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Rite Aid (RAD) Tops Q2 Earnings & Sales; Down on Soft View

Shares of Rite Aid CorporationRAD plunged 10.8% after the release of its second-quarter fiscal 2016 results, as the company lowered its guidance for the fiscal year, based on current trends and expenses related to the buyout of EnvisionRx. Also, the company's quarterly results bore the brunt of the acquisition.

Q2 Highlights

Quarterly adjusted earnings of 4 cents a share surpassed the Zacks Consensus Estimate by a penny, but plunged 69.2% year over year. Including expenses related to debt redemption, quarterly earnings came in at 2 cents per share, down 84.6% year over year.

Apart from this, the year-over-year slump in earnings was also attributable to various costs and investments associated with the company's EnvisionRx buyout, which was concluded in the quarter under review.

The company, which trails only Walgreens Boots Alliance Inc. WBA and CVS Caremark Corp. CVS in size, witnessed a 17.5% jump in total revenue to $7,664.8 million. Also, total revenue outpaced the Zacks Consensus Estimate of $7,601.4 million, on the back of comparable store sales (comps) growth of 2.1%,

Deeper Insight

Sales at the Retail Pharmacy Segment climbed 1.9% to $6.647.2 million, backed by positive comps and contributions from EnvisionRx.

Further, front-end and pharmacy comps rose 0.3% and 2.8%, respectively, despite a negative impact of 223 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 69.3% of total drugstore sales. Third-party prescription sales accounted for 97.8% of pharmacy sales.

Rite Aid's adjusted EBITDA declined 4.8% year over year to $346.8 million, with the adjusted EBITDA margin contracting 110 bps to 4.5%, partly on account of lesser pharmacy reimbursements compared with the year-ago period.

Financials

Rite Aid ended the quarter with cash and cash equivalents of $152.6 million, long-term debt (excluding current maturities) of $7,361.1 million, and total shareholders' equity of $429.7 million.

During the quarter, the company generated cash flow of $26.3 million from operating activities and incurred gross capital expenditure of nearly $161.8 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.

Store Update

Rite Aid stores continue to undergo renovation, with 119 outlets being remodeled in the second quarter. Additionally, the company introduced two stores, relocated three stores, acquired two stores and shuttered nine stores during the quarter. As of quarter end, the company completed wellness remodels at 1,859 stores. Moreover, it opened five clinics, taking its total clinics count to 70. As of Aug 29, 2015, Rite Aid operated 4,561 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.

Outlook

Management remains pleased with Rite Aid's progress toward transforming into a retail healthcare company, given its successful undertakings like the addition of RediClinics to stores, the buyout of EnvisionRx, and the launch of its wellness+ with Plenti program. With these initiatives underway, the company is looking forward to enriching consumer experience and providing better care to communities.

However, the company revised its fiscal 2016 outlook as per current sales trends and based on expectations of greater amortization expense associated with EnvisionRx's acquisition.

Consequently, Rite Aid now expects sales for fiscal 2016 to be in the range of $30.8-$31.1 billion, compared with $30.7-$31.2 billion predicted earlier. Retail drugstore sales are expected to lie in the band of $26.7-$27.0 billion, down from $26.9-$27.4 billion guided earlier. Further, the company anticipates comps growth of 1.5%-2.5%, compared with 2.5%-4.5% projected earlier.

Adjusted EBITDA for fiscal 2016 is now expected to range from $1.36-$1.44 billion compared with the prior projection of $1.35-$1.45 billion. However, the mid-point of both guidance ranges remains the same.

Nevertheless, management lowered its fiscal 2016 earnings outlook as well, to a range of 12-19 cents per share from 14-22 cents expected earlier.

Zacks Rank

Rite Aid currently carries a Zacks Rank #4 (Sell). A better-ranked stock in the same industry is Herbalife Ltd. HLF , with a Zacks Rank #1 (Strong Buy).

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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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