledge Donigan, Rite Aid Corporation - President CEO & Director [42] -------------------------------------------------------------------------------- Matt? -------------------------------------------------------------------------------- Matthew Schroeder, Rite Aid Corporation - CFO & Executive VP [43] -------------------------------------------------------------------------------- That's not a number we disclose, Carla. I would say that we would expect kind of the growth in that CMS receivable over the year to be pretty similar to what it was last year before we get to the point where we securitize it. -------------------------------------------------------------------------------- Carla Casella, JPMorgan Chase & Co, Research Division - MD & Senior Analyst [44] -------------------------------------------------------------------------------- Okay. Great. And then you talked about the -- I got a lot of questions on the CapEx. But I don't know if I heard the store open closure plans for the year and the cadence that you plan? -------------------------------------------------------------------------------- Heyward Rutledge Donigan, Rite Aid Corporation - President CEO & Director [45] -------------------------------------------------------------------------------- Well, first, we are planning to close some stores. Ironically, one of the stores we're planning to close was burned down during the protest. And of course, we look at this through the lens of our new strategy now. So we are making store closure decisions a little bit differently than we had in the past. We're looking at the potential for market growth, the potential with the store remodel and new merchandising, looking at the socioeconomic demographic information. We do plan to close some stores. Matt, I'll let you comment on that. -------------------------------------------------------------------------------- Matthew Schroeder, Rite Aid Corporation - CFO & Executive VP [46] -------------------------------------------------------------------------------- Yes, we do. We're taking a look at -- we always take a look, Carla, at stores both coming up off the lease and also ones that are not performing our expectations. But I would characterize as store closures as targeted, and I would say from a modeling standpoint, don't expect any material changes in the number of stores in the store base, either from new stores or closures. -------------------------------------------------------------------------------- Carla Casella, JPMorgan Chase & Co, Research Division - MD & Senior Analyst [47] -------------------------------------------------------------------------------- Okay. And just one question on the gross margin side. Can you quantify how much of the gross margin pressure was from that wellness plus shift? And how we should see that trend in the year in terms of what comes a year? Do you see more of the wellness plus purchases, if there is a seasonality to it? And then also when you annualize it? -------------------------------------------------------------------------------- Heyward Rutledge Donigan, Rite Aid Corporation - President CEO & Director [48] -------------------------------------------------------------------------------- Matt, I'll let you answer on the numerics and then Jim weigh in if you want to talk about wellness+. -------------------------------------------------------------------------------- Matthew Schroeder, Rite Aid Corporation - CFO & Executive VP [49] -------------------------------------------------------------------------------- Sure. In numeric standpoint, a pretty good part of the gross margin pressure was due to increased markdowns and a lot of that did come from seeing probably a bit of a disproportionate increase in our front-end sales coming from those members that are gold and silver members and get the incremental discounts. So I don't believe this will be something that's seasonal. I think it's just kind of where we're seeing some of the sales growth that we saw in the quarter. And I think time will tell how that plays out over the next few quarters. -------------------------------------------------------------------------------- James Joseph Peters, Rite Aid Corporation - COO [50] -------------------------------------------------------------------------------- Thanks, Matt. And I would add just qualitatively, essentially mix of customers. So gold and silver up and bronze down. Overall, we saw trip frequency when looking at declines. More than offset by basket size increases when looking at total customer base, our gold and silver were our most loyal customers drove the sales increases. And of course, our bronze and non-carded shoppers declined in visit frequency, kind of creating some drag on sales. So that's what I would suggest is the qualitative side of that question. -------------------------------------------------------------------------------- Carla Casella, JPMorgan Chase & Co, Research Division - MD & Senior Analyst [51] -------------------------------------------------------------------------------- And just one more on the gross margin. Is there a significant difference in margin on the pharmacy side between an acute prescription versus a maintenance-type prescription? -------------------------------------------------------------------------------- Heyward Rutledge Donigan, Rite Aid Corporation - President CEO & Director [52] -------------------------------------------------------------------------------- Matt. -------------------------------------------------------------------------------- Matthew Schroeder, Rite Aid Corporation - CFO & Executive VP [53] -------------------------------------------------------------------------------- There is not. -------------------------------------------------------------------------------- Heyward Rutledge Donigan, Rite Aid Corporation - President CEO & Director [54] -------------------------------------------------------------------------------- Somebody asked the question earlier, which I neglected to answer, which is how are we going to keep the volumes and market share and these new customers and emerging customers coming is that we're seeing really, really strong results in the gold. And those are our most loyal customers. So we don't anticipate that changing. -------------------------------------------------------------------------------- Operator [55] -------------------------------------------------------------------------------- And we have one -- time for one more call. Your last question comes from Bryan Hunt from Wells Fargo Securities. -------------------------------------------------------------------------------- Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [56] -------------------------------------------------------------------------------- Just following on with the line of questioning and answering on Carla's question. When you look at the incremental sales from Instacart in e-comm, how many of those customers are unique versus existing gold and silver? -------------------------------------------------------------------------------- Heyward Rutledge Donigan, Rite Aid Corporation - President CEO & Director [57] -------------------------------------------------------------------------------- Jim? -------------------------------------------------------------------------------- James Joseph Peters, Rite Aid Corporation - COO [58] -------------------------------------------------------------------------------- Sure. We see our gold customers have increased substantially. But in part, they've increased substantially because of new interactions with our e-com site. And so we drove kind of increases in gold membership as largely a function of our e-commerce growth, folks who have turn to Rite Aid for e-commerce for the first time who immediately signed up for e-commerce by first enrolling in wellness. And we see that moving up the chain. So they've correlated together, and they've been positive. But overall, that's early anecdote, and it's really too early to tell whether or not that's a trend or not. -------------------------------------------------------------------------------- Heyward Rutledge Donigan, Rite Aid Corporation - President CEO & Director [59] -------------------------------------------------------------------------------- I think one thing that's exciting -- I'm sorry, one thing that's exciting about e-commerce, I happen to be right now sheltering in a market that isn't a Rite Aid market. And one of the beauties is I've been able to get my prescription sent to me and have also been able to order Rite Aid products online. So think of this as a way for us to expand also beyond our current footprint, a virtual way without brick-and-mortar. Sorry, go ahead, Bryan. -------------------------------------------------------------------------------- Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [60] -------------------------------------------------------------------------------- And my second question is, I was wondering when you look at that, again, following up on a question earlier on that $750 million amount, can you talk about what the regulator is within your ability to layer on additional second lien debt and maybe what that limit might be? -------------------------------------------------------------------------------- Matthew Schroeder, Rite Aid Corporation - CFO & Executive VP [61] -------------------------------------------------------------------------------- Yes. I think all that, Bryan, is pretty clearly spelled out in some of our debt documents. So I don't know if I want to get in the weeds on that on this call. Happy to take that one off-line, if you'd like. -------------------------------------------------------------------------------- Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [62] -------------------------------------------------------------------------------- Yes. That would be great. And then lastly, a lot of the food retailers we follow talked about delivery. For the most part, being incremental or purely incremental, and Heyward you kind of touched on it being able to go outside of market. So when you look at the growth and delivery, how much of that do you think is incremental versus a shift in methodology of use of Rite Aid from your existing customers? -------------------------------------------------------------------------------- Heyward Rutledge Donigan, Rite Aid Corporation - President CEO & Director [63] -------------------------------------------------------------------------------- Jim, do you want to start? And Matt may be able to quantify. -------------------------------------------------------------------------------- James Joseph Peters, Rite Aid Corporation - COO [64] -------------------------------------------------------------------------------- Yes. I mean, honestly, I would say, it's still too early to tell. I think our numbers, when you look at our growth in part, we do believe that our delivery is clearly a component of that. So giving people the opportunity to order on the Rx side, drugs that we can get to their homes through home delivery. I think that, in large part, was probably, although it's anecdotal, folks who otherwise would have gotten those in store. I think on the front end, quite the contrary. I think, again, anecdotally and too early to tell, I think those would, in large part, have a higher concentration of kind of net new. -------------------------------------------------------------------------------- Operator [65] -------------------------------------------------------------------------------- Thank you. I would like to turn the call back over to Heyward Donigan for closing remarks. -------------------------------------------------------------------------------- Heyward Rutledge Donigan, Rite Aid Corporation - President CEO & Director [66] -------------------------------------------------------------------------------- Well, thanks, everyone, for your questions. Great dialogue. Before we end the call, I'd like to just sort of give you a final flavor of the great stuff going on at our company. I spoke earlier about the crucial dialogue that's happening right now regarding diversity and racial justice. The dialogue has led to some really important conversations within our organization and with our customers. And as a reminder, these millennial customers that we're targeting, issues of environment, racial justice and just general equality is really, really important to this group. So this is important, not just for us as a company, in terms of our associates and our communities, but for our customers. I'm really amazed by how our associates have responded to this dialogue as well as what's been happening with some of the work within our communities. And I'm really amazed by the human spirit of our neighbors in the communities we serve. A great example is what recently occurred at Rite Aid in Philadelphia. We really bore the brunt of some of the unfortunate side effects of the protest. And Philly was particularly difficult for us in terms of looting and stores being burned down. One of our stores was severely damaged in the wake of the protest. And in fact, it's still closed. The amazing thing was, the morning after, when our team went to visit the store, we found that 15 of our neighbors were already on-site cleaning up. And when we talked with them, they said they were just helping simply because that was their neighborhood Rite Aid pharmacy. And so they wanted us to reopen and they didn't want us to leave the community. And I just think that is the coolest thing. There's a lot being discussed right now, and sometimes it's difficult to test through the noise. But rest assured that there's important moments of care and compassion that are happening right now throughout our country and thankfully at Rite Aid as well. Highlighting these moments really helps us make real progress as we continue our important discussions about equality and tolerance. And so looking forward to another tough, challenging but really productive and exciting quarter to come. So that concludes today's call. Thanks for joining us, and we'll talk again in September when we report on our Q2 results. -------------------------------------------------------------------------------- Operator [67] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.