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Rite Aid 4Q Loss Narrows Amid Sales Growth, Tax Benefit

04/12/2012 | 01:27pm US/Eastern

--Same-store sales improve for five straight quarters with rollout of loyalty program and renovated stores

--Rite Aid converted 280 stores into new wellness format in the latest quarter

--Loss was greater than analysts expected and new fiscal-year outlook is tempered

(Updates the second paragraph with the latest stock quote and analyst commentary in the eighth through 12th paragraphs.)

 
   By John Kell 
   Of  
 

Rite Aid Corp.'s (>> Rite Aid Corporation) fiscal fourth-quarter loss narrowed as the drug-store company benefited from an extra week of sales and a tax benefit in the latest period.

The chain's loss was greater than analysts expected and its view for the new fiscal year was tempered, though shares were flat at $1.70 in recent trading Thursday as the broader market rallied higher.

The No. 3 U.S. drug-store chain behind Walgreen Co. (WAG) and CVS Caremark Corp. (>> CVS Caremark Corporation) has posted losses since its 2007 acquisition of the Brooks and Eckerd chains that saddled it with debt just before consumers slashed spending. It has benefited from cutting costs and refinancing billions of dollars in debt, and the company has seen sales growth recently after a long stretch of declines.

Rite Aid's same-store sales have improved for the past five quarters as the company benefits from the rollout of a loyalty program and store renovations under a new format that expands clinical pharmacy services and offers more health and wellness products. Rite Aid converted 280 stores into the new wellness format during the latest quarter, and, while still early in that process, President and Chief Executive John Standley said the effort was helping bolster front-end sales.

Standley told analysts during the company's conference call that enrollment in the Wellness+ loyalty program, which was launched in April 2010, has reached 52 million members and with two years of membership activity the drug-store chain has enough history and data to monitor active members who have used their cards at least twice in the last 26 weeks.

The company's effort to offer more flu immunizations, meanwhile, resulted in the administration of nearly 1.5 million flu shots in the latest fiscal year, more than double the prior year's total. That improvement came amid a mild cold and flu season that hurt the latest quarterly results from CVS and Walgreen.

Standley also noted a marketing campaign helped court customers forced to shift their prescriptions away from Walgreen after that drug-store chain exited from pharmacy-benefit manager Express Scripts Holding Co.'s (ESRX) network following a contract dispute.

Analysts say increasingly contentious contract disputes between payers and providers, as well as reimbursement-rate pressures, would justify consolidation between the top three drug-store chains. Though some speculate Walgreen may look to acquire Rite Aid as a solution to the contract impasse with Express Scripts, others argue a new contract agreement could be reached by this summer.

Raymond James analyst John Ransom said the latest market speculation suggests Walgreen may be more inclined to settle with Express, which earlier this month completed its $29.1 billion acquisition of peer Medco Health Solutions. That would lessen some of the upside thesis to Rite Aid's shares.

Ransom said that even though Rite Aid's new management team "has worked wonders with a really tough hand to play," the company remains heavily leveraged with more than $6 billion in debt and very minimal free cash flow generation.

Imperial Capital analyst Mary Ross Gilbert said her firm has long seen Rite Aid as a longer-term acquisition target, though she notes management continues to improve the business from an operating standpoint. She touted the value of the company's Northeast and West Coast locations and said Rite Aid has kept capital expenditures at a fairly low level.

Ross Gilbert noted Rite Aid's execution of late has kept the business relatively stable and with financial markets in their favor, the company has the ability to refinance maturities as they come due.

For the quarter ended March 3, Rite Aid reported a loss of $161.3 million, or 18 cents a share, from a year-earlier loss of $205.7 million, or 24 cents a share. The latest period included $56.3 million in termination and impairment charges, along with a $24.2 million tax benefit, while the prior year included $154.1 million in charges and a small tax expense.

Analysts polled by Thomson Reuters most recently projected a loss of 14 cents.

Gross margin fell to 24.9% from 26.4%.

Rite Aid recently reported total drug-store sales of $7.12 billion, up 11% from a year earlier, mostly owing to an extra week of sales in the period. Same-store sales improved 3%, the drug-store chain's best showing in five years.

Looking to fiscal 2013, Standley said Rite Aid intends to remodel 500 stores into the wellness format. For the year, the company projected a per-share loss of 13 cents to 31 cents on revenue of $25.4 billion and $25.8 billion. Analysts polled by Thomson Reuters recently expected a loss of 25 cents and revenue of $25.74 billion. Rite Aid expects same-store sales growth of up to 1.5% over the just-completed fiscal year.

-By John Kell, Dow Jones Newswires; 212-416-2480; john.kell@dowjones.com

--Tess Stynes contributed to this article.

Stocks mentioned in the article : Rite Aid Corporation, CVS Caremark Corporation
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