The third largest drugstore chain the country Rite-Aid (NYSE:RAD) reported that same store sales declined 3% y/y in November on the two-fold impact of temporary store closures due to Superstorm Sandy and the introduction of generic drugs.  Same store sales have now declined for three consecutive months, and we expect it to bear down on the third quarter results out on December 20. The 3% decline includes a 4.2% decrease in pharmacy sales, a decrease we believe can mostly be attributed to generic introductions as the prescription filled increased 2.2% during the same period. Front end sales declined marginally, we expect primarily because of early shopping as preparation for Sandy in October  and store closures during the storm.  About a sixth of its approx. 4,600 stores were closed for varying duration during the storm. We believe that the company’s strategy of closing or relocating under performing stores and increasing customer engagement through its new store format has helped it control the losses in November and expect sales to rebound from December onward.
Sales to continue lagging growth in prescriptions
Same store sales for the nine month period of the current fiscal year have now decreased marginally (0.3%) over the prior year period. Prescription count during the same period, a combined result of prescriptions gained from Express Scripts and Walgreen fallout and the popularity of its Wellness+ store formats have increased 3.5% during the same period. We believe the disparity between increase in prescription count and decrease in sales is a function of large number of generic introductions.
Meanwhile, the number of prescriptions filled in the country is expected to grow due to the aging population, increased life expectancy, “baby boomers” becoming eligible for Medicare prescription program and new drug therapies. With many more branded drugs scheduled to go off patent over the next couple of years, we expect an inverse relationship between prescription sales and prescriptions filled for some time. The dispute between Walgreen and Express Scripts ended mid September when the former started filling prescriptions from the latter. We expect the renewal of the arrangement to result in a slowdown of prescription filled growth over the coming quarters as some of the ex-Walgreen customers move back.
Generics help narrow losses
While generics continue to hurt revenues, they also boost profitability because they come with a wider margin between the cost for the pharmacy to purchase the drugs and the reimbursement it receives. This had helped the company reduce its net loss during the third quarter to about $40 million from $90 million a year ago. We expect the trend to continue in the Q3 results with the losses narrowing further.
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- Rite Aid Q2 Earnings Review: Reimbursement Pressure Eats Into Margins As Remodeled Stores To Drive Sales Growth
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- Can Pharmacy Retailers Finally Stop Worrying About Generic Price Inflation?
We have a price estimate of $1.50 for Rite Aid stock which is at a 50% premium to the current market price.Notes:
- Rite Aid Reports 3.0 Percent Same Store Sales Decrease for November, Rite Aid, December 2012 [↩]
- Rite Aid Reports 1.1 Percent Same Store Sales Decrease for October, Rite Aid, November 2012 [↩]
- Rite Aid Provides Hurricane Sandy Store Update Status; Company Supports Relief Efforts Across Region, Rite Aid, November 2012 [↩]