The nation’s third largest pharmacy Rite Aid (NYSE: RAD) will report its first quarter earnings on June 20. Fiscal 2012 was a good year for Rite Aid as the management’s continued efforts to revive profits resulted in a net income of $118 million – Rite Aid’s first profitable year in five years.
The company refinanced a portion of its debt last year, which is expected to provide an additional annual cash interest savings of approximately $45 million. On similar lines, the company plans to refinance $400 million worth of its outstanding debt on books to take advantage of the low interest rate scenario and to extend the maturity of its existing debt. The new series of senior notes will be due in 2021, against its current outstanding 9.5% senior notes which are due in 2017. The refinancing program would have a positive effect on the company’s bottom line in this financial year. 
The company is expected to report revenues of $6.264 billion for the first quarter ending May 31, a 2.8% decline year-on-year, partly due to a lower number of operative drugstores and partly due to other factors further outlined in this analysis. The drugstore chain operated 4,652 stores on June 1, a net decrease of 37 stores over the year. 
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Express Scripts-Walgreen Dispute Resolution To Have A Negative Effect On Top Line Figures
Rite Aid benefited immensely due to the dispute between pharmacy benefit management major, Express Scripts and drugstore chain, Walgreen (NYSE: WAG). Rite Aid added about $70 million to its top line as customers shifted from Walgreen to Rite Aid in order to continue filling prescriptions under their existing plans. The dispute got resolved in September last year and some customers started moving back to their original drugstore. Although, Rite Aid’s management estimates retaining about 75%-80% of the customers gained during the period, they also expect some more customers to shift back to their original drug vendor gradually. 
New Generic Introductions To Weigh Down On Revenue
Generics had a 6.65% negative impact on Rite Aid’s 2012 revenues.  According to a recent IMS Health report, total spending on medicines on a real per capita basis declined by 3.5% in 2012, as a result of declining use of branded drugs, greater availability of lower-cost generics, lower levels of price increases and reduced spending on new medicines. In 2012, 84% of total dispensed prescriptions were generics, up from 80% in 2011 and is expected to reach 87% by 2017.
Another research report from IMS Health forecasts global generic spending to increase from $242 billion in 2011 to $400-$430 billion in 2016. We estimate this rising trend of generic usage to have a continuing negative impact on Rite Aid’s top line.
Front-End Sales To See An Uptick
Rite Aid’s continuing efforts to improve its same store front-end sales would deliver results as they are expected to increase by 0.4% year-on-year. This uptick may partly be attributed to the rising number of Wellness Ambassadors employed by the company to provide its customers with more personalized services and partly to the savings offered by the Wellness+ customer loyalty program. Rite Aid currently employs about 1,300 Wellness Ambassadors across its stores. The company also had about 25.2 million active Wellness+ members, which accounted for about 79% of total front-end sales in 2012.  A member who has made purchases twice using the card in the past 26 weeks is considered to be an active member.
Rite Aid also launched a “Nail-Art Contest” in May, in which customers had to submit their nail art designs at www.riteaidnails.com to win 20 different prizes, including a $500 Rite Aid gift card, nail products from exclusive Rite Aid suppliers and “Gold” status for a year on Rite Aid’s free customer loyalty program, Wellness+.  This was the second time that the company hosted this contest after receiving an excellent response in 2012, when the contest boosted front-end sales by 1.4% in the second quarter, as compared to the 2011 period. Front-end sales currently contribute about 33% to Rite Aid’s intrinsic value and we would be closely watching its contribution to the company’s bottom line in the upcoming earnings.
We will update our price estimate of $2 for Rite Aid after the company reports its first quarter results.Notes:
- Rite Aid Announces Offering of Senior Notes as Part of a Refinancing of Certain of its Outstanding Indebtedness, June 17, 2013 [↩]
- Rite Aid Reports Same Store Sales for May, June 6, 2013 [↩]
- Rite Aid Management Discusses Q4 2013 Results – Earnings Call Transcript, April 11, 2013 [↩] [↩]
- Consolidation and Generics Help Rite Aid Report Its First Profitable Year In Five, April 2013 [↩]
- Rite Aid Launches 2(nd) Annual Online Nail Extravaganza Contest with Beauty Prizes, Coupons & Tips, May 2013 [↩]