Earnings Preview: Rite Aid - Analyst Blog

Rite Aid Corporation ( RAD ), the third largest retail drugstore in the U.S. based on revenues and number of stores, is scheduled to report its third-quarter 2012 financial results before the opening bell on December 15, 2011. The current Zacks Consensus Estimate for the quarter is loss of 12 cents a share. For the quarter under review, revenue is expected to be 6,278 million, according to the Zacks Consensus Estimate.

Second-Quarter 2012, a synopsis

Rite Aid reported a loss of 11 cents per share for the second quarter of 2012, which not only improved from the prior-year quarter loss of 23 cents, but also outshined the Zacks Consensus Estimate loss of 18 cents. Growth in same-store sales along with reduced selling, general & administrative (SG&A) expenses had a positive influence on the company's recent results.

Rite Aid's revenues came in at $6,271.1 million for the quarter compared with $6,161.8 million in the prior-year period. The marginal increase of 1.8% was mostly attributable to growth in same-store sales, partially offset by store closings. Same-store sales for the quarter witnessed an increase of 2.2%. Total revenue beats the Zacks Consensus Estimate of $6,207.0 million.

Management's Guidance for 2012

Looking ahead, Rite Aid expects fiscal 2012 revenue to be between $25.8 billion and $26.1 billion based on same-store sales increase of 0.75% to 2.0%. Net loss is now expected to be in the range of $345 million to $495 million (or 40 cents to 56 cents per share) instead of $370 million to $560 million (or 42 cents to 64 cents per share) forecasted earlier.

Zacks Consensus

The analyst covered by Zacks expects Rite Aid to post third-quarter 2012 loss of 12 cents a share, higher than the loss of 9 cents delivered in the prior-year quarter. The current Zacks Consensus Estimate ranges between loss of 9 cents and 15 cents a share.

For fiscal 2011, the Zacks Consensus Estimate stood at loss of 45 cents per share, down from the previous fiscal loss of 64 cents. The current Zacks estimate ranges between loss of 36 cents and 51 cents a share.

Agreement of Estimate

In the last 7 or 30 days, no movement in estimates has been noticed in either third-quarter 2012 or fiscal 2012.

Magnitude of Estimate Revisions

The magnitude of estimate revisions remain stagnant over the last 7 and 30 days, as analysts covering the stock have not revised their estimates for third-quarter 2012 and fiscal 2012.

Surprise History

With respect to earnings surprises, Rite Aid has missed as well as topped the Zacks Consensus Estimate over the last four quarters in the range of negative 14.3% to positive 50%. The average remained at positive 25%. This suggests that Rite Aid has surpassed the Zacks Consensus Estimate by an average of 25% in the trailing four quarters.

Our View

Generic (non-brand) drugs are less expensive but generates higher gross margin. Recent trend in the U.S. is witnessing a growing demand for generic drugs. The company is expected to expand its generic drug portfolio in order to enhance its top-line as well as market share. Rite Aid has an edge over its competitors as it is the third largest retail drugstore in the U.S. based on revenues and number of stores.

Moreover, the company is in the process of various cost cutting initiatives including centralized indirect procurement of drugs, administrative headcounts requirement, slashing supply chain costs, reducing debt, etc. which will certainly facilitate the company to improve its bottom-line.

However, in the United States, pharmacy sales growth has slowed down due to longer FDA approval process, drug safety concern, loss of individual health insurance resulting from unemployment and an increase in the use of non-branded drugs, which are less expensive but generate higher gross margin. Due to these factors, the company's same-store-sales are expected to remain weak. The company has reported losses for the last fourteen consecutive quarters.

Moreover, Rite Aid's generic drug sales are negatively affected by Wal-Mart Stores Inc.' s ( WMT ) strategy of entering the retail generic drug market. Due to Wal-Mart's broad array of manufacturers in India, Israel, and the U.S., the mass merchant can offer generic drugs at a discounted price compared with average $10 generic drug co-pay.

Rite Aid, which competes with CVS Caremark Corporation ( CVS ) and Walgreen Co. ( WAG ), currently, holds a Zacks #2 Rank, implying a short-term 'Buy' rating on the stock. Besides, the company retains a long-term 'Neutral' recommendation on the stock.

CVS CAREMARK CP ( CVS ): Free Stock Analysis Report

RITE AID CORP ( RAD ): Free Stock Analysis Report

WALGREEN CO ( WAG ): Free Stock Analysis Report

WAL-MART STORES ( WMT ): Free Stock Analysis Report

Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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