Rite Aid Sales Continue To Grow In September But Margins Will Remain Under Pressure

Rite Aid (NYSE: RAD), the third largest drugstore chain in the U.S., showed a continued growth momentum with a 4.5% annual increase in its drugstore sales ($2 billion) for the month of September, reported last week. Same-store-sales grew 5.1% while front-end sales grew 2.3%. Prescription sales accounted for 69.5% of total drugstore sales. Pharmacy same-store-sales increased 6.3%. At $14.93, year-to-date total drugstore sales are up 3.3% compared to the same period last year.

Posting significant increases in its same-store-sales and prescription count, Rite Aid reported its eighth consecutive quarter of profitable growth in net income as well as adjusted EBITDA in Q2 2015 (ended August), as we discussed last month. However, the company’s stock price has declined by almost 25% since the earnings release because management lowered its fiscal 2015 guidance, mainly due to an anticipated decline in reimbursement rates and lower profitability from generic drugs in the second half of the fiscal. While Rite Aid revised revenue estimate for fiscal 2015 is only marginally lower than its original guidance, it has significantly lowered its EBITDA and net income estimates.

Revised Fiscal 2015 Guidance

– Total sales between $26.0 billion and $26.3 billion vs its previous guidance of $26.0 – $26.5 billion.

– Same-store-sales to increase 3% to 4%.

– Adjusted EBITDA to be between $1.20 billion and $1.28 billion, compared to its initial estimate of $1.28–$1.35 billion.

– Net income in the range of $223 million to $333 million, as compared to the initial guidance of $298 – $408 million.

– Earnings per diluted share between $0.22 to $0.33, down from the earlier forecast of $0.30 to $0.40.

– Capex of $525 million.

Pharmacy Margins Expected To Decline In The Second Half Of Fiscal 2015

Rite Aid’s gross margin in the quarter improved marginally, from 28.9% in Q2 2014 to 29.0% in Q2 2015, due to the favorable impact of the inventory valuation related to the transition to its new drug purchasing and delivery arrangement with McKesson.  Pharmacy gross profit dollars in Q2 2015 were higher but the margin rate was lower, compared to Q2 2014. Pharmacy gross profit was positively impacted by both a higher prescription count and the benefits of the purchasing agreement with McKesson; on the other hand, it was negatively impacted by continued reimbursement rate pressure.

Based on the current estimates for reimbursement rates, anticipated lower profitability due to a delay in the introduction of a generic equivalent to Nexium, and higher costs for generic drugs that recently lost their exclusivity, Rite Aid expects the pharmacy gross margin in the second half of fiscal 2015 to decline compared to the same period last year. The company has accordingly lowered its guidance for adjusted EBITDA, net income and earnings per diluted share.

Our price estimate of $5.66 for Rite Aid is now over 10% higher than the current market price.

View our detailed analysis for Rite Aid

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