Consolidation And Generics Help Rite Aid Report Its First Profitable Year In Five

Rite Aid (NYSE: RAD) announced its fourth quarter earnings on April 11, 2013. It has been grappling with a high level of indebtedness since it acquired Brooks and Eckered in the year 2007. The third largest retail drugstore chain has been trying hard to right-size its business and it has closed down nearly 7 percent of its total number of stores since 2007. In 2007 the chain touched an all-time high of 5000 stores, and since then it has come down to 4623 stores as on March 2, 2013. This has been a push toward better profitability, and last year was first profitable one in the last five years.

Rite Aid reported revenues of $25.4 billion during the 52 week period ending on March 2, 2013 which is 2.8% lower than the 53 week period in the prior year. The primary reason behind this decline has been the presence of an additional week in the last accounting year. Cheaper generics also impacted the current year revenues and resulted in the low revenue figure.

In line with our estimates, prescription sales constituted about 67% of the total drugstore sales. The total same store sales for the year decreased by 30 basis points. Even though the front end same store sales increased by 1.4%, it was mitigated by a 1% decrease in the pharmacy same store sales. The number of prescriptions filled in same stores increased by 3.4% over the period, which was more than offset by a 6.65% negative impact from new generic medicines. Going forward we estimate the proportion of prescription sales to total sales will decline. ^[1]

View our detailed analysis for Rite Aid

Positive impact of generics on profitability

Although generics sales have a negative impact on total revenue growth given their lower prices, they have impacted profitability positively. On an average generics contribute almost 50% more in gross profits than its branded substitutes. The proportion of generics in a consumer’s pharmacy basket will see a sustained rise in the next five years as a huge number of branded drugs are going to lose their patent protection, opening the market to generic drug manufacturers. Patents of almost $80 billion worth of branded drugs will expire in the next five years adding to the drugstore chain’s profitability.

Customer stickiness improves due to loyalty program

Rite Aid has invested a lot of its time and money in developing the new Wellness+ Customer Loyalty Program which is now helping it to rake in higher revenues. The program had as many as 25 million active members as on March 2, 2013 who accounted for 80% of Rite Aid’s front end sales and 68% of prescriptions filled. An active member is one who has made two purchases using the card in the last 6 months.

Rite Aid has also been able to retain a much higher share of Express Scripts customers because of its Wellness+ program. Going forward, we estimate Rite Aid putting much more emphasis on its Wellness+ program and remodeling more stores to its new Wellness formats which has a unique merchandising display and specialized Wellness Ambassadors who help customers make informed decisions.

We have a price estimate of $2 for Rite Aid, which is approximately 5% below the current market price.

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1. SEC Filings, 8K [↩]