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RAD Beats, Mixed Outlook for FY13

Zacks Equity Research

Drugstore chain operator Rite Aid Corp. (RAD) posted a net loss of approximately $161.3 million in the fourth quarter of fiscal 2012, marking an improvement from a loss of $205.7 million in the year-ago period.

The quarterly adjusted loss per share came in at 4 cents, which not only improved from the prior-year loss of 24 cents, but also outpaced the Zacks Consensus Estimate loss of 12 cents a share. Growth in same-store sales and reduced selling, general & administrative (SG&A) expenses had a positive influence on the recent results.

On a reported basis, including LIFO charges, the company incurred a loss of 18 cents per share.

Quarterly Details

Rite Aid's revenues came in at $7,146.8 million for the quarter compared with $6,456.5 million in the prior-year period. The nearly 10.7% increase was mostly attributable to growth in same-store sales and an additional week in the quarter, partially offset by store closings. Same-store sales for the quarter increased 3%. Moreover, total revenue edged past the Zacks Consensus Estimate of $7,100 million.

Pharmacy same-store sales grew 3.8%, despite the negative impact of 216 basis points (bps) from the introduction of new generic drugs. Rite Aid’s pharmacy sales growth was primarily driven by successful execution of its flu immunization program and wellness+ loyalty program.

Prescriptions filled at comparable stores increased 2.4% from the year-ago quarter. Front-end same-stores sales climbed up 1.6% during the quarter.

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 4.8% year over year to $1782.1 million, while gross margin contracted 140 bps to 24.9%. SG&A expenses as a percentage of sales contracted by 60 bps to 24.6%, mainly owing to cost-containment measures undertaken by management.

The company recorded an approximately 63.5% decrease in lease termination and impairment charges to $56.3 million, primarily driven by lower store closures in the reported quarter. Rite Aid reported adjusted EBITDA of $274.3 million compared with an adjusted EBITDA of $215.4 million in the prior-year quarter.

Fiscal 2012, a synopsis

During fiscal 2012, Rite Aid’s net loss narrowed to 43 cents per share compared with a loss of 64 cents in fiscal 2011. Revenues during the fiscal increased 3.6% to $26,121.2 million from $25,214.9 million in fiscal 2011, primarily driven by an increase of 2% in comparable-store sales.

Balance Sheet and Cash Flow

At the end of the fiscal, Rite Aid had cash and cash equivalents of $162.3 million and long-term debt of $6,221.2 million. During the fiscal, the company deployed $408.8 million toward debt repayment and $75.9 million toward capital expenditure. The company generated a cash flow of $266.5 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.


Going forward, Rite Aid expects fiscal 2013 revenues to be between $25.4 billion and $25.8 billion based on same-store sales increase of flat to 1.5%. Currently, net loss is expected to be in the range of $103 million to $267 million (or 13 cents to 31 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 #2 Rank, which translates into a short-term Buy rating. However, we retain a long-term Neutral recommendation on the stock.

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