Rite Aid’s Q3’15 Earnings Preview: Topline Growth Is Intact But Margins Remain Under Pressure

+262.59%
Upside
0.65
Market
2.35
Trefis
RAD: Rite Aid logo
RAD
Rite Aid

The third largest drugstore chain in the U.S., Rite Aid (NYSE: RAD) will report its Q3 2015 earnings on December 18th. The company reported its eighth consecutive quarter of profitable growth in net income as well as adjusted EBITDA, and posted significant increases in its same-store-sales and prescription count in Q2 2015. However, the management lowered its fiscal 2015 guidance (in the Q2’15 earnings call) mainly due to an anticipated decline in reimbursement rates and lower profitability from generic drugs in the second half of the fiscal year, which led to a significant decline in its stock price. The company lowered its revenue guidance and diluted EPS target to $26.0 – $26.5 billion and $0.30 to $0.40 from $26.0 billion – $26.3 billion and $0.22 to $0.33, respectively.

Rite Aid reported it sales figure for the month of November and Q3 2015 on December 4 (Read Press Release). At $6.65 billion, the company witnessed a 5.1% and 5.4% year-on-year increase in total drugstore sales and same-store-sales for Q3 2015. Front-end same-store-sales grew 1.6% while pharmacy-same-store sales increased 7.1%. Prescription count on a comparable stores basis increased 4.2% and prescription sales accounted for 69.7% of drugstore sales in the quarter.

Rite Aid continues to focus on its store re-modeling initiative, efficient cost management and customer loyalty programs to spur its future growth. Controlling costs and making operational progress remain key focus areas for the company. In addition to expanding its healthcare offering, Rite Aid is making progress in building up its real estate pipeline to execute its relocation and new store program over the next several years. As of November end, the company operated 4,572 stores.

Relevant Articles
  1. Rite Aid Stock Could Move Higher From $10
  2. Key Takeaways and Trends From Rite Aid’s Q2 FY’19 Earnings
  3. How Has Rite Aid Performed In FY 2018?
  4. What Are The Chances Of Rite Aid’s Recovery From Its Current Slump?
  5. Why Is Rite Aid’s Stock Performing So Poorly?
  6. Walgreens And Rite Aid Deal Is Back On Track And Both The Companies Are Expected To Gain

Our price estimate of $5.66 for Rite Aid is almost in line with the current market price. We will update our model after the Q3 2015 earnings release.

View our detailed analysis for Rite Aid

Pharmacy Margins To Decline In The Second Half Of Fiscal 2015

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.

Rite Aid’s gross margin in Q2 2015 improved marginally to 29.0% compared to 28.9% in Q2 2014, 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 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.

New Drug Sourcing And Distribution Process Can Ease Pressure Off Margins

Rite Aid recently announced an expanded tie-up with McKesson Corporation (MCK), the largest distributor of pharmaceutical and medical supplies in the U.S., to source and distribute generic pharmaceuticals for Rite Aid. It claims that the continued implementation of its new drug purchasing and distribution process with McKesson was one of the most significant initiatives it focused on in Q2 2015. Rite Aid has now completed the conversion of all its stores and four pharmacy distribution centers to this new distribution process. The company believes the new process will provide it with working capital benefits and improved customer service through a better in-stock position.

The agreement with McKesson, which has been extended until March 2019, is expected to lower the purchasing cost of generic drugs for Rite Aid, providing the company with long term drug savings. The expanded partnership offers significant working capital benefits by providing Rite Aid pharmacies with direct to store delivery five days a week. Rite Aid believes the partnership will allow it to achieve supply chain efficiencies and derive additional cash flow to fuel long term growth. It claims that the agreement is generating purchasing savings that are in line with its expectations.

Wellness Stores Are At The Center Of Rite Aid’s Growth Strategy

Loyalty programs such as the Wellness+ program have been one of the key factors driving growth in Rite Aid’s pharmacy sales, as well as front-end sales. The Wellness+ program helps strengthen relationships with customers, which in turn increases the number of loyalty shoppers at Rite Aid.  It remains a key component of Rite Aid’s health and wellness offering.

Wellness stores continue to outperform the non-wellness stores in terms of same-store front-end sales and script counts. Some pilot concepts, such as an enhanced OTC presentation that features educational materials, interactive product displays, etc.,  have done well in existing Wellness stores and will be applied to other Wellness stores in the future. Additionally, Rite Aid is also testing new concepts such as the day cafe to enhance customer experience at its stores.


Rite Aid on a standalone basis has an estimated generic purchasing power of $1.5 billion, which is significantly lower than its peers. [1]

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

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