Despite Q2 losses, Rite Aid's on the right track
CAMP HILL, Pa. Rite Aid on Thursday reported revenues of $6.2 billion, down 2.5%, reflecting a net loss of $197 million (minus 23 cents per diluted share) and adjusted EBITDA of $181.2 million (2.9% of revenues) for its fiscal second quarter ended Aug. 28.
“Despite lower sales and the sluggish economy, we started to see some positive trends in our business during the second quarter,” stated John Standley, Rite Aid president and CEO. “Sales in our core drug store categories have started to strengthen, and our gross margin trends are showing improvement,” he said. “[And] while reimbursement pressures are still challenging, our pharmacy margin rates have begun to stabilize.”
Aportion of the net loss can be traced to the investments Rite Aid has committed against initiatives designed to expand the business long term, including the Wellness+ customer loyalty program and the expansion of the chain’s immunization capabilities. “While the start-up costs of those investments have had a negative impact on our results this quarter, we’re excited about the impact we’re seeing so far,” Standley said. “More than 22 million customers and patients have enrolled in Wellness+ only five months after the nationwide launch. Our pharmacists have administered more flu shots this year than they did at the same time a year ago. [And] we remain focused on reducing costs and operating more efficiently. Our continued strong liquidity and recent refinancing give us even more runway to deliver on our initiatives.”
Same-store sales for the quarter decreased 1.5% over the prior-year 13-week period, consisting of a 0.9% decrease in the front-end and a 1.8% decrease in pharmacy. Pharmacy sales included an approximate 195 basis point negative impact from new generic introductions. The number of prescriptions filled in same stores decreased 2.1% over the prior-year period. Prescription sales accounted for 68.1% of total drug store sales, and third-party prescription revenue represented 96.1% of pharmacy sales.
In the second quarter, the company opened no new stores, relocated five stores, remodeled one store and closed 20 stores. Stores in operation at the end of the second quarter totaled 4,747.
As previously announced, Rite Aid continued to reduce debt in the second quarter with the repurchase of $93.8 million of its 8.5% convertible notes due 2015. In addition, the company completed refinancing transactions that extended debt maturities and lowered interest expense. Those transactions included a new $1.2 billion revolving credit facility due 2015 that replaced its $1.2 billion revolving credit facility due 2012, and the issuance of $650 million of 8% senior secured notes due 2020 used to repay and retire the company’s $648 million Tranche 4 Term Loan due 2015 under its senior secured credit facility.
Based on current trends, Rite Aid revised its fiscal 2011 outlook for sales, adjusted EBITDA and net loss. Sales now are expected to be between $25 billion and $25.4 billion, with same-store sales expected to range from a decrease of 1.5% to flat. Adjusted EBITDA is expected to be between $875 million and $950 million.
As a result of narrowing adjusted EBITDA guidance, a $44 million debt modification charge for the company’s recent refinancing and lower interest expense related to the company’s refinancing and debt repurchase activities, net loss is now expected to be between $400 million and $590 million, or a loss per diluted share of 46 cents to 67 cents. The company confirmed previous guidance for capital expenditures at approximately $250 million.