Rite Aid Corporation (RAD)

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Rite Aid (RAD)

F3Q11 Earnings Call

December 16, 2010 8:30 a.m. ET

Executives

Matt Schroeder - Group Vice President, Strategy and IR

John Standley - President and CEO

Frank Vitrano - CFO and CAO

Analysts

John Heinbockel - Guggenheim Partners

Mark Wiltamuth – Morgan Stanley

Matthew Fassler - Goldman Sachs

Carla Casella - JPMorgan

Karru Martinson - Deutsche Bank

Emily Shanks - Barclays Capital

Karen Eltrich - Goldman Sachs

Bryan Hunt - Wells Fargo Securities

[inaudible] - Cantor Fitzgerald

Mary Gilbert - Imperial Capital

Presentation

Operator

At this time, I would like to welcome everyone to the Rite Aid third quarter fiscal 2011 conference call. [Operator Instructions.] I will now turn the call over to Mr. Matt Schroeder.

Matt Schroeder

Thank you operator, and good morning everyone. We welcome you to our third quarter fiscal 2011 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 third 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, are 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

Thank you Matt. It was a challenging quarter for us as we cycled a large self-insurance credit and an earlier flu outbreak and an H1N1 pandemic in last year's third quarter. Similar to the second quarter, the core operating numbers were generally pretty good, with the exception of revenues, which were lower largely to a decline in script count.

Our wellness+ card-based loyalty program is going great, and helped fuel a significant turnaround in front-end sales during the quarter, and although our immunization program may fall short of our goal to administer 1 million doses, we provided four times as many flu shots during the quarter than we did in the prior year.

During the quarter, we added the Save-A-Lot discount grocery concept to 10 of our stores in the Greenville, South Carolina market, and are very encouraged by the early results of these co-branded Save-A-Lot/Rite Aid stores.

Before I get into the specifics about our initiatives, let me provide a little more color on the third quarter. After my comments, Frank will go through the results in much more detail.

The $42 million decline in EBITDA was driven by two primary factors: a $29.5 million increase in self-insurance expense resulting from a credit in the prior year to reduce self-insurance reserves, and a 1.7% decline in script count due mostly to a weaker start to the cough, cold, and flu season compared to last year, which was abnormally early.

Front-end comparable store sales, which made a nice turnaround during the quarter, including a 1.3% increase in November, were fueled by wellness+ and +UP rewards, which give wellness+ members additional savings on their next trip to Rite Aid.

For the quarter, adjusted EBITDA gross margin was down only 8 basis points compared to last year, which, given some of the pressure we've seen on pharmacy margin in the past, is good news. Excluding self-insurance, adjusted EBITDA SG&A was flat to last year on a rate basis, which, given the decline in script count, was also good news. This was again due mostly to a great job by our store teams as they continue to focus on running more efficient stores.

Liquidity remains strong, and we continue to make progress with working capital, with FIFO inventory declining $160 million compared to last year's quarter. As I said, other than script count, the core operating numbers were pretty good for the quarter.

Turning to our sales growth initiatives, while we are not pleased with revenues for the quarter, we are encouraged by the progress we are seeing with our initiatives, and continue to believe they will ultimately gain enough traction to offset negative headwinds like the continued weak economy.

We continue to exceed our enrollment expectations for wellness+, our card-based loyalty program launched nationally 8 months ago. You'll remember that wellness+ is unique to other loyalty programs because it offers tiered rewards with increasing levels of front-end discounts and health screenings based on the dollar amount of front-end purchases and the number of prescriptions filled. As of last week, we had over 29 million members enrolled in the program.

Use of the card continues to be strong, with 70% of front-end sales, and 50% of prescriptions, from wellness+ members last week. Excluding New York and New Jersey, which are states that don't allow points for prescriptions, 64% of prescriptions were filled by patients enrolled in the program.

We continue to see other encouraging results from wellness+, both on the front end and in the pharmacy. On the front end, as we discussed last quarter, wellness+ basket size is larger than non-members, 50% larger now compared to 40% larger last quarter. Redemption rates on +UP rewards, which provide additional value by generally reducing a retail price below our normal ad price, are strong, and increasing as customers learn the features of the program. +UPs combined with the tiered reward structures of wellness+, are helping us make solid improvements in front-end sales, as we saw in the third quarter.

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