Rite Aid Corporation (RAD)

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Rite Aid Corporation (RAD)

F4Q10 Earnings Call

March 31, 2010 8:30 am ET

Executives

Matt Schroeder – Group Vice President Strategy, Investor Relations and Treasurer

Mary Sammons - Chairman & Chief Executive Officer

John Standley - President & Chief Operating Officer

Frank Vitrano - Chief Financial Officer & Chief Administrative Officer

Analysts

Bryan Hunt - Wells Fargo Securities

Meredith Adler – Barclays Capital

Carla Casella – JP Morgan

Karu Martesen - Deutsche Bank

Mary Gilbert - Imperial Capital

Analyst for Lisa Gill – JP Morgan

Presentation

Operator

Welcome everyone to the Rite Aid fourth quarter fiscal 2010 conference call. (Operator Instructions) I will now turn the conference over to Mr. Matt Schroeder, Group Vice President of Strategy, Investor Relations and Treasurer. Please go ahead, Sir.

Matt Schroeder

Thank you and good morning everyone. We welcome you to our fourth quarter conference call. On the call with me are Mary Sammons, our Chairman and Chief Executive Officer; John Standley, our President and Chief Operating Officer; and Frank Vitrano, our Chief Financial and Chief Administrative Officer.

On today’s call, Mary will give an overview of our fourth quarter results. Frank will discuss the key financial highlights and fiscal 2011 outlook. John will discuss our business 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 on our website, www.riteaid.com under the Investor Relations information tab for conference calls. We will not be referring to them 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 would 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 uncertainty that can cause results to differ. Also we will be using a non-GAAP financial measure. The definitions of the non-GAAP financial measure along with the reconciliations to related GAAP measures are described in our press release. I would also like to encourage you to reference our SEC filings for more detail.

With these remarks I would now like to turn it over to Mary.

Mary Sammons

Thanks, Matt and good morning everyone. Thanks for joining us today as we review our results for the fourth quarter and fiscal 2010 and provide guidance for fiscal 2011.

As you can see from our release it was a difficult quarter with mixed results. We improved front-end margins as our team did a better job of managing seasonal inventory, buying down to match the decrease in demand for discretionary items that we have seen all year and once again our team did a good job of controlling operating expenses. But these were not enough to offset lower sales negatively impacted by a cautious consumer and a cough, cold and flu season that started out strong in the third quarter but died out in the fourth and continued pressure on pharmacy margins.

With everyone’s focus on healthcare costs it is not surprising we continue to see increased pressure on prescription reimbursement. Frank and John will discuss the impact in greater detail in just a few minutes.

As for fiscal 2010, last year was tough for all retailers as the economy and unemployment worsened as the year progressed. Despite these challenges we made a lot of progress transforming our business throughout the year. We are much more efficient operators today which will further benefit our bottom line when we start to see an economic recovery. Even though we held tight on expenses our overall customer satisfaction rating improved every quarter as our associates continued to take great care of their customers.

We delivered free cash flow for the first time in three years and started to reduce debt. Thanks to our working capital initiatives we start the new fiscal year with a strong liquidity position enabling us to make strategic investments in initiatives for long-term growth. These include the upcoming national launch of our new customer loyalty program called Wellness Plus, the training of additional immunizing pharmacists to get ready for the next flu season and a new private brand architecture to increase these higher margin sales. You will hear more details a little later from John who has done a great job leading the successful piloting of these growth initiatives as well as launching our segmentation strategy to improve the productivity of our diverse store base.

These accomplishments are just some of the reasons why as we announced in January that John will become CEO of Rite Aid at our annual meeting in June and I continue as Chairman. As I have said before, John brings the right combination of operational knowledge, hands-on management and financial orientation to successfully lead our company for the future.

This morning we also gave guidance for fiscal 2011 which you can see from our release. We remain cautious about the overall economy with unemployment still around 10% and under-employment even higher which also has a big impact on discretionary spending. We expect customers will continue to be focused on getting the best value for every dollar in a competitive retail environment and we expect pressures on pharmacy to continue as both private and government payors search for more ways to cut healthcare costs.

Our guidance also includes investments we will be making in the programs designed for long-term profitable sales growth that I mentioned earlier. Our top priority this year is growing profitable sales. Before I turn it over to Frank let me just add a few comments about the recently passed healthcare reform. We expect the additional 32 million people who will be covered by health insurance in 2014 to be good for our business as will the closing of the donut hole in Medicare Part D which begins with a $250 rebate this year, expands to 50% brand drug coverage in 2011 and is eliminated completely by 2020.

Read the rest of this transcript for free on seekingalpha.com