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Rite Aid (RAD) Q3 Earnings Beat, Stores Transfer on Track

Rite Aid Corporation RAD reported third-quarter fiscal 2018 results, which marked a considerable improvement from the company’s recent trend. After posting in-line earnings last quarter, the company’s break-even results topped the Zacks estimate in the third quarter. Further, the company initiated the process of transferring stores and related assets in a phased manner to Walgreens Boots Alliance Inc. WBA.

During the third quarter, the company completed the pilot closing and first subsequent closing under the purchase agreement with Walgreens, which resulted in the transfer of 97 Rite Aid stores and related assets. So far, Rite Aid has successfully transferred 357 stores to Walgreens for net proceeds of about $715 million, which were used to pay down debt.

Per the amended and restated asset purchase agreement with Walgreens, the latter will buy 1,932 Rite Aid stores, three distribution centers and related inventory in an all-cash deal of around $4.375 billion. Notably, the companies plan to continue the transfer of ownership of stores in a phased manner in coming months.

As majority of the closing conditions for the sale have been met, and only few remain to be fulfilled for the transfer of stores, Rite Aid has classified the 1,932 stores and three distribution centers as assets held for sale. Consequently, operating results and cash flows from these stores are treated as discontinued operations in the company’s financial statements.

Going forward, Rite Aid remains focused on completing the transfer process, while simultaneously identifying new opportunities to strengthen business and providing a great experience to customers and patients.

Shares of Rite Aid have been responding positively to the transfer of stores as evident from its 19.9% growth in the past month, outperforming the industry’s 5.2% growth.

Q3 in Detail

Rite Aid posted break-even adjusted bottom-line results for third-quarter fiscal 2018, compared with earnings per share of 3 cents reported in the year-ago quarter. Further, results beat the Zacks Consensus Estimate of a loss per share of 2 cents. The bottom line was primarily hurt by a decline in adjusted EBITDA, which was negated by reduction in adjusted income tax expense.

Rite Aid Corporation Price, Consensus and EPS Surprise

Rite Aid Corporation Price, Consensus and EPS Surprise | Rite Aid Corporation Quote

Revenues dropped 5.6% to $5,353.2 million, also falling short of the Zacks Consensus mark of $7,736.4 million. During the quarter, Retail Pharmacy segment revenues slipped 3% on account of soft same store sales and unfavorable reimbursement rates. Moreover, revenues from the Pharmacy Services segment declined 12.2% due to an election to take part in lesser Medicare Part D regions and a fall in commercial business.

Same-store sales dipped 2.5%, owing to a 3.5% fall in pharmacy sales and 0.5% decrease in front-end sales. Pharmacy sales included a negative impact of nearly 198 basis points (bps) from the introduction of new generic drugs. Further, prescription count at comparable stores slipped 2.4% due to the omission of some pharmacy networks from the prior-year quarter. Prescription sales constituted 66.5% of total drugstore sales.

Rite Aid’s adjusted EBITDA plunged about 32.5% year over year to $129.2 million, with the respective margin contracting 100 bps. This was due to a fall in adjusted EBITDA contributions from Retail Pharmacy segment primarily stemming from reduced reimbursement rate, as well as lower adjusted EBITDA at the Pharmacy Services segment.

Store Update

Rite Aid continues to renovate stores, with 20 outlets remodeled, one opened, one expanded and one relocated in the quarter under review. This brings the company’s total wellness stores count to 2,505. Further, the company sold 97 stores to Walgreens and shut seven stores during the quarter, consequently taking the total store count to 4,404 as of Dec 2, 2017.

Financial Status

Rite Aid ended the third quarter with cash and cash equivalents of approximately $169.8 million, long-term debt (net of current maturities) of $6,905.9 million and total shareholders’ equity of $825.1 million.

Further, this Zacks Rank #3 (Hold) company’s cash from operating activities came in at $129 million as of the end of third-quarter fiscal 2018 and $424.5 million for the nine months of fiscal 2018.

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Diplomat Pharmacy has advanced 15.7% in the past month. The stock has a long-term growth rate of 6.6%.

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