Rite Aid CorporationRAD reported adjusted earnings of 6 cents a share in the third quarter of fiscal 2016 that came a penny ahead of the Zacks Consensus Estimate, but plunged 40% year over year. Results gained from strong top-line growth as well as improvement in comparable store sales (comps) and adjusted EBITDA, coupled with solid contributions from the newly formed Pharmacy Services Segment.
However, results were impacted by lower income tax expense in the prior-year quarter, higher interest and amortization expense associated with the EnvisionRx buyout, and transaction charges related to its merger agreement with Walgreens Boots Alliance Inc. WBA .
The company witnessed a 21.8% jump in total revenue to $8,154.2 million. However, the top line missed the Zacks Consensus Estimate of $8,202 million. The year-over-year growth in revenues resulted from strong performances at its Retail Pharmacy and Pharmacy Services segments.
Sales at the Retail Pharmacy Segment climbed 0.8% to $6,744.1 million, backed by comps growth of 0.9%. The improvement in comps resulted from a rise in front-end and pharmacy comps as well as an increase in prescription count at comparable stores. Sales at the newly formed Pharmacy Services segment were $1,500.9 million.
Front-end and pharmacy comps rose 0.3% and 1.2%, respectively. The improvement in pharmacy comps came despite a negative impact of 252 basis points (bps) due to the introduction of new generic drugs. Prescription count at comparable stores improved 0.2% year over year. Prescription sales constituted 69.9% of total drugstore sales. Third-party prescription sales accounted for 97.9% of pharmacy sales.
Rite Aid's adjusted EBITDA jumped 12.1% year over year to $373.2 million, with the adjusted EBITDA margin contracting 40 bps to 4.6%. The rise in adjusted EBITDA, in dollar terms, was mainly due to strong adjusted EBITDA contributions from both operating segments.
Rite Aid, which trails CVS Health Corporation CVS in size, ended the quarter with cash and cash equivalents of $226.3 million, long-term debt (excluding current maturities) of $7,287.9 million, and total shareholders' equity of $500.8 million.
During the first three quarters of fiscal 2016, the company generated cash flow of $328 million from operating activities and incurred gross capital expenditure of nearly $199 million.
For fiscal 2016, the company anticipates capital expenditure of $665 million, out of which $95 million will be deployed toward new and relocated stores, $235 million toward wellness remodels, and approximately $100 million for script file buys. Additionally, the company expects to generate free cash flow of about $300-$400 million in fiscal 2016.
Rite Aid stores continue to undergo renovation, with 96 outlets being remodeled and 5 relocated in the third quarter. Additionally, the company acquired two stores, relocated five stores and shuttered three stores during the quarter. As of quarter end, the company completed wellness remodels at 1,948 stores. Moreover, it opened 5 clinics, taking its total clinics count to 75. As of Nov 28, 2015, Rite Aid operated 4,560 stores across 31 states and the District of Columbia.
In fiscal 2016, the company intends to open or buy out 18 new outlets, relocate 27 stores, close 40 stores and remodel 400 wellness stores.
Rite Aid reiterated its fiscal 2016 outlook provided on Sep 17, 2015, and stated its intention to hold back any guidance for fiscal 2017, due to its pending merger agreement with Walgreens. We note that the company's current fiscal 2016 outlook does not include any impact from its pending merger with Walgreens.
As previously announced, Rite Aid expects sales for fiscal 2016 to be in the range of $30.8-$31.1 billion. Retail drugstore sales are anticipated to lie in the band of $26.7-$27.0 billion, while comps are expected to grow about 1.5%-2.5%.
Adjusted EBITDA for fiscal 2016 is expected to range from $1.36-$1.44 billion. Earnings for the fiscal are projected in the range of 12-19 cents per share.
Rite Aid currently carries a Zacks Rank #3 (Hold). A better-ranked stock in the same industry is Diplomat Pharmacy Inc. DPLO , with a Zacks Rank #2 (Buy).