Backed by its store re-modeling initiative, efficient cost
management and customer loyalty programs Rite Aid (
), one of the leading drugstore chain in the U.S.,
witnessed another quarter of strong performance in Q3 2014.
Reporting $6.4 billion in sales, a 1.9% year-over-year growth,
the company marked a 2.3% rise in its same store sales for Q3
2014. Though front-end sales declined by 0.2%, pharmacy
same store sales grew by 3.5% year-over-year.
Rite Aid's net income increased by 14%, to $71.5 million, driven
by strong EBITDA growth and lower interest expense. Higher pharmacy
gross profits, driven by script count growth and generic
purchasing efficiencies, along with strong expense control, helped
Rite Aid report a positive net income for the fifth consecutive
quarter. Higher same-store prescription count and pharmacy
inflation resulted in an increase in Rite Aid's pharmacy
same-store sales. However, the front-end earnings were negatively
impacted by cautious consumer spending in a competitive promotional
Controlling costs and making operational progress remain key
focus areas for Rite Aid, as it aims to build a unique brand
focused on health and wellness. Rite Aid brand penetration
increased to 18.4% in Q3 2014, a 0.3% year-over-year growth.
All in all it was a positive report, albeit as EPS guidance for
next quarter of $0.17 to $0.23 was just shy of the consensus
$0.24, producing some pressure (likely transient) on the stock.
Management tied this to the impact of new generic introductions and
continuing reimbursement rate pressure on same store sales
We believe that the Rite Aid company will benefit from positive
trends in the pharmaceutical industry: 1) the aging U.S.
population; 2) new drug therapies; and, 3) the Affordable
Care Act expanding insurance to millions of Americans.
However, we think that the intense competition from relatively
larger players, including
) and CVS Caremark (
), can limit Rite Aid's growth potential in the future. Though its
leverage ratio improved in Q3 2013 it continues to operate under
We are in the process of updating
our price estimate of $2.95 for Rite Aid
, which is at a significant discount to the current market price
View our detailed analysis for Rite Aid
Health & Wellness Stores To
Strengthen Rite Aid's Image
Loyalty programs such as the Wellness+ program has helped
improve Rite Aid's pharmacy sales as well as front-end sales in the
last few quarters. The Wellness+ program helps strengthen the
relationship with customers in turn increasing the number of
loyalty shoppers at Rite Aid. For Q3 2014, front-end
same-store sales in the Wellness Stores exceeded the non-Wellness
Stores by 3.2%, whereas script growth in the Wellness
Stores was 1.4% higher compared to the non-Wellness
Loyalty programs remain a key component of Rite
Aid's health and wellness offering. The company made
significant progress in transforming its stores into true
neighborhood destinations for health and wellness in Q3 2014.
During the quarter, Rite Aid remodeled 94 stores and relocated
4 stores bringing the total to 1,117 wellness stores, which now
represents one-fourth of its stores. It remains on track
to reach its target of 1,200 Wellness Stores by the end
of this year.
Rite Aid recently launched its Wellness65+ program aimed at
senior patients who are known to be higher spenders in the pharmacy
category. By the end of Q3 2014, about 1.3 million senior
citizens had enrolled in the program and Rite Aid claims that the
program is attracting new customers as well as strengthening the
loyalty of its existing members. According to a 2012 RAND
Health study, wellness programs are the rage in corporate America,
with half of surveyed companies offering wellness promotion
Rite Aid has more than 1,900 Wellness Ambassadors providing
personalized levels of customer service in its Wellness Stores.
Wellness Ambassadors continue to play a critical role in driving
flu shot awareness, wellness65+ enrollment and its community
Milder Flu Season Can
Impact Prescription Growth In The Future
Rising flu immunization was the key factor responsible for the
0.7% increase in Rite Aid's pharmacy same-store prescription count
in Q3 2014. So far, Rite Aid pharmacists have administered over 2.4
million flu shots and it expects to meet its goal of 2.5 million by
the end of 2013. However, the company expects a soft flu season
going forward which can impact its prescription growth in
Lower Generic Substitution To Benefit Top Line
The total generic dispensing rate, which implies the percentage
of generic drugs in a consumer's prescription, grew to 78.5% in
2012 (calendar year), from 74.1% and 71.5% in 2011 and 2010,
respectively. The negative impact of generic drugs substitution on
pharmacy same-store sales declined from 9.24% in Q3 2013 to 0.88%
in Q3 2014. The pace of generic drugs substitution has
slowed down recently and the trend is expected to continue in 2014.
Generic drugs have comparatively lower prices compared to branded
drugs and thus their rising proportion in prescriptions impacts
Rite Aid's top-line growth. We expect the pressure to ease off in
Fiscal 2014 Outlook
- Total sales in the range of $25.3 billion to $25.4
- Adjusted EBITDA to be between $1.25 billion and $1.28
- 0.35% to 0.85% growth in same-store sales, which reflects a
2.4% negative pharmacy sales impact from new generic
introductions and continued reimbursement rate pressure.
- Expected diluted EPS of $0.17 to $0.23.
- Capital expenditure of $415 million.
- Rite Aid plans to open 1 new store, complete 14 relocation,
remodel 400 Wellness Stores and close 35 stores.
- Free cash flow between $250 million to $300 million.
Drives a Stock at Trefis