Drugstore chain Rite Aid (NYSE:RAD) reported a 1% decline in same-store sales in June, in contrast to its consistent comps growth over the last few quarters. The decline, however, was primarily due to decreased pharmacy same store sales resulting from a 672 bp negative impact from new generic introductions and July 4 holiday, and was in-line with the overall pharmacy retail industry trends. The company’s prescription counts at comparable stores continued to improve (3%) which also helped other front-end comps.
Rite Aid, which competes with larger rivals Walgreen (NYSE:WAG) and CVS Caremark (NYSE:CVS), continued to post a loss in 2011 but has reported consistent stabilization of operating trends and narrowing losses over the last six quarters.
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Our Take On Rite Aid
Since the beginning of fiscal 2012, Rite Aid’s same store sales have grown 1.7% over the prior-year period, driven by a 2.1% rise in front-end comps and a 1.4% increase in pharmacy comps. Pharmacy sales were supported by 3% higher prescription count, offset by negative impact from new generic introductions. Aided by the Wellness loyalty program, expanded immunization and store upgrades, these comps have consistently improved for the past six quarters, helping the drug retailer narrow its losses.
Rite Aid has also been working on various cost-cutting initiatives like centralized indirect procurement of drugs and efficient supply chain as well as debt refinancing to make sure it timely addresses its upcoming debt maturities. Increased investment in upgrading its stores have improved comps and profitability and have helped stabilize the operating trends.
Strong Industry Outlook
We also expect Rite Aid to benefit from the growth in drug retail space due to increased prescription expenditure, especially given the aging U.S. population and expanded insurance coverage for 30 million more Americans post the 2010 health reforms. It continues to benefit from the recent spurt in generic drugs expansion after several blockbuster drugs like Lipitor lost patent protection.
Generic drugs moderate the drug retailers’ top-line growth since they cost much lesser than their branded counterparts, but significantly boost their bottom-line. According to The Economist, blockbusters with a combined $170 billion in annual sales will go off-patent by 2015. On average, generic drugs provide 50% higher gross margin dollars, although there would be increased reimbursement rate pressure on the drug retailers from the PBMs, which are also trying to cash in on the generics expansion.