Rite Aid looks to retain ESI patients, provide 'superior customer experience'

CAMP HILL, Pa. — With the dispute between Walgreens and Express Scripts over, one of the biggest challenges for Rite Aid will be retaining the customers it won over during the impasse.

That was the biggest message during a conference call between Rite Aid executives and Wall Street analysts Thursday morning as the company announced its second quarter 2013 results.

“We're working really hard, and we're going to do our best to keep all the patients we can,” Rite Aid COO Ken Martindale said. “So we feel good about what we're going to do, and I hope we can retain a good portion of these patients.”

Doing that will mean “providing a superior customer experience,” as Rite Aid chairman, president and CEO John Standley put it. “I'm proud of the hard work that our entire Rite Aid team puts forth as we look to deliver a one-of-a-kind experience to our customers,” Standley said.

It also means more promotion of the 4,643-store chain's Wellness+ loyalty card program, whose number of active members has increased by 8% over second quarter 2012 to 25 million. Standley said members accounted for 74% of front-end sales, compared with 69% in second quarter 2012, as well as 68% of prescription sales. Later this year, the company is planning an "extensive" marketing campaign, which Standley said would promote the program's "incredible value." According to the company, the number of gold and silver members has continued to increase, and those members show basket sizes about 40% to 50% larger than others, with about half of them shopping at Rite Aid stores weekly. "They're clearly our best customers," Martindale said, adding that the company would introduce "additional concepts" over the next six to nine months.

The Wellness store format has seen expansion as well. The company remodeled 147 stores and now has a total of 570, with the expectation that it will have 780 completed by the end of fiscal year 2013. It also has trained 815 Wellness Ambassadors, staff who are specially trained and equipped to help customers select products and guide them to the pharmacy when needed. Standley said the company had continued to see a "positive impact" on front-end sales at the Wellness stores, compared with the older stores.

On the pharmacy side, where Rite Aid hopes to administer 2 million flu shots this season, compared with last season's 1.5 million, the company got a significant boost thanks to the contractual dispute between competitor Walgreens and pharmacy benefit manager Express Scripts. Standley said maintaining the ESI customers the company gained would be a top priority, along with enrolling them in the Wellness+ program. "We continue to believe we received our fair share of new ESI scripts,”" CFO and chief administrative officer Frank Vitrano said.

Guggenheim Securities analyst John Heinbockel said the company's $219 million EBITDA, while behind analyst projections of $225 million to $230 million, still represented a 19% increase over second quarter 2012, while first-quarter EBITDA increased by 16%. "Rite Aid's [Q2] operating results were strong in absolute terms, rising 19%, but fell short of our recently-raised and consensus expectations largely due to higher SG&A expense dollars," Heinbockel wrote. "We would focus more on the absolute performance."

Sales for the quarter were $6.2 billion, compared with $6.3 billion in second quarter 2012, the decrease stemming primarily from store closings and a decrease in pharmacy comps due to a 750-basis point reduction from new generic introductions, though same-store prescriptions grew by 4%. Same-store sales were flat compared with last year, including a 1.4% increase in front-end comps and a 0.7% decrease in pharmacy comps. Net loss for the quarter was $38.8 million, compared with $92.3 million in second quarter 2012. The company attributed the narrowed losses to increased EBITDA, decreases in LIFO, store closings and impairment and depreciation and amortization charges. The company also updated its fiscal 2013 guidance, expecting sales between $25.1 billion and $25.4 billion in fiscal 2013, with same-store sales ranging from a 1% decrease to a 0.25% increase over fiscal 2012, the reduced guidance stemming from a projected 650-basis point negative impact on pharmacy comps from introductions of new generic drugs and reimbursement rate pressure.