Rite Aid To Retain Its Growth Momentum In Q4’14

Rite Aid (NYSE: RAD), one of the leading drugstore chains in the U.S, is set to release its Q4 2014 and fiscal year 2014 results on April 10. Fiscal 2013 was the company’s first profitable year in five years and the positive trend continued in fiscal 2014. Backed by its store re-modeling initiative, efficient cost management and customer loyalty programs, Rite Aid reported its fifth consecutive quarter of positive net income in Q3 2014. Rite Aid remains confident about its long term prospects, as its turnaround strategy continues to reap benefits for the company.

For Q4 2014, ending March 1, Rite Aid witnessed a 2.1% year-over-year increase in total sales. Though its front-end sales declined marginally (attributable to a decrease in sales of flu-related over-the-counter products), the pharmacy sales grew by 3.5%. Prescription count at comparable stores declined 1.8% compared to Q4 2013. Prescription sales accounted for 67.5% of the total drugstore sales, which grew by 2.2% annually.

Controlling costs and making operational progress remain key focus areas for Rite Aid, as it aims to build a unique brand focused on health and wellness. Rite Aid brand penetration increased to 18.4% in Q3 2014, a 0.3% year-over-year growth. ^[1]

We believe that Rite Aid will benefit from the positive trends in the pharmaceutical industry.  These inlcude: 1) the aging U.S. population; 2) new drug therapies; and 3) the Affordable Care Act expanding insurance to millions of Americans. However, we think that the intense competition from relatively larger players, including Walgreen (NYSE:WAG) and CVS Caremark (NYSE:CVS), can limit Rite Aid’s growth potential in the future. Though its leverage ratio improved in Q3 2013 it continues to operate under heavy debt.

We will update our valuation for Rite Aid after the fiscal 2014 earnings release.

View our detailed analysis for Rite Aid

Health & Wellness Stores To Strengthen Rite Aid’s Image

Loyalty programs such as the Wellness+ program has helped improve Rite Aid’s pharmacy sales as well as front-end sales in the last few quarters. The Wellness+ program helps strengthen the relationship with customers, in turn increasing the number of loyalty shoppers at Rite Aid. For Q3 2014, front-end same-store sales in the Wellness Stores exceeded the non-Wellness Stores by 3.2%, whereas script growth in the Wellness Stores was 1.4% higher compared to the non-Wellness Stores.

Loyalty programs remain a key component of Rite Aid’s health and wellness offering. The company made significant progress in transforming its stores into true neighborhood destinations for health and wellness in Q3 2014. During the quarter, Rite Aid remodeled 94 stores and relocated four stores bringing the total to 1,117 wellness stores, which now represents one-fourth of its stores. It remains on track to reach its target of 1,200 Wellness Stores by the end of this year.

Rite Aid recently launched its Wellness65+ program, which is aimed at senior patients who are known to be higher spenders in the pharmacy category. By the end of Q3 2014, about 1.3 million senior citizens had enrolled in the program and Rite Aid claims that the program is attracting new customers as well as strengthening the loyalty of its existing members. According to a 2012 RAND Health study, wellness programs are the rage in corporate America, with half of surveyed companies offering wellness promotion programs. ^[2]

Rite Aid has more than 1,900 Wellness Ambassadors providing personalized levels of customer service in its Wellness Stores. Wellness Ambassadors continue to play a critical role in driving flu shot awareness, wellness65+ enrollment and its community engagement efforts.

Generic Substitution To Increase Towards The End Of The Year

Generic drugs are comparatively lower priced but offer higher gross margins (approximately 50% higher) than branded drugs, a trend that has negatively impacted Rite Aid’s top line growth but improved its margins. The total generic dispensing rate, which factors the percentage of generic drugs in a consumer’s prescription, grew to 78.5% in 2012, from 74.1% and 71.5% in 2011 and 2010, respectively. The generic wave peaked in Q1 2013 and hit a trough in Q1 2014 (calendar year). Generic drug substitution has a 1.3% negative impact on Walgreen’s pharmacy same store sales as compared to a 9.24% negative impact in Q3 2013.

In its recent earnings call, Walgreen announced that it anticipates the rate of decline in new generics introduction to moderate in the current quarter and turn positive towards the end of the year. Despite the slower substitution, an estimated $15 billion worth of branded products will come off patent in the next three years, opening them to competition from generic drugs. ^[3]

Understand What Drives a Stock at Trefis

1. Rite Aid Management Discusses Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, December 19, 2013 [↩]
2. Has This Drugstore Chain Found A Winning Strategy, Daily Finance, August 27, 2013 [↩]
3. CVS Caremark’s CEO Discusses Q2 2013 Results – Earnings Call Transcript, Seeking Alpha, August 6, 2013 [↩]