Rite Aid Continues To Grow Store Sales, Maintaining Margins Despite Higher Expenses

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Rite Aid

The third largest drugstore chain in the U.S., Rite Aid, announced its earnings for the first quarter of FY 2016 (March to May). In the last fiscal year, revenues grew at a moderate rate of about 3% and margins remained flat despite continued reimbursement pressure. Rite Aid continued growing at a similar pace in Q1 2016 (at 2.8% year-over-year) driven by increases in same-store sales and same-store prescription count.  It continues to make significant investments in transforming itself into a more rounded healthcare company (rather than being just a drug seller). Some of these initiatives include the addition of RediClinics to Rite Aid stores and launching an enhanced customer loyalty program (wellness+ with Plenti). Below, in this article, we take a look at the quarter’s results in a bit more detail and why Rite Aid is focusing on expanding the number of its RediClinics.

Our price estimate for Rite Aid currently stands at $7.54 per share. We are in the process of updating our model for this quarter’s results.

View our detailed analysis for Rite Aid

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Brief Summary of Q1’16 Earnings

Rite Aid’s revenues increased 2.9% over the prior year, primarily driven by same-store sales. During March, April and May, the company clocked year-over-year growth rates of 4.3%, 3.0% and 2.1%, respectively, in its same-store sales. Revenue from prescription drugs, which amounted to about 70% of the overall revenue in FY 2014, grew by 3.9% and front-end sales grew by 0.6%. Despite a negative impact of 165 basis points on prescription drug sales due to the launch of new generics (generics reduce revenue per prescription as they are cheaper), the increase in the number of prescriptions filled by 1.6% more than offset the negative impact.

On the margins front, the adjusted EBITDA margin stood at 4.5% compared to 4.4% for the like period last year. Even though the company’s SG&A expenses increased due to RediClinic expansion and the roll-out of the Plenti program, an increase in front-end and pharmacy gross profit prevented a decline in margins.

Growing Popularity of Retail Clinics Could Boost Revenues

The role of retail clinics in health care has been steadily and rapidly expanding in recent years. Their popularity is also steadily growing as they have certain advantages over physician offices. Retail clinics can offer faster access to basic health care services as appointments, are typically not required which reduces wait times. For patients who do not have quick access to their primary care physicians, or need care outside of normal office hours (usually, physician offices are closed on weekend and evening hours), retail clinics offer a great alternative [1].

Last April, Rite Aid acquired RediClinic, a leading retail clinic operator operating across 30 locations in the greater Houston, Austin and San Antonio areas. As of February 28, 2015, the company opened 24 RediClinics in Rite Aid stores in the greater Baltimore/Washington, D.C. and Philadelphia markets and plans to expand to 35 in-store clinics by spring 2015. Since 2005, RediClinic has catered to over 1.5 million consumers [2], by providing simple access to superior-quality and affordable healthcare facilities. These clinics in addition to the company’s store remodeling efforts are likely to attract more footfall to Rite Aid stores and hold the potential to boost store sales.

Other Sources:

Rite Aid Investor Relations

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Notes:
  1. Investors May Find Opportunities In Retail Clinic Growth []
  2. Rite Aid Opens First RediClinics Inside Select Rite Aid Pharmacies []