Rite Aid Corporation (NYSE:RAD) is a retail drugstore chain in the U.S. In the company’s stores, it sells prescription drugs and a range of other merchandise, which it calls front-end products. Front-end products include over-the-counter medications, health and beauty aids, personal care items, cosmetics, household items, beverages, convenience foods, greeting cards, seasonal merchandise and other everyday and convenience products, as well as photo processing.
Performance Report Card
Results in April showed investors just how far the company has come. Profits were much higher than expected, with same-store sales gains of 2.1% resulting from a 3.5% boost in pharmacy comps. In addition, projections for the full fiscal year look promising, with comps expected to rise between 2.5% and 4.5% and large gains seen for adjusted operating earnings as well.
Total drugstore sales for the 17 weeks ended June 28, 2014 increased 2.8% with sales of $8.42 billion compared to $8.191 billion for the same period last year. Prescription sales represented 68.4 percent of total drugstore sales, and third party prescription sales represented 97.4 percent of pharmacy sales.
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For the four weeks ended June 28, 2014, same store sales increased 3.9 percent over the prior-year period. June front-end same store sales increased 0.9 percent. Pharmacy same store sales, which included an approximate 169 basis points negative impact from new generic introductions, increased 5.4 percent. Prescription count at comparable stores increased 3.5 percent over the prior-year period.
Total drugstore sales for the four-week period increased 3.5 percent to $1.995 billion compared to $1.927 billion for the same period last year. Prescription sales accounted for 68.4 percent of drugstore sales, and third party prescription sales represented 97.5 percent of pharmacy sales.
Rite Aid has converted more than 1200 stores to its updated “wellness” format and will close in on 1,600 remodeled stores by the end of the year. Rite Aid has also enrolled over 1.7 million elderly consumers in its Wellness 65+ loyalty program, which cleverly targets the segment of the populace most dependent on pharmacy sales and services. Rite Aid has also expanded its generic-drug sourcing and distribution agreement as part of McKesson Corporation's (NYSE:MCK) One Stop proprietary generics program, which should reduce purchasing costs and working capital needs by $150 million over the next fiscal year.
Now, Rite Aid is moving toward fostering its own growth. In April, Rite Aid announced it would purchase Texas-area clinic operator RediClinic, furthering the drugstore chain's efforts to broaden its mission to incorporate more aspects of health care.
In addition, store remodeling efforts to recast its drugstores as wellness-oriented stores has allowed Rite Aid to expand into other product lines, ranging from fitness apparel and equipment to specialized nutritional products and foods. Rite Aid’s loyalty program has also been a source of growth helping to encourage long-term patronage among customers.
Rite Aid has transformed 1,215 stores into its wellness format so far, and management plans to remodel an additional 450 stores during the current year. According to the company, front-end same-store sales in the wellness stores exceeded the non-wellness stores by 320 basis points, and script growth in the wellness stores exceeded the non-wellness stores by 1% during the company's fiscal 2014 year ended on March 1. Considering these statistics, the wellness format seems to be having a considerably positive impact on performance.
The company is successfully growing its Wellness 65+ loyalty program, targeting the key senior demographic. Rite Aid has enrolled more than 1.7 million members in its Wellness 65+ loyalty program as of the end of the last quarter, and this bodes remarkably well in terms of competitive strengths and growth opportunities over the coming years, as seniors are an essential demographic segment in terms of health care demand.
Rite Aid has also expanded its partnership with McKesson for the sourcing and distribution of generic pharmaceuticals as part of McKesson's One Stop proprietary generics program. This will generate important efficiencies in terms of lower purchasing costs and reduced working capital requirements for Rite Aid; management estimates the agreement will cut capital requirements by $150 million during the coming year.
Financial performance has materially improved over the last several years, with both sales and earnings consistently rising. April sales data was particularly encouraging, as Rite Aid announced a strong increase of 5% in same-store sales versus the same month in the prior year.
Essentially, pharmacy stocks are a hot ticket. The industry as a whole has produced significantly larger gains than the S&P 500 while Rite Aid has been one of the best performing stocks in the market since the fourth quarter of 2012. As the company is making efforts to improve its cost structure and remodel its stores, these efforts will help it improve its profitability and cash flows.
The company has strong growth potentials to excel in the long run. The company is well headed to growing its top line in a highly competitive environment. Furthermore, both of the company's initiatives, wellness remodeling and RediClinic, will mark a brighter and growing revenue base.
If Rite Aid can continue generating growing sales, and the company manages to increase profit margins to levels more in line with those of industry peers, the stock should deserve a considerably higher valuation. Potential for gains is hardly over for investors in Rite Aid. Rite Aid is clearly moving in the right direction, and the company looks ready to leave the turnaround phase in the past in order to focus on growth opportunities during the years ahead. These moves will create shareholder return in the times to come.