Rite Aid Revises Guidance In Second Quarter

September 18, 2014

Solid same store sales growth at Rite Aid caused second quarter profits to surge but looming pressure on pharmacy margins prompted the company to reduce its full year outlook.

Rite Aid reported revenues of $6.5 billion for its second quarter ended August 30, representing a 3.9% lift credited to rising pharmacy same-store sales.  Rite Aid revised its year-end guidance, however, based on anticipated lower pharmacy margins going forward.

"In the second quarter, our team of dedicated Rite Aid associates worked together to execute our strategy and deliver results that reflect growth in net income and adjusted EBITDA and significant increases in same-store sales and prescription count," stated Rite Aid chairman and CEO John Standley.  "Heading forward, while we believe that our key initiatives will continue to drive top-line growth, we are revising our guidance based on lower than anticipated pharmacy margin in the second half of fiscal 2015.  As we navigate these headwinds, we will remain focused on growing our business, generating continued operational efficiencies and positioning our associates to deliver a consistently outstanding experience for our customers."

Same-store sales for the quarter increased 4.1% over the prior year, consisting of a 1.1% increase in front-end sales and a 5.6% increase in pharmacy sales.  Pharmacy sales included an approximate 199 basis point negative impact from new generic introductions.  The number of prescriptions filled in same stores increased 3.7% over the prior year period.

Prescription sales accounted for 68.8% of total drug store sales, and third-party prescription revenue was 97.5% of pharmacy sales.

Net income was $127.8 million or $0.13 per diluted share compared to last year's second quarter net income of $32.8 million or $0.03 per diluted share.  The improvement in net income resulted primarily from an increase in adjusted EBITDA, a lower LIFO charge due to pharmacy inventory reductions and a $62.2 million loss on debt retirement in the prior year, partially offset by higher income tax expense.

Adjusted EBITDA was $364.2 million or 5.6% for the second quarter compared to $341.6 million or 5.4% of revenues for the like period last year.  Adjusted EBITDA improved due to an increase in front-end and pharmacy gross profit, partially offset by an increase in selling, general and administrative expenses related to the company's higher level of sales.

The improved pharmacy gross profit was driven by the increase in pharmacy revenues and the impact on inventory valuation related to the company's transition to its new drug purchasing and delivery arrangement with McKeeson, partially offset by lower reimbursement rates.  The net effect on inventory valuation resulting from the transition to the outsourced McKesson arrangement is not expected to be material to fiscal 2015 results, but did increase gross profit, adjusted EBITDA and pre-tax income by approximately $40 million in the second quarter.

In the second quarter, the company relocated 5 stores, remodeled 117 stores and expanded 1 store, bringing the total number of wellness stores chainwide to 1,433.  The company also opened 1 store and closed 10 stores, resulting in a total store count of 4,572 at the end of the second quarter.

Based upon current estimates for reimbursement rates and anticipated lower profitability from new generics and generic drugs that recently lost exclusivity, the company is expecting decreases in pharmacy margin in the second half of fiscal 2015 as compared to its prior estimates and therefore is lowering its guidance for adjusted EBITDA, net income and net income per diluted share.  Adjusted EBITDA is expected to be between $1.2 billion and $1.275 billion.  Net income is expected to be between $223 million and $333 million and income per diluted share between $0.22 and $0.33.  The company is also narrowing guidance for sales and same-store sales.  Sales are expected to be between $26 billion and $26.3 billion and same-store sales to range from an increase of 3% to an increase of 4% over Fiscal 2014.  Capital expenditures are expected to be approximately $525 million.

Source: Retailing Today