Rite Aid Wellness Initiatives & Cost Controls Support $1.38 Value
Rite Aid (NYSE:RAD), the third largest retail pharmacy chain in the U.S. with over 4,700 locations, recently released its second quarter earnings with improved key metrics and guidance for 2012. Rite Aid has been aggressively focusing on improving its bottom line and achieved a third successive quarter of positive same store sales growth. The company’s Wellness Plus loyalty program launched in April 2010 was the key factor behind this growth. We recently launched coverage of Rite Aid in the note titled Rite Aid: New Formats and Initiatives Drive Growth. Rite Aid sells both prescription and non-prescription drugs as well as retail merchandise such as cosmetics and food. Rite Aid competes with Walgreen (NYSE:WAG), CVS Caremark (NYSE:CVS) and Wal-Mart (NYSE:WMT).
We have a $1.38 Trefis price estimate of Rite Aid stock, which is about 40% ahead of the current market price.
Wellness+ Program, Cost Controls Help Same Store Sales
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Rite Aid continued to improve its top-line, with third consecutive quarter of same store sales growth. Same store sales increased 2.2% over the prior year with a 2.5% increase in the front-end sales and a 2% increase in the pharmacy same store sales.
The top-line grew despite a negative impact in pharmacy sales from new generic introductions. The key driver of this growth was the Wellness+ card-based loyalty program launched last year. The scheme gained early traction and now has more than 44 million members, up 10% from 40 million last quarter. Wellness+ members have higher spending levels on average than non-members and a much higher rate of prescription retention. They accounted for about 70% of its non-pharmacy sales during the quarter, up from 60% last year.
This growth was supplemented with a continued decline in the selling, general and administrative (SG&A) expenses to around 25% of revenues this quarter compared to 26% last year leading to better EBITDA margins and improved 2012 forecasts.
New Formats Help Reach Customers
In order to improve sales per unit area of retail space, Rite Aid has been liquidating unprofitable stores and remodeling others. It plans to remodel its entire chain over the next five years in order to attract more footfalls per store and improve ticket size.
It recently started the roll-out of its new Wellness store format. Rite Aid has completed over 40 wellness stores till August 2011 and plans to remodel 300 stores in fiscal 2012. It has received very encouraging feedback for these stores which offer expanded clinical services, organic foods, personal care products and homeopathic medicines with its unique on-site Wellness ambassadors.
It still faces stiff competition from pharmacy leaders Walgreen and CVS, both of which are much much bigger than Rite Aid, having better customer reach and popular wellness clinics.