Rite Aid Improves Profitability But Lowers Outlook On Generic Drugs

by Trefis Team
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Rite Aid (NYSE:RAD), the third largest drug retailer in the U.S., reported this Thursday that revenues for the 13-week second quarter were down 0.6% to $6.2 billion as a result of a decrease in pharmacy same store sales and store closings. However, front-end, same-store sales and prescription count exhibited strong growth in the quarter. The same-store prescription count has now grown for 7 consecutive quarters helping the company narrow down its losses.

The proliferation of  generic medications also led the company to revise its guidance for 2013 with sales now expected to be around $25 billion and same store sales to range from a decrease of 1.0% to an increase of 0.25% compared to fiscal 2012. Rite Aid competes with its bigger peers Walgreen (NYSE:WAG), CVS Caremark (NYSE:CVS) and Walmart (NYSE:WMT).

See our complete analysis of Rite Aid

Revenues are down but EBITDA up as generics dominate

The company reported a lower net loss of $53.5 million compared to the second quarter of last year. This was aided by a 1.4% increase in front end, same-store sales and the benefit of additional prescriptions from the Express Scripts/Walgreen dispute. The company noted that the new generic medications which negatively impacted the top-line pharmacy sales, had a positive impact on pharmacy gross margins. This has helped the company grow adjusted EBITDA by 19% year-over-year to $218 million for the quarter. The overall penetration of generic medications increased to nearly 80% and the company is working to contain its generic procurement costs to further gain on the margins.

Repeat buying from Wellness+ customers driving sales

The number of active members of  Wellness+ customer loyalty program grew by 8% over prior year to approximately 25 million active members at the end of the quarter; active members defined as those who’ve used their cards at least twice in the past 6 months. Wellness+ members accounted for 74% of front end sales in the second quarter compared to 69% in the prior year period. They also accounted for 68% of prescriptions filled, up from 67% in last year second quarter. This growth was driven by an increase in the proportion of Gold and Silver members even as the number of overall active user stays constant between Q1 and Q2.

The company is in line to attain its target of 780 Wellness stores by the end of current fiscal which would help it leverage the Wellness+ customers better. We expect the increased focus on Wellness+ program will help the company retain some of the new patients it received due to the Express Scripts/Walgreen dispute even as an increasing number makes repeat purchases.

Strong Industry Outlook

We expect the company to benefit from the proliferation of generic drugs which should help improve its margins while limiting the top-line growth since they cost much lesser than their branded counterparts. The Economist estimates that 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.

We are in the process of revising our $1.51 Trefis price estimate of Rite Aid stock.

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