Rite Aid Corporation (RAD)

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Rite Aid Corp. (RAD)

F2Q11 (Qtr End 08/28/2010) Earnings Call

September 23, 2010 8:30 am ET

Executives

Matt Schroeder - Group Vice President, Strategy and IR

John Standley - President and CEO

Frank Vitrano - CFO and CAO

Analysts

Emily Shanks - Barclays Capital

Lisa Gill - JPMorgan

Karen Eltrich - Goldman Sachs

Karru Martinson - Deutsche Bank

Bryan Hunt - Wells Fargo Securities

Meredith Adler - Barclays Capital

Andrew berg - Post Advisory Group

Carla Casella - JPMorgan

Presentation

Operator

At this time, I would like to welcome everyone to the Rite Aid second quarter fiscal 2011 conference call. (Operator Instructions)

I would now like to turn the conference over to Mr. Matt Schroeder.

Matt Schroeder

We welcome you to our second quarter conference call. On the call with me are John Standley, our President and Chief Executive Officer; and Frank Vitrano, our Chief Financial and Chief Administrative Officer.

On today's call, John will give an overview of our second quarter results and discuss our business. Frank will discuss the key financial highlights and fiscal 2011 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 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'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.

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 is described in our press release. I would also encourage you to reference our SEC filings for more detail.

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

John Standley

Thanks, Matt. It was a very busy quarter for us, and I'm very pleased with the progress we're making on our key initiatives as well as improving our balance sheet. Our wellness+ card-based loyalty program is going great. Our immunization program is ramping up, and we're moving forward with our segmentation-based initiatives.

Before I get into the specifics about the initiatives, I have a couple of comments about the second quarter results, which Frank will go through in detail in just a few minutes.

As expected, our SG&A increased this quarter because of a shift in the timing of Memorial Day holiday, expenses to rollout wellness+ and the cost to expand our immunization capabilities, which altogether reduced adjusted EBITDA by $26 million.

Comparable store front-end sales declined 90 basis points due to softness in our seasonal and general merchandize categories, but our core drug store categories performed well.

September front-end same-store sales are improving and are expected to be in the range of negative 50 to negative 75 basis points. Script count declined 2.1% in the quarter due to growth of 90-day scripts, maturation of the Rx Savings Card and cycling some H1N1 benefit in the prior year.

Script count improved month-to-month during the quarter, and in September, it is expected to be similar to our August number.

The year-over-year decline in Pharmacy margin was substantially less this quarter versus last year's second quarter. Distribution expenses were 1.48% of sales, lower than last year's, thanks to our continued focus on improving distribution efficiency.

FIFO inventory was $70 million less than last year's second quarter. We had $1.1 billion of liquidity at the end of the quarter, giving us the flexibility to invest in the future growth of our business.

We reduced debt by $158 million compared to last year's second quarter, and we completed the refinancing of our revolving credit facility and Tranche 4 Term Loan, reducing our interest expense by about $13 million annually and extending the maturities.

Even though comparable adjusted EBITDA is down slightly after taking into account $26 million related to the holiday, pay shift and growth initiatives, the core business performed well with continued good cost control and solid gross margins.

We continue to operate more efficiently with reductions in many of our retail operating expenses year-over-year and believe there are more opportunities to further reduce operating cost throughout our company. With a low sales momentum, we'll improve our results, which is why the investments we made in our growth initiatives this quarter are so important.

We're working on the right things. Enrolment in our tiered reward loyalty program, wellness+, launched nationwide only five months ago, is already exceeding our expectations. We had more than 22 million members last week and now expect to have more than 30 million members by the end of the fiscal year.

Card usage has been strong. 56% of our front-end sales and 52% of prescription sales came from wellness+ members last week. The script count number grows to 58% of all scripts filled using wellness+ if you eliminate New York and New Jersey where giving points for prescriptions is not allowed.

We've also seen encouraging results from the pilot markets where script counts, which were running behind the chain before the program, are now running 70-plus basis points ahead of the chain.

Front-end basket size for wellness+ members is 40% higher than for non-members, and it gets better as you move up the rewards levels. At the Plus level, the lowest level, the average front-end basket size was 46% larger than non-members; at Silver, 88% larger than non-members; and at the top level Gold, 78% higher than non-members. And remember, Gold members got a 20% front-end discount, while Silver members got a 10% discount.

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