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Rite Aid's June Comps Improve

Zacks Equity Research

Drugstore chain retailer, Rite Aid Corp. (RAD) reported slight growth in comparable-store sales for Jun 2013, thereby breaking the declining trend of comps for the past four months. The company’s comps for the 4-week period ended Jun 29, 2013 inched up 0.7%, primarily driven by improved comps results at its pharmacy and front-end stores.

Pharmacy comps for June were up 0.9%, which included a negative impact of approximately 305 basis points from generic drug introduction. The results were also adversely affected due to a 0.2% drop in prescription counts. Additionally, the company’s front-end comps rose 0.4%.

Rite Aid reported total drugstore sales of $1.927 billion for the month, up 0.2% from the year-ago figure of $1.924 billion, with prescription sales constituting 67.4% of it. Third-party prescription sales accounted for 97.0% of pharmacy sales. .

For the 17-week period ended Jun 29, Rite Aid’s comps decreased 1.7% primarily due to a fall of 2.7% in pharmacy comps, partially offset by 0.4% rise in front-end comps. In the said period, total drugstore sales fell 2.1% to $8.191 billion from $8.365 billion in the comparable period of 2012.

Prescription sales comprised 67.5% of total drugstore sales, with prescription counts dropping 0.1%. Additionally, third-party prescription sales constituted 97.0% of the pharmacy sales.

Rite Aid, which trails Walgreen Co. (WAG) and CVS Caremark Corp. (CVS) in terms of store count, has persistently witnessed a downward sales trend over several quarters due to the introduction of lower cost generic (non-brand) drugs. Such non-branded drugs are less expensive in the market but generate higher gross margins for the company.

This is evident from Rite Aid’s performance in first-quarter fiscal 2014, when generic medication primarily drove its margin expansion. Going forward, this Zacks Rank #3 (Hold) stock is likely to focus on expanding its portfolio of generic medication, given the growing demand for such drugs.

However, Rite Aid’s generic drug sales could be dented by Wal-Mart Stores Inc.’s (WMT) entry into the retail generic drug market. Due to Wal-Mart’s wide array of manufacturers in India, Israel, and the U.S., the mass merchant can offer the particular drugs at a more discounted price compared with the average $10.00 generic drug co-pay.

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