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Margins In Focus Ahead Of Rite Aid's Earnings
12/18/2012 3:29:00 PM
The third largest drug retailer in the U.S., Rite-Aid ( RAD ), is expected to continue narrowing its losses when it announces its Q3 earnings results on December 20. During the quarter, the company saw 3.5% growth in prescription count offset by increasing generic introductions with a 3% decline in pharmacy same store sales. Rite Aid suffers from high debt and weak cash flows and has been focusing on improving its profitability. Its efforts in this direction have borne fruit with the success of key initiatives like Wellness+ loyalty program and store remodels resulting in Q2 net losses narrowing to 0.6% of revenues from 1.5% a year ago.
Sales To Continue To Decline
The company reported total drugstore sales of $6.2 billion for the quarter, a 2% decline over the same period last year. Front-end same store sales increased by 1% while pharmacy same store sales decreased by 3% during the period. The company saw 3.5% growth in prescriptions offset by the increasing number of generic introductions and lower prices of generics. With prescription drug sales accounting for almost 70% of total drugstore sales and more branded drugs scheduled to go off-patent over the next two years, we expect the trend of declining total drugstore sales to continue.
The sustained growth in prescription count was aided by the popularity of the Wellness+ loyalty program and additional traffic due to the Express Scripts-Walgreen impasse. Despite the growth in generic introductions leading to an improvement in gross margins, the company has yet to report a profitable quarter ever since it acquired Brooks and Eckerd drugstores in 2007. In addition, interest payments related to high debt have been eating up the company's already weak cash flows.
Improving same store performance will underscore future growth
Rite Aid currently operates 4,633 stores compared to 4,679 stores in the like period a year ago. This decrease is attributable to the company liquidating its underperforming stores to improve profitability. It has also relocated some of its stores in addition to remodeling some. The plan is to remodel 500 stores in the current fiscal year, which we expect will help improve the company's performance. Proper debt management coupled with a consistent improvement in profits support a bright outlook as drug retailers look forward to a significant boost in prescription expenditure from the aging U.S. population and expanding insurance coverage. It makes sense for Rite Aid to invest more in improving profitability of its stores considering that its performance metrics like prescriptions filled at each store and revenue per unit area are considerably lower compared to larger peers CVS and Walgreen.
We have a price estimate of $1.50 for Rite Aid stock which is at a 50% premium to the current market price.
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