Rite Aid executives discuss future, look to improve pharmacy performance

CAMP HILL, Pa. Rite Aid on Sept. 24 readjusted its outlook for fiscal 2010 thanks to a number of confounding factors, Rite Aid executives noted, including a recession economy that’s yet to materially recover and increased generic utilization, which on the surface reduces top-line sales significantly, even as more revenue from the higher-margin pharmaceuticals drops to the bottom line.

However, in the current climate the dispensing of generic pharmaceuticals captures fewer margin improvements as compared with years past, John Standley, Rite Aid president and COO, explained to analysts Thursday morning. “[One] significant factor that has hurt pharmacy margin quite a bit this year is the tightening of the generic supply market [through consolidation],” he said. “It’s more difficult to find cost savings today to offset reimbursement rate reductions [such as with AWP] and in fact we have seen some cost increases,” Standley added.

Rite Aid’s pharmacy margin declined 88 basis points in the quarter, a further reduction from last quarter’s pharmacy margin.

Generic penetration reached an all-time high of 70.4% in the quarter.

Mary Sammons, Rite Aid chairman and CEO, noted that prescription metrics had improved through the month of September, whether measured by prescriptions dispensed (140 basis point improvement across comparable stores), sales or customer satisfaction scores.

Looking forward, Rite Aid hopes to further improve pharmacy performance through increased prescription file buys in the second half of the year. The central-Pennsylvania drug chain is also piloting a loyalty card program that emphasizes pharmacy.

Another key metric for Rite Aid in its latest turnaround has been reducing and controlling expenses, including overhead like labor, inventory and capital expenditures. "Our team did a great job of reducing SG&A and controlling inventory, critical in a challenging environment like this one,” Sammons said.

“As for front-end sales, although we’ve seen improvement in September, they continue to be negatively impacted by a value-driven customer searching for discounts, buying more items on sale than they have in the past,” Sammons said. “On the positive side, this same customer looking for value helped pushed private brand penetration 90 basis points higher than last year [it’s now at 15.2%], and private brand will continue to be a focus growth area for us.”

Greater penetration across store brands are good tidings for Rite Aid, Standley explained, as private label products are typically 50% more profitable than branded products.

“As we move into the second half of the year, we expect the negative trends [generics, front-end sales] that impacted our second quarter to continue,” Sammons said. “As a result, we’ve lowered our outlook for fiscal 2010 and also widened our guidance because of the uncertainty we see over the next six months about the timing of the economic recovery and the strength of the cough, cold and flu season.”

Total sales are expected to fall between $25.7 billion and $26.2 billion in fiscal 2010 with same-store sales ranging from a decrease of 1% to an increase of 1% over fiscal 2009, as compared with prior guidance of sales between $26.3 billion and $26.7 billion and same-store sales projections of an increase of 0.5% and 2.5%. Adjusted EBITDA is now expected to fall between $900 million and $1 billion, versus $1.025 billion and $1.125 billion per Rite Aid’s last guidance. And net loss for fiscal 2010 is expected to be between $390 million and $615 million or a loss per diluted share of 48 cents to 74 cents. Prior guidance, updated following the first quarter after the chain’s debt load had been re-organized, tabulated a fiscal 2010 net loss of between $265 million and $490 million.

Guidance for capital expenditures remains at approximately $250 million.

“Even with our revised guidance, we are forecasting $200 million in free cash flow this year and our priority remains starting to pay down debt at the end of this fiscal year,” Sammons said.

Rite Aid reported revenues of $6.3 billion, down 2.7%, and a net loss of $116 million, or $0.14 per diluted share for its fiscal second quarter ended Aug. 29.

While many analysts expressed concern around Rite Aid’s results, that net loss of $0.14 per share actually beat consensus projections, which analysts tabulated would be $0.15 per share negative for the quarter, according to published reports. Same-store sales for the quarter decreased 1.1% over the prior-year 13-week period, consisting of a 4.9% decrease in the front-end and a 0.8% increase in pharmacy. The number of prescriptions filled increased 1.4%.

Beginning next month, Rite Aid will no longer break out its Brooks/Eckerd operations separately. As a possible positive, the move may prove to be a boost to Rite Aid’s stock performance in the long-term, as any continued-but-slow improvements across the Brooks/Eckerd base will be folded into Rite Aid’s overall results. And overall, Rite Aid is trending positive across its back bench.

However, one negative may be a degree of uncertainty among analysts as they will no longer be afforded a crystal-clear picture of what was once the Brooks/Eckerd chain.