Rite Aid Corporation (RAD)

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Rite Aid (RAD)

Q2 2013 Earnings Call

September 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

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

Analysts

John Heinbockel - Guggenheim Securities, LLC, Research Division

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

Karru Martinson - Deutsche Bank AG, Research Division

Carla Casella - JP Morgan Chase & Co, Research Division

Mark Wiltamuth - Morgan Stanley, Research Division

Edward J. Kelly - Crédit Suisse AG, Research Division

Karen H. Eltrich - Goldman Sachs Group Inc., Research Division

Steven Valiquette - UBS Investment Bank, Research Division

Joseph Stauff - Susquehanna Financial Group, LLLP, Research Division

Jason DeRise - UBS Investment Bank, Research Division

Presentation

Operator

Good morning. My name is Kimberly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rite Aid Second Quarter Fiscal 2013 Conference Call. [Operator Instructions]

Mr. Matt Schroeder, you may begin your conference.

Matt Schroeder

Thank you, Kimberly, and good morning, everyone. We welcome you to our second quarter conference call. On the call with me are John Standley, our Chairman, President and Chief Executive Officer; Frank Vitrano, our Chief Financial and Chief Administrative Officer; and Ken Martindale, our Chief Operating 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 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, including annual earnings and sales guidance, on our website, www.riteaid.com, under the Investor Relations Information tab for conference calls. This guidance is a point-in-time estimate made early in the fiscal year. 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 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.

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 fiscal 2013 second quarter results. We are pleased with our results for the quarter as we continue to make significant progress in our turnaround efforts. We have continued strong growth in front end, same-store sales and prescription count. We have also grown adjusted EBITDA and same-store prescription count for 7 consecutive quarters thanks to our chain-wide focus on executing key sales initiatives, operating more efficiently and providing a superior customer experience.

Our adjusted EBITDA was $218.7 million for the quarter, an increase of $34.4 million or 19% year-over-year. We also decreased net loss by $53.5 million compared to the second quarter of last year. Loss per share improved from $0.11 per share in the prior year second quarter to $0.05 per share this quarter. Same-store sales were flat due to a 1.4% increase in front end, offset by a 0.7% decrease in the pharmacy. Prescriptions filled at same stores increased 4% over the prior year period, which includes the benefit of additional prescriptions resulting from the Express Scripts/Walgreens dispute.

A key trend during the quarter was the impact of new generic medications. This wave of generics has negatively impacted top line pharmacy sales by approximately 750 basis points. This is compared to a negative impact of approximately 148 basis points during last year's second quarter. At the same time, these new generics are having a positive impact on pharmacy gross margin, which has been a key driver for increasing adjusted EBITDA. Our generic penetration grew to nearly 80% during the quarter, a 4% increase over last year's second quarter, and we continue to work diligently to contain generic drug purchasing cost.

Another key development was the continued success of our flu immunization program. Since flu shots arrived in our stores in late July, our teams have done a great job of reaching out to our customers in communities to promote how convenient it is to get a flu shot at Rite Aid. We are already well ahead of last year's pace, and our goal is to administer 2 million flu shots this year compared to nearly 1.5 million last year.

Our pharmacy and store teams are highly engaged in their communities, raising awareness of our Flu Shot program. We also will be supporting our flu immunization efforts with a comprehensive marketing campaign that includes TV and radio ads.

Our wellness+ customer loyalty program continues to have tremendous impact on our business. At the end of the quarter, we had approximately 25 million active members defined as those who have used their card at least twice in the past 6 months. This represented an 8% increase over the prior year. While total active members have remained consistent with the end of our first quarter, the number of gold and silver members, our most valuable and most satisfied customers, continues to increase.

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