Rite Aid’s Sales Growth Slows In February, Though Launch Of RediClinics To Aid Top Line Moving Forward

Last week, Rite Aid (NYSE: RAD), the third largest drugstore chain in the U.S., reported same store sales for the month of February (5 weeks) as well as the last quarter (13 weeks ended February 28) of fiscal 2015. Its monthly same store sales for February increased 3.3% over the prior-year period, slower than the 4.8% growth seen in January. On the other hand, the quarterly sales figure increased 4.5% year over year, which is also slightly lower than the Q3’15 growth of 5.3%. The company’s stock price, which had risen 10% in the month preceding the news release, fell 5% in two days following the release. Our price estimate of $6.27 for Rite Aid is approximately 20% lower than the current market price.

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February front-end same store sales increased 1.6 percent and the prescription count at comparable stores increased 2.2 percent over the prior-year period. New generic introductions continued to negatively impact pharmacy same store sales, with an approximate impact of 144 basis points, compared to 114 basis points in January. In spite of this pressure, pharmacy same store sales registered an increase of 4.1% year over year. Total drugstore sales for the five-week period increased 1.7 percent to about $2.56 billion compared to $2.51 billion for the same period last year.

For the 52-week period ended Feb. 28, 2015, comparable store sales increased 4.3%, while front-end comparable store sales increased 1.2%. Prescriptions filled at comparable stores increased 3.5% and total drugstore sales increased 3.7% compared to last fiscal.

Pharmacy Sales To Benefit From EnvisionRx Acquisition

Rite Aid’s acquisition of EnvisionRx, a national pharmacy benefit management (PBM) company, is likely to boost the company’s pharmacy retail business, as a portion of the company’s PBM accounts should gravitate towards Rite Aid to get their prescriptions filled (~40% of CVS’ PBM prescriptions go through its own channels) ^[1]. This will also ease some pressure off the company’s margins, as margins in the pharmacy retail business are much higher than those in the PBM business. For example, CVS Health (NYSE: CVS) makes an EBITDA margin of about 16% in its retail business, compared to a little over 5% in PBM (based on 2014 results). So, as more and more PBM customers go to Rite Aid’s stores to fill their prescriptions, retail will form a larger portion of the revenue and help improve the overall margin. (Note that Rite Aid also has to integrate EnvisionRx with its drugstore operations, which could weigh on margins in the short term)

Newly Launched RediClinics Will Also Boost Top Line

Last April, Rite Aid acquired RediClinic, a leading retail clinic operator operating across 30 locations in the greater Houston, Austin and San Antonio areas. Earlier in February, almost a year after the acquisition, the company announced the opening of 24 RediClinics within select pharmacy stores. Since 2015, RediClinic has catered to over 1.5 million consumers((Rite Aid Opens First RediClinics Inside Select Rite Aid Pharmacies, Yahoo Finance, February 4, 2015)), by providing simple access to superior-quality and affordable healthcare facilities. Retail clinics play an importance role in today’s healthcare delivery system and will benefit Rite Aid’s overall health and wellness strategy. Rite Aid intends to leverage RediClinic’s expertise to deliver convenient healthcare and wellness programs to its customers in select markets.

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1. Annual Analyst Day 2014, CVS Health Events, December 16, 2014 [↩]