Rite Aid reports results for 3Q 2008

12/18/2008

CAMP HILL, Pa. Rite Aid delivered an early Christmas present to investors Thursday, reporting an adjusted EBITDA increase of 8.5% on higher gross margin rates and improved cost controls and, for the first time since its acquisition of Brooks/Eckerd, positive front-of-store sales growth across its Brooks/Eckerd store base.

Rite Aid reported revenues of $6.5 billion, down 0.5%—primarily as a result of closing 229 stores—and a net loss of $243.1 million ($0.30 per diluted share) for its fiscal third quarter ended Nov. 29. The adjusted EBITDA of $252 million, representing 3.9% of revenues, significantly exceeded expectations of Wall Street analysts, which hovered around $205.2 million.

“I am pleased to report a significant improvement in our operating results this quarter with adjusted EBITDA up 8.5%,” stated Mary Sammons, Rite Aid chairman and chief executive officer.  “With the Brooks/Eckerd integration complete, our team has been totally focused on delivering profitable sales and taking unnecessary costs out of the business, and it showed.  Same-store sales were up, with pharmacy sales in core Rite Aid stores especially strong despite an industrywide slowdown in prescription growth.  Our gross profit rate improved, and our cost savings initiatives intensified in the quarter. Improving operational efficiency is a top priority, and we expect to see even greater benefits from these initiatives going forward.”

And things are looking up for the chain. The largest variable in the near future will be sales, explained John Standley, president and chief operating officer at Rite Aid, during a conference call with analysts Thursday morning. Given that sales improvements can be realized through continued optimal cost controls and the blocking and tackling of retailing—in other words merchandising and marketing—Rite Aid is not in an altogether bad position. “I remain confident,” he said. “We have a lot of momentum here,” he added. “We’re seeing a very nice month in pharmacy [so far in December] across both Brooks/Eckerd and core stores.”

“Although sales in 3Q, especially in November, were weaker than we had expected, management indicated that seasonal inventory was bought carefully, and mark downs began as planned before Thanksgiving,” noted Meredith Adler, research analyst of Barclays Capital. “In addition, the company indicated that it had not been more promotional during the quarter than previously and is still focused on generating profitable sales.”

“The business environment is likely to be even more challenging than it is today,” Sammons said, but with the continued improvements in cost controls and quarter-over-quarter increases in Brooks/Eckerd sales results, Rite Aid will likely to continue to improve operational results as the chain enters 2009.

Those greater cost controls and incremental improvements in operations will help deliver on the chain’s guidance with regard to total sales and adjust EBITDA, but current sales trends and the tough economy has prompted the chain to lower its guidance for same store sales and increase projected  net loss for fiscal 2009, which ends Feb. 28.   

Total sales projects remain between $26 billion and $26.5 with adjusted EBITDA between $950 million and $1 billion.  Same-store sales are now expected to improve between 0.5% and 1.5% over fiscal 2008 as compared to previous guidance of a 1.5% to 3% increase. And net loss for fiscal 2009 is expected to be between $593 million and $773 million, or a loss per diluted share of $0.74 to $0.95, compared to previous guidance of $445 million to $535 million or a loss per diluted share of $0.56 to $0.67. The company continues to expect capital expenditures, excluding approximately $200 million of proceeds from sale and leaseback transactions, to be approximately $550 million.  

Overall same-store sales for the No. 3 drug store retailer were up 1.4% year-over-year, consisting of a      2.3% increase across the front-end and a 1% increase in the pharmacy. However, the number of prescriptions filled across the chain fell approximately 1%, suggesting that the Brooks/Eckerd pharmacy operations may be losing marketshare. Rite Aid’s core stores filled more prescriptions in this quarter compared to last year, the chain reported.

Excluding the acquired Brooks Eckerd stores, same-store sales for the 13-week third quarter increased 2.6% over the prior-year period with front-end increasing 1.9% and pharmacy growing 3%. Same-store sales at the former Brooks/Eckerd operations fell 1% over the period, The chain’s 3.7% increase across the front-end in its Brooks/Eckerd operations is a sea change from what the chain recorded across its second quarter, which was a decline of 2.7%. Pharmacy same-store sales improved as well, with a 2.6% decline in comparable sales over the third quarter, compared to a 4.6% decline across the second quarter.

Prescription sales accounted for 67.9% of total sales, and third-party prescription sales represented 96.4% of pharmacy sales. 

In the third quarter, the company opened 13 stores, relocated 23 stores, remodeled 11 stores and closed           29 stores.  Stores in operation at the end of the third quarter totaled 4,914.

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