Rite Aid Corporation (RAD)

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Rite Aid (RAD)

Q3 2013 Earnings Call

December 20, 2012 8:30 am ET

Executives

Matt Schroeder - Group Vice President of Strategy & Investor Relations and Treasurer

John T. Standley - Chairman, Chief Executive Officer, President and Member of Executive Committee

Kenneth A. Martindale - Chief Operating Officer and Senior Executive Vice President

Frank G. Vitrano - Chief Administrative Officer, Chief Financial Officer and Senior Executive Vice President

Analysts

Edward J. Kelly - Crédit Suisse AG, Research Division

Stephen V. Tanal - Goldman Sachs Group Inc., Research Division

John Heinbockel - Guggenheim Securities, LLC, Research Division

Carla Casella - JP Morgan Chase & Co, Research Division

Joseph Stauff - Susquehanna Financial Group, LLLP, Research Division

Mark Wiltamuth - Morgan Stanley, Research Division

Jason DeRise - UBS Investment Bank, Research Division

Bryan C. Hunt - Wells Fargo Securities, LLC, Research Division

Presentation

Operator

Good morning. My name is Felicia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rite Aid Third Quarter Fiscal 2013 Conference Call. [Operator Instructions] Thank you. Mr. Schroeder, you may begin.

Matt Schroeder

Thank you, Felicia, and good morning, everyone. We welcome you to our third quarter conference call. On the call with me are John Standley, our Chairman, President and Chief Executive Officer; Ken Martindale, our Chief Operating Officer; and Frank Vitrano, our Chief Financial and Chief Administrative Officer. On today's call, John will give an overview of our third quarter results and discuss our business. Ken will give an update on some of our key initiatives. Frank will discuss the key financial highlights and fiscal 2013 outlook, and then we will take questions.

As we mentioned in our release, we are providing slides related to the material we will be discussing today. These slides include annual earnings and sales guidance. These slides are provided on our website, www.riteaid.com, under the Investor Relations Information tab for conference calls. This guidance is a point-in-time estimate, and the company expressly disclaims any current intention to update it. This conference call and the related slides will be available on the company's website until the next earnings call unless the company withdraws them earlier and should not be relied upon thereafter. We will not be referring to the slides directly in our remarks but hope you will find them helpful, as they summarize some of the key points made on the call.

Before we start, I'd like to remind you that today's conference call includes certain forward-looking statements. These forward-looking statements are made in the context of certain risks and uncertainties that can cause actual results to differ. These risks and uncertainties are described in our press release, in Item 1A of our most recent annual report on Form 10-K and other documents that we file or furnish to the Securities and Exchange Commission. Also, we will be using a non-GAAP financial measure. The definition of the non-GAAP financial measure, along with the reconciliations to the related GAAP measure, are described in our press release. Also included in our slides are the non-GAAP financial measures of adjusted EBITDA gross profit and adjusted EBITDA SG&A and the reconciliations of those measures to their respective GAAP financial measure.

With these remarks, I'd now like to turn it over to John.

John T. Standley

Thank you, Matt, and thank you all for joining us this morning to review our third quarter results for fiscal 2013. During the quarter, we reached a significant milestone in our turnaround efforts by earning net income of $61.9 million or $0.07 per diluted share compared to a net loss of $52 million or $0.06 per diluted share in the previous year's third quarter. In addition, we achieved a company record of $295.3 million in adjusted EBITDA, an increase of nearly $74 million over the prior year period. This improvement was driven by increases in front-end [ph] sales and prescription counts, as well as an improvement in pharmacy gross margin. We have now increased both adjusted EBITDA and same-store prescription counts for 8 consecutive quarters. Additionally, our year-to-date net loss has narrowed to $5 million.

These results were driven not only by our recent business trends but also by our nearly 90,000 Rite Aid associates who have worked hard for the past several years to fundamentally improve our business and generate the positive momentum we've experienced over the past 2 years. I am proud that we have achieved this significant milestone by putting our customers first and challenging ourselves to better serve them.

During the quarter, we continued to experience steady growth in front-end same-store sales, which increased 1.1%. In addition, we saw a strong growth in prescriptions filled in same stores, which increased 3.6% and includes the benefit of the additional prescriptions resulting from the Express Scripts/Walgreens dispute.

Another key trend was the wave of new generic medications, which was the primary driver of our increase in gross profit. Our generic penetration during the quarter crossed through the 80% threshold, as patients sought these lower-cost options for their medication therapy. At the same time, the new generics negatively impacted our pharmacy same-store sales by approximately 924 basis points. This is a key factor behind the 2.7% decrease in pharmacy same-store sales and our 1.5% decrease in total same-store sales.

Immunizations had a positive impact on same-store prescription counts and remain a top priority, as we look to promote the convenience of getting a flu shot from your neighborhood Rite Aid pharmacist. To date, our pharmacists have given over 1.8 million flu shots and are on pace to achieve our goal of administering 2 million flu shots this year. In early December, we saw an increase in flu shot activity in response to widespread reports concerning the early arrival of flu this year and the potential for a severe flu season. We're using this opportunity to educate patients about other immunizations and clinical pharmacy services we can provide on a state-by-state basis.

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