Rite Aid (
), one of the leading drugstore chain in the U.S., reported
its Q2 2014 earnings on September 19. Fiscal 2013 marked the
company's first profitable year in five years and the positive
trend has continued so far this year. Backed by its store
re-modeling initiative, efficient cost management and customer
loyalty programs, Rite Aid claims that it has seen a
better-than-expected performance in the first two quarters of
At $6.3 billion, Rite Aid reported a marginal rise (0.76% y-o-y)
in its revenue base mainly driven by higher pharmacy sales. Though
its front-end same-store sales declined by 0.3%, its pharmacy
same-store sales climbed by 1.7%, which led to a 1% increase in
Rite Aid's overall same-store sales, compared to Q2 2013.
Earning $33 million as net income, compared to a net loss of $39
million a year ago, Rite Aid continued to remain profitable for the
third consecutive quarter. Its stock price increased by
approximately 15% after the company reported its Q2 2014
While Rite Aid believes that its growth in the second half will
slow down, it remains confident about its long-term prospects as
its turnaround strategy continues to reap benefits for the company.
Despite the negative impact of the dispute settlement between
Walgreen and Express Scripts, Rite Aid is confident
of retaining 75% of scripts gained from Walgreen
View our detailed analysis for Rite Aid
Higher Operating Margin & Lower Interest
Expense Expands Bottom Line
The improvement in net income in Q2 2014 was primarily driven by
Rite Aid's low expense base and growth in its adjusted operating
margin which was partially offset by a $62.2 million loss
on debt retirement related to the company's refinancing initiative
announced in June this year.
Rite Aid recorded its 11th consecutive quarter of y-o-y growth
in adjusted EBITDA which was 56% higher compared to Q2 2013.
Increasing proportion of generic drugs, strong pharmacy margins,
improving front-end margins, strong expense control and
the recovery of $23.5 million from the settlement of a
prescription drug antitrust case are the key factors driving
improvement in margins. Additionally, Rite Aid's debt
refinancing initiative in July 2013, to take advantage of the
low interest rate scenario and to extend the maturity of its
existing debt, lowered its interest expense.
Lower Generic Penetration Rate May Impact Gross Margins
In The Second Half of 2014
Rite Aid reported 1.48% higher gross profit margin compared to
Q2 2014. Pharmacy gross profits increased on account of new generic
introductions and the prescription drug antitrust settlement,
partially offset by continued pharmacy reimbursement rate pressure
and cost increases on older generic drugs.
The rise in generic penetration has enabled Rite Aid to
become more profitable in spite of lower sales, as generic drugs
offer over 50% higher margins compared to branded drugs. 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,
However, in its earnings call Rite Aid mentioned that
the pace of generic drugs substitution has slowed down
recently which can limit the future growth in pharmacy gross
margins. The introduction of new generic drugs had a 2.49%
negative impact on Rite Aid's top line growth in Q2 2014 as
compared to a 7.5% negative impact in Q2 2013. Lower generic
substitution combined with the expected flat front-end gross
margins this year will have a negative impact on Rite Aid's bottom
line in the second half of fiscal 2014.
Nevertheless, an estimated $15 billion worth of branded
product will come off patent in the next three years, opening them
to competition from generic drugs. Thus, we believe that Rite Aid
will manage to retain margins at the current level.
Strengthening Rite Aid's Image As A Health & Wellness
Rite Aid aims to transform majority of its stores into
neighborhood destinations for health and wellness. At the end of Q2
2014 the company had remodeled a total of 1,019 stores and
remains on track to complete 1,200 by the end of this year.
Rite Aid claims that its Wellness stores outperformed all its
other stores in Q2 2012. Front-end same-store sales in the Wellness
Stores exceeded the non-Wellness Stores by 3.4% and script growth
in the Wellness Stores exceeded the non-Wellness Stores by
Loyalty programs such as the Wellness+ program has helped
improve its front-end as well as pharmacy sales in the last few
quarters, and remain a key component of Rite Aid's health
and wellness offering. The Welness+ program helps strengthen
the relationship with customers in turn increasing the number of
loyalty shoppers at Rite Aid. At present the company has more
than 25 million active Wellness+ members.
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 Q2 2014, more than 930,000 senior citizens
had enrolled in the program.
According to a 2012 RAND Health study, wellness programs are the
rage in corporate America, with half of surveyed companies offering
wellness promotion programs. Such loyalty programs and similar
initiatives can enable Rite Aid to broaden its customer base.
Fiscal 2014 Outlook
Rite Aid updated its estimate for fiscal year 2014 based on the
stronger than expected performance in the first half of the year.
Nevertheless, it expects a lower second half performance as
compared to fiscal 2013.
- Total sales between $25.1 billion and $25.3 billion.
- Adjusted EBITDA in the range of $1.240 billion - $1.3
- Same-store sales to increase/decrease by 0.5% (includes
the anticipated negative pharmacy sales impact of 2.4%
from new generic introductions and continued reimbursement
- Net income in the range of $182 - $268 million or diluted EPS
of $0.18 - $0.27.
- Capex of $400 million with $175 million allocated to
remodels and $65 million for file buys.
We are in the process of updating
our price estimate of $2.58 for Rite Aid
Drives a Stock at Trefis