Rite Aid Corporation (RAD, Financial) is one of the leading retail drugstore chains in the United States. 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 every day and convenience products as well as photo processing. With approximately 4,600 stores in 31 states and the District of Columbia, RAD has a strong presence on both the East and West Coasts. Rite Aid is the largest drugstore chain on the East Coast and the third-largest in the United States, employing roughly 89,000 associates.
Performance So Far
Revenues for the quarter were $6.5 billion versus revenues of $6.3 billion in the prior year's second quarter. Revenues increased 3.9 percent, primarily as a result of an increase in pharmacy same store sales.
Same store sales for the quarter increased 4.1 percent over the prior year, consisting of a 1.1 percent increase in front-end sales and a 5.6 percent increase in pharmacy sales. Pharmacy sales included an approximate 199 basis point negative impact from new generic introductions. The number of prescriptions filled in same stores increased 3.7 percent over the prior year period. Prescription sales accounted for 68.8 percent of total drugstore sales, and third party prescription revenue was 97.5 percent of pharmacy sales.
Net income was $127.8 million or $0.13 per diluted share, compared to last year's second quarter net income of $32.8 million or $0.03 per diluted share. The improvement in net income resulted primarily from an increase in Adjusted EBITDA, a lower LIFO charge due to pharmacy inventory reductions and a $62.2 million loss on debt retirement in the prior year, partially offset by higher income tax expense.
Adjusted EBITDA was $364.2 million or 5.6 percent of revenues for the second quarter compared to $341.6 million or 5.4 percent of revenues for the like period last year. Adjusted EBITDA improved due to an increase in front-end and pharmacy gross profit, partially offset by an increase in selling, general and administrative expenses related to the higher level of sales. The improved pharmacy gross profit was driven by the increase in pharmacy revenues and the impact on inventory valuation related to the company's transition to its new drug purchasing and delivery arrangement with McKesson, partially offset by lower reimbursement rates.
In the second quarter, the company relocated 5 stores, remodeled 117 stores and expanded 1 store, bringing the total number of wellness stores chainwide to 1,433. The company also opened 1 store and closed 10 stores, resulting in a total store count of 4,572 at the end of the second quarter.
What’s in Store
It has partnered with McKesson (MCK, Financial) for better distribution of generic pharmaceuticals. This partnership will result in lower capital requirements for RAD. It may cut costs by $150 million in 2015. It is expected that by the end of 2015, RAD will be able to convert half of its stores to wellness centers, considering its present momentum.
RAD is building up its real estate pipeline for future relocations and stores. By pursuing opportunities to build new stores, it can further develop underpenetrated markets and enter adjacent markets that have positive demographics for their business. It is concentrating on expanding its health care offerings to meet the pace of changing demands. Trends like the aging U.S. population and expanded access to health insurance through the Affordable Care Act will place enormous demands on the U.S. health care system. As a community pharmacy with nearly 4,600 convenient locations, Rite Aid is well positioned to provide an even higher level of care to help meet this growing demand, drive positive health outcomes and find ways to help lower health care costs.
To End
RAD is doing all it takes to foster its growth. It has upgraded its stores and is concentrating on expanding its product lines. The company has the potential to excel in the times to come. Pharmacy stocks have always been an investors’ favorite. It has strong fundamentals and the projected numbers are good. It is focused on leveraging cost structure and investing in new stores. Backed by customer loyalty programs, remodeling efforts and initiatives to cut costs, RAD is still on the right track.
