Industry mixed on Rite Aid results

CAMP HILL, Pa. —One financial quarter into Rite Aid’s acquisition of Brooks and Eckerd, analysts still prescribe caution regarding the potential success of the Brooks-Eckerd assimilation. “Rite Aid’s initial quarter with Eckerd was mixed,” wrote Goldman Sachs analyst John Heinbockel in a Sept. 27 research note. “On the one hand, the early stages of the integration appear to be proceeding well, especially as it relates to IT and procurement.… On the other hand, the core business is sluggish, with the company definitely guiding sales, and possibly guiding EBITDA, lower in 2007.”

But not all analysts are as conservative. Lehman Brothers analyst Meredith Adler continues to be bullish on the chain, keeping an “outperform” rating on the shares, citing Rite Aid’s improved performance and the potential for boosts from the ongoing integration of Brooks and Eckerd stores. The deal could ultimately lift shares, as it pays off by eliminating costs, including supply and distribution costs and by improving market share on the East Coast, Adler wrote.

Two of Rite Aid’s creditors similarly expressed a vote of confidence last month when they raised the chain’s credit line from $400 million to $650 million collectively, according to a document filed with the Securities and Exchange Commission Oct. 3.

Specifically, the new agreements with Citibank and Wachovia Bank increased the company’s credit lines to $325 million and $200 million, respectively.

The termination date of the receivables financing agreement also was extended to Sept. 16, 2008, and the availability of the backstop amortization facility that is provided by the investor agents and related banks was extended to September 2010.

Rite Aid last month recorded revenues of $6.6 billion for the 13-week period ended Sept. 1, representing a 53.9 percent increase and including sales from the chain’s newly acquired Brooks and Eckerd store base. “As you know Brooks-Eckerd store sales were negative when we acquired them back in June,” reported Mary Sammons, Rite Aid president and chief executive officer to analysts late last month. “That trend continued [throughout the store], especially in categories where we discontinued unsustainable and sometimes below-cost promotions. The good news is we’ve seen the margin rate improve, and expect sales to do the same as we clear out all nonperforming inventory, get our full merchandise mix into all the stores, convert more stores and launch the aggressive marketing program we have planned for later this year.”

Regarding the integration, Sammons reported that Rite Aid has hit every milestone within the first 90 days of its integration plan—successfully converting all six distribution centers. “Our new DCs are now stocked with 8,500 new items and are now distributing Rite Aid merchandise to our acquired stores,” she said. Almost half of the Brooks-Eckerd stores now are sporting permanent exterior Rite Aid fixtures, with the remainder expected to be installed before Black Friday.

Rite Aid’s store brands are in all the Brooks and Eckerds, Sammons reported, and approximately two-thirds of the chain’s planogramming are being reset.

Same-store sales (which does not yet include the Brooks and Eckerd stores) increased 1.1 percent during the second quarter as compared with the year-ago like period, consisting of a 1.4 percent pharmacy same-store sales increase and a 0.6 percent increase in front-end same-store sales.

As a result of current sales trends, the company noted, Rite Aid revised its guidance for sales and same-store sales—sales are expected to fall between $24.5 billion and $25.1 billion. Same-store sales, which will not include the acquired stores until one year after close, are expected to improve 1.3 percent to 3.3 percent over fiscal 2007. This compares with previous fiscal 2008 sales guidance of between $25.3 billion and $26 billion, with same-store sales improving 3.8 percent to 5.8 percent over fiscal 2007.

Rite Aid also increased its guidance for acquisition-related cost savings for fiscal 2009 to $300 million as compared with the previous guidance of $225 million, which are expected to come primarily from the areas of merchandising, purchasing, advertising, distribution and administration.