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Rite Aid (RAD) Beats Q2 Earnings Estimates, Updates View

Zacks Equity Research

Rite Aid Corporation RAD reported second-quarter fiscal 2020 results, wherein adjusted earnings from continuing operations of 12 cents per share outshined the Zacks Consensus Estimate of 8 cents. Moreover, the bottom line compared favorably with the year-ago quarter’s adjusted loss of 15 cents per share.

Notably, the bottom line benefited from lower impairment charges in the reported quarter, somewhat offset by a decrease in adjusted EBITDA. Moreover, operating efficiency in the Retail Pharmacy Segment along with higher Medicare Part D revenues and prescription count sales growth remains impressive. Management is also optimistic about the company, courtesy of EnvisionRxOptions PBM as well as health and wellness offerings.

Backed by these positives, shares of this Zacks Rank #3 (Hold) gained 1.8% yesterday. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Rite Aid Corporation Price, Consensus and EPS Surprise

Rite Aid Corporation Price, Consensus and EPS Surprise

Rite Aid Corporation price-consensus-eps-surprise-chart | Rite Aid Corporation Quote

Q2 in Detail

Revenues dipped nearly 1% to $5,366.3 million and also lagged the Zacks Consensus Estimate of $5,415 million. During the second quarter, the Retail Pharmacy segment revenues slipped 1.6% owing to lower store count, somewhat offset by higher same-store sales. At the Pharmacy Services segment, revenues edged up 1.1% owing to higher Medicare Part D revenues.

Retail Pharmacy same-store sales inched up 0.4% owing to a 1.5% rise in pharmacy sales, partly offset by a 1.8% decline in front-end sales. Excluding cigarettes and tobacco products, front-end same-store sales fell 0.6%. Pharmacy sales included an adverse impact of nearly 276 basis points (bps) from the introduction of new generic drugs. Further, prescription count at same-store sales rose 2.7%. Prescription sales constituted 67.2% of total drugstore sales. Notably, the company delivered the fifth straight quarter of same-store pharmacy sales and prescription count improvement.

Rite Aid’s adjusted EBITDA fell 9.7% year over year to $134.2 million, with adjusted EBITDA margin contracting 20 bps to 2.5%. This downturn was due to lower adjusted EBITDA at the Retail Pharmacy and Pharmacy Services segments.

Moreover, the Retail Pharmacy’s adjusted EBITDA was hurt due to weaker front-end gross profit on account of lower front-end same-store sales and decrease in the Transition Services Agreement (‘TSA’) fee income from Walgreens Boots Alliance WBA. The Pharmacy Services segment was hurt by to higher cost of investments toward growth, partly compensated with improvements in pharmacy network performance.

Store Update

Rite Aid remodeled 24 stores while relocated one outlet in the fiscal second quarter, bringing the company’s total wellness store count to 1,805. Moreover, it shuttered two stores, taking the total store count to 2,464 as of Aug 31, 2019.

Financial Status

Rite Aid ended the quarter with cash and cash equivalents of approximately $142.2 million, long-term debt (net of current maturities) of $3,834.6 million and total shareholders’ equity of $960.6 million.

Further, the company used cash from operating activities of $278.8 million in the fiscal second quarter.

Outlook

Rite Aid, which shares space with Herbalife Nutrition Ltd. HLF and CVS Health Corporation CVS, updated its outlook for fiscal 2020. This view includes the assumption of higher prescription count coupled with improvements in drug costs and SG&A expenses. Also, management expects to witness strength in pharmacy network performance in the Pharmacy Services division. However, it expects to witness decrease in prescription reimbursement rates.

It continues to project sales of $21.5-$21.9 billion for fiscal 2020. The company projects same-store sales growth of 0-1% over fiscal 2019. Moreover, Rite Aid now anticipates adjusted EBITDA to be between $510 million and $550 million compared with the earlier projection of $500-$560 million for fiscal 2020.

Further, it now estimates a net loss of $235-$275 million, wider than the prior expectation of $170-$220 million. The company now envisions adjusted earnings in the range of flat to 56 cents per share. Earlier, it projected bottom line between adjusted loss of 14 cents and earnings of 72 cents per share. Meanwhile, capital expenditures are likely to be roughly $250 million.

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