Rite Aid (NYSE:RAD), the third largest drug retailer in the U.S., reported strong growth in 2011 with improved same store sales and lower losses compared to last year. Last quarter was the fifth consecutive quarter of same store sales growth for Rite Aid. For the full year, same store sales improved by 2% with an average 1% more prescriptions filled at its stores, boosted by the success of key initiatives like Wellness+ loyalty program, doubled flu immunizations and Wellness store remodels. The drug retailer is focusing on further improving its same store sales and prescription count this year, and it will continue to invest in Wellness remodels and loyalty program to improve profitability. Rite Aid competes with its bigger peers Walgreen (NYSE:WAG), CVS Caremark (NYSE:CVS) and Walmart (NYSE:WMT).
Fifth Consecutive Quarter of Same Store Sales Growth Narrows Losses
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Rite Aid narrowed its losses in 2011, having posted its fifth consecutive quarter of same store sales growth. The successful Wellness+ loyalty program and expanded flu immunization have been the key performance drivers. With focus on improving profitability of its stores, Rite Aid completed 280 remodels to Wellness formats and closed 47 under-performing stores last year. It also administered twice the number of flu shots this year compared to last year. Over the fiscal, revenues increased by 3.6%, driven by a 2% increase in same store sales, partially offset by a negative impact from new generic introductions.
Performance further improved during the last quarter, with revenues growing at 10% (y/y) and 3% higher same store sales. Prescriptions per store grew by 2.4%, benefiting from additional traffic from Express Scripts customers that previously went to Walgreen.
However, despite higher margins from new generic introductions, the reimbursement rate environment turned challenging for the drug retailers last year, including Rite Aid, which pulled down their gross margins. This is likely to continue affecting the company’s margins in 2013.
Spending More To Improve Same Store Sales
Rite Aid will continue focusing on growing its same store sales and prescription count, and it is expected to raise investments in its existing stores by about 35% this year for more wellness store remodels, loyalty programs and prescription file purchases. It remodeled around 280 stores in 2011 and targets remodeling of its entire chain over the next 5 years. It is also likely to triple the capital allocated for the purchase of prescription files to $75 million this year compared to last year.
It make sense for Rite Aid to invest more in improving profitability of its stores, considering that its performance metrics like prescriptions filled at each store and revenue per unit area are 30-40% lower compared to larger peers CVS and Walgreen.
We have a revised $1.55 Trefis price estimate of Rite Aid stock, which is in-line with the current market price.