Rite Aid’s Debt Refinancing And Robust April Sales Lift Outlook

Rite Aid (NYSE:RAD), the third largest drug retailer in the U.S., recently announced its April sales with the same store sales continuing to climb and losses abating. The same store sales have consistently improved for the past five quarters. The company has also refinanced more debt due in 2015 though a bond sale with extended maturities of 2020, similar to its February refinance, which led the stock to a 5% jump.

The recent refinancing activity and the stabilization in operating trends has also led Fitch to revise its outlook for the company to stable from negative. The drug retailer has come a long way from its weakened sales position two years ago, but still has significant debt and lags its larger competitors Walgreen (NYSE:WAG) and CVS Caremark (NYSE:CVS) in terms of performance.

See our complete analysis of Rite Aid

Consistently Improving Metrics

In April, Rite Aid continued its streak of monthly sales growth as same store sales increased 3% (y/y) with front-end same store sales improving by 2.7% and pharmacy same store sales by 3%, despite a 300 basis points negative impact from new generic introductions. Prescription count at comparable stores increased 4% over the prior year period, which is likely to have benefited from filling prescriptions for PBM Express Scripts customers that previously went to Walgreen.

Rite Aid delivered sustained growth throughout 2011 with improved same store sales and lower losses. Last quarter was the fifth consecutive quarter of same store sales growth for the drug retailer, boosted by the success of key initiatives like Wellness+ loyalty program, expanded flu immunization programs and Wellness store remodels. Rite Aid closed down more than 50 under-performing stores during the past one year and remodeled 280 stores, which has also helped improve its comparable same store sales.

Debt Refinance

The company is also refinancing its debt to make sure it timely addresses its upcoming debt maturities. It recently offered additional notes worth $426 million due 2020 as part of refinancing of its debt due in 2015. In February, it retired $459 million worth of its debt due in 2015 by offering $481 million worth of notes due in 2020. In view of the recent debt refinancing activity and the stabilization in its operating trends, Fitch has revised the rating outlook to stable from negative. ^[1]

Nonetheless, Rite Aid is still highly leveraged with weak cash flows and limited capital for investment and depends upon favorable credit market conditions to refinance debt and continue with its same store sales growth and margin expansion. Off late, the reimbursement rate environment has turned challenging for the drug retail industry, including Rite Aid, mitigating the windfall earlier expected from new generic introductions. Rite Aid also faces significant competition from retailers such as Wal-Mart, which sells over 360 generic drugs for only $4 per subscription, significantly lower than Rite Aid’s prices – putting further pressure on margins and future cash flows.

We have a $1.55 Trefis price estimate of Rite Aid stock, at 3% premium to the current market price.

1. Fitch Affirms Rite Aid’s Outlook Stable, Marketwatch, May 2012 [↩]