Generic Drugs Slow Rite Aid’s Sales Growth

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Rite Aid

Rite Aid (NYSE: RAD), the third largest drugstore chain in the U.S. in terms of revenue and number of stores, reported its sales figure for the month of August as well as the quarter ended August 31, last week. Declining store count and a rising proportion of generic (non-branded) drugs, which are priced lower compared to branded drugs, have put pressure on Rite Aid’s top line in the last few quarters.

For the quarter ended August 2013, same store sales increased by 1% (y-o-y) whereas the front-end same store sales declined by 0.3% (y-o-y). Rite Aid reported 0.7% (y-o-y) growth in its total drugstore sales ($2.4 billion) for the quarter and prescription sales accounted for 67.9% of the drugstore sales. For the month of August, the 2.5% (y-o-y) growth in pharmacy sales was offset by a 1.7% (y-o-y) decline in front-end same store sales. Total same store sales for the month came in 1.1% higher compared to last year. Rite Aid’s total same store sales so far this year is 0.8% lower compared to the same period last year.

The aging U.S. population combined with the fact that older people contribute to a larger proportion of expenditure on drugs, increased life expectancy, new drug therapies and the Affordable Care Act expanding insurance to millions of Americans are key trends driving growth in the pharmaceutical industry. Despite intense competition we believe that Rite Aid can benefit from the above trends in the long run.

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The rising proportion of low-cost generic drugs and the declining number of stores continue to limit Rite Aid’s top line growth. Nevertheless, the company’s store modelling initiative, cost savings from the closure of under-performing stores, expanding member base for its Wellness+ card-based loyalty program and its strategic alliance with GNC can help drive its future growth.

View our detailed analysis for Rite Aid

Negative Revenue Impact By Generic Drugs Introduction

The introduction of new generic drugs had a 1.6% negative impact on Rite Aid’s pharmacy sales for the month of August.

The total generic dispensing rate, which implies the percentage of generic drugs in a consumer’s prescription, grew to 78.5% in 2012, from 74.1% and 71.5% in 2011 and 2010, respectively. Though the substitution of generic drugs will continue for the next three to five years, the pace is expected to slow down. Nevertheless, an estimated $15 billion worth of branded product will come off patent in the next three years, opening them to competition from generic drugs. [1]

Declining Store Count & Growing Success Of The Wellness Program

As of August 31, 2013, Rite Aid operated 4,604 stores compared to 4,643 stores in August 2012. In the last few quarters, the company has closed its under-performing stores and remodeled many of its existing stores. We think the move will improve Rite Aid’s profitability in the future.

Rite Aid’s loyalty programs such as the Wellness+ program has helped improve its front-end as well as pharmacy sales in the last few quarters. The improving results can be partly attributed to the rising number of Wellness Ambassadors employed by the company to provide its customers with more personalized services. Such loyalty programs and similar initiatives has enabled Rite Aid to broaden its customer base. Rite Aid has more than 25 million active Wellness+ members.

We will update our price estimate of $2.60 for Rite Aid after its Q2 2014 earnings release on September 19, 2013.

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Notes:
  1. CVS Caremark’s CEO Discusses Q2 2013 Results – Earnings Call Transcript, Seeking Alpha, August 6, 2013 []