Rite Aid Continues Its Profitability Improvements Amid Declining Revenues

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Rite Aid’s (NYSE: RAD) first quarter earnings Thursday, June 20, came as a breather to its investors as the company continued its profitability streak for the third time in a row. Although the revenues inched lower by 2.7%, as we expected in our previous analysis, higher margins on generic medicines boosted its net income to $89.7 million.

The company reported revenues of $6.3 billion this quarter, down from revenues of $6.5 billion in the previous year as generics had a 4.58% negative impact on total revenues. The company operated 4,615 pharmacy stores at the end of the quarter, down from 4,652 stores the previous year. Declining store count is one of the reasons behind the decreasing revenues for the company.

On a same store basis the company reported 2.5% decline in sales as pharmacy sales decreased by 3.8%, which was partly offset by 40 basis points increase in front-end sales. Rite Aid’s growing emphasis on front-end sales by employing higher number of wellness ambassadors and remodeling stores to wellness format have started paying off, as front-end sales in wellness format stores have been 3.5% higher than front-end sales in non-wellness format stores. The company remodeled additional 108 stores to the wellness format during this quarter. We have updated our model to reflect the latest earning figures and forecasts. [1]

View our detailed analysis for Rite Aid

Wellness65+ Launched To Attract Senior Patients

Rite Aid has recently launched Wellness65+ program aimed at senior patients who are known to be higher spenders in the pharmacy category. The program provides them opportunities to review their medications with Rite Aid pharmacists and clear their doubts about their prescriptions.  In addition to this, they can get free blood pressure screening and 1 point for every $1 they spend on co-payments for prescriptions supported by government-funded programs, enabling them to earn Gold or Silver status at a faster rate.

The company will also launch Wellness65+ Wednesday events starting July 3, where wellness65+ members can attend themed health events at every Rite Aid store on the first Wednesday of every month and also receive a 20% discount on their front-end purchases during that day, irrespective of their membership status. We expect these initiatives to pick up the company’s front-end as well as pharmacy sales over the coming periods. [2]

Refinancing Measures To Lower Interest Expenses In The Coming Periods

Rite Aid has announced two refinancing rounds over the past two weeks totaling to  $1.31 billion. These measures have reduced the effective interest rates considerably and extended the maturity of the notes to 2021 from 2017. The company expects to save about $35.4 million annually, as a result of lower interest charges. Although the company will incur a charge of $63 million in retiring older debt, the long term effect will be positive for the company’s bottom line. [2]

We have updated our price estimate for Rite Aid to $2.33 considering the recent positive developments.

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Notes:
  1. SEC Filings, 8K, June 2013 []
  2. Rite Aid Management Discusses Q1 2014 Results – Earnings Call Transcript, June 2013 [] []
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