Beating Expectations Yet Again, Rite Aid To Continue Investments In Remodeling And Expansion

The third largest drugstore chain in the U.S., Rite Aid (NYSE: RAD) announced its earnings for the last quarter of FY 2015 as well as the full year (ended February 28 2015). In the previous quarter, the company exceeded its guidance and consensus estimates and raised its prior  guidance for the full year. The company repeated this outperformance in the final quarter as well, beating this revised FY 15 guidance in spite of continued headwinds.

Brief Summary Of The Q4’15 Earnings

Revenue for Q4 2015 increased 2.8% year over year to $6.8 billion. While higher front-end and pharmacy sales primarily contributed to the increase, incremental revenue from RediClinic and Health Dialog stores pushed the top line higher. To break the numbers down further, the increase in the front-end same-store sales was fueled by higher levels of cough, cold and flu incidents (2% contribution) and good performance in core drug store categories. And pharmacy same-store sales increased by 5.7%, despite the negative impact of approximately 128 basis points from new generic drugs.

Gross margins remained stable  year over year at about 29%. Higher expenses, however, resulted in higher selling, general and administrative expenses (higher by $17.6 million) pushing the EBITDA margin a tad lower to 5.0% vs. 5.4% in Q4 2014. As the company determined that its  projections of deferred tax assets are more likely than not realizable in the future, it reduced the deferred tax valuation allowance on its books. This led to an income tax benefit of $1.72 billion, taking the net income for the quarter to a whopping $1.84 billion.

Our price estimate for Rite Aid currently stands at $6.27. We are in the process of updating our model for the FY 2015 annual results.

View our detailed analysis for Rite Aid

Margins Remained Stable Overall. But, Multiple Forces Are Working In The Background

Compared to the previous fiscal year, the pharmacy gross profit margin was worse this year primarily due to continued reimbursement pressure and the cycling of the prior year’s favorable MediCal adjustment (related to a decision by California to exclude certain drugs from a retroactive MediCal reimbursement rate). However, the company was able to partially offset these negatives through purchasing efficiencies. While higher script counts also eased pressure off margins to an extent,  management expects some headwinds going forward, as Medicaid expansion will be relatively slower in the next two quarters, versus the rapid growth seen last year.

Rite Aid also benefited from lower inventory (down by  approximately $132 million  year over year) resulting from the transition to direct store delivery from McKesson. While the planned reductions in store inventory were slower than originally expected, the company expects to see additional working capital benefits from store pharmacy inventory reductions in fiscal 2016.

Outlook For FY 2016

Positives

• The company expects script growth to benefit from the Affordable Care Act, favorable demographics, file buy acquisitions, growth in immunizations and other initiatives
• Sales are also expected to receive a boost from an increase in remodeled stores. By the end of Q4 2015, the company had a total of 1,634 wellness stores which represents about 36% of the entire Rite Aid chain. These stores continue to outperform the rest of the chain in terms of same-store front-end sales and script count

Negatives

• Rite Aid anticipates a negative impact of approximately 400 basis points on its pharmacy sales growth rate due to new generic introductions and continued reimbursement rate pressure
• It has also stepped up investment in the rollout of RediClinic and expects to incur some early start-up losses associated with opening approximately 50 additional clinics in fiscal 2016
• The company will construct a new 900,000 square foot distribution center in Spartanburg, South Carolina which will employ nearly 600 people once it becomes fully operational. This will result in higher capital expenditure resulting in higher depreciation expenses. However, the negative impact will only be seen in the short term. As the company begins shipping out of this building early in FY 2017, it will drive much greater efficiency in Rite Aid’s supply chain

FY 2016 Guidance

– Total sales between $26.9 billion and $27.4 billion

– Same-store-sales growth in the range of 2.5% to 4.5%

– Adjusted EBITDA between $1.25 billion and $1.35 billion

– Net income in the range of $190 million and $275 million

– Earnings per diluted share in a range of $0.19 to $0.27

– Capital expenditures are expected to be approximately $650 million

Sources:

Rite Aid Investor Relations

Seeking Alpha Earnings Call Transcripts

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