Brooks/Eckerd comps bode well for Rite Aid

7/21/2008

CAMP HILL, Pa. —With the reporting of Rite Aid’s fiscal 2009 first-quarter results on June 26, the days of Rite Aid minus Brooks/Eckerd same-store sales reporting are over. And while that may mean an initial drag on Rite Aid’s comparable store results in the short-term—Rite Aid reported a decline of 0.4 percent in same-store sales across its entire store base for the month of June, up 2.6 percent across Rite Aid’s core stores, but down 6.2 percent in the acquired stores—a number of developments in the near horizon could change that.

First, sales in the Brooks/Eckerd stores should show some pretty bold improvement as Rite Aid cycles through a number of factors, including the full transition from the Jean Coutu Group promotional strategy to the Rite Aid program. “Brooks/Eckerd still faces a tough comparison in June against ‘hot’ promotions implemented by prior management [that were] not ended until mid-July,” Lehman Brothers analyst Meredith Adler said in a research note released earlier this month. Right about the time those aggressive promotions ended, Rite Aid had moved to a single, national circular program, which consequently was before the Brooks/Eckerd stores had the full complement of Rite Aid merchandise—a fact that limited Rite Aid’s promotional capabilities for almost two quarters.

On a go-forward basis, Rite Aid’s promotional strategy is more in tune with today’s discretionary-cash-challenged consumer. “Our promotion plan going forward will continue to deliver good value to attract a more cost-conscious customer, but keep markdowns and margins in better balance at the same time,” Mary Sammons, Rite Aid chairman, president and chief executive officer, said.

Another factor that should soon cycle out of Rite Aid’s comp sales, the transition from a Brooks/Eckerd product mix to Rite Aid’s planogram, proved more disruptive to sales than Rite Aid executives had initially anticipated. As Rite Aid took control of Brooks/Eckerd last year, it assumed a front-end operation that had been on the decline during the nine months it took from acquisition-announcement to acquisition-completion.

To date, Rite Aid has completed some 70 percent of its Brooks/Eckerd remodels, with the remainder projected for completion by October. “As you would expect, front-end sales are improving more quickly [in the remodeled Brooks/Eckerd stores], and we’ve cut the rate of decline in half with strong growth in core drug store categories like OTC and vitamins, which include high margin Rite Aid brands,” Sammons said.

While it will be October 2009 before Rite Aid completely cycles through the impact of the product mix shift, in the short-term it has alredy begun to move the needle in private label. For its fiscal year 2008, Rite Aid’s store brand penetration topped out at 12.9 percent, and prior to the acquisition, private label accounted for less than 9 percent of front-end sales in the acquired stores. By May, private label penetration in the former Brooks/Eckerd stores had reached 11.5 percent.

Another positive takeaway for Rite Aid: even with a 5.4 percent decline in June comparable pharmacy sales across Brooks/Eckerd, Rite Aid’s overall pharmacy same-store sales results were relatively flat—0.5 percent. The same holds true for the front-end—a decline of 8.1 percent in the former Brooks/Eckerd stores versus a decline of 0.2 percent across Rite Aid’s entire store base.

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