From a company that many observers and analysts predicted was near death only a year ago, Rite Aid Corporation has seemingly reinvented itself.
The Camp Hill, PA-based drug chain reported significant earnings and sales gains in its fiscal third quarter ended November 29, 2014. The company reported net income of $104.8 million or $0.10 per diluted share, revenues of $6.7 billion and adjusted EBITDA of $332.8 million, or 5.0 percent of revenues.
“We are pleased with our results for the third quarter,” said Rite Aid chairman and CEO John Standley, the key architect of the turnaround. “Our focus on expanding our health and wellness offering and delivering a higher level of care to the communities we serve drove our strong same-store sales, prescription count and gross profit. Based upon our strong third-quarter results, we have raised our guidance for the year.”
While Rite Aid’s revenue growth has seemingly come from nowhere, the turnaround actually began 18 months ago when Standley, the former Pathmark CEO, was named to lead Rite Aid, a company that had struggled with operations issues and management scandals for much of the past 15 years.
Standley brought in a new management team and began to focus more on store upgrades, improved front-end alignment and wellness. Still, a year ago Rite Aid’s stock was trading at only about $1.30 per share (as recently as 2009, Rite Aid’s shares were trading as low as $0.28 per share). At the close of business on January 6, Rite Aid’s stock price was $7.66 per share, a highly improved figure which has also allowed the Central PA merchant to pay down debt.
Net income for the third quarter was $104.8 million or $0.10 per diluted share compared to last year’s third quarter net income of $71.5 million or $0.04 per diluted share. The improvement in net income resulted primarily from an increase in adjusted EBITDA and a lower LIFO charge, partially offset by a higher loss on debt retirement related to the redemption of the company’s 10.25 percent senior secured notes.
Adjusted EBITDA was $332.8 million or 5.0 percent of revenues for the third quarter compared to $282.3 million or 4.4 percent of revenues for the like period last year. Adjusted EBITDA improved due to an increase in front-end and pharmacy gross profit, partially offset by an increase in selling, general and administrative expenses related to the drug chain’s higher level of sales.
The improved pharmacy gross profit was driven by the increase in pharmacy prescription revenues and a reduction in generic drug costs, driven by the company’s transition to its new drug purchasing and delivery arrangement with McKesson, partially offset by lower reimbursement rates, the company noted.
Revenues for the quarter were $6.7 billion versus revenues of $6.4 billion in the prior year’s third quarter. Revenues increased 5.3 percent, primarily as a result of an increase in same store sales.
Same store sales for the quarter increased 5.4 percent over the prior year, consisting of a 1.6 percent increase in front-end sales and a 7.2 percent increase in pharmacy sales. Pharmacy sales included an approximate 228 basis point negative impact from new generic introductions. The number of prescriptions filled in same stores increased 4.5 percent over the prior year period. Prescription sales accounted for 69.8 percent of total drugstore sales, and third party prescription revenue was 97.6 percent of pharmacy sales.
In the third quarter, the company relocated three stores, remodeled 103 stores and expanded one store, bringing the number of wellness-oriented units chain-wide to 1,529. The company also acquired six stores and closed six stores, resulting in a total store count of 4,572 at the end of the third quarter.
Based upon third quarter results, Rite Aid said it was raising its guidance. Adjusted EBITDA is expected to be between $1.28 billion and $1.31 billion. Net income is expected to be between $315.0 million and $370.0 million and income per diluted share between $0.31 and $0.37. Sales are expected to be between $26.25 billion and $26.4 billion and same store sales to range from an increase of 3.75 percent to an increase of 4.25 percent over Fiscal 2014. Capital expenditures are expected to be approximately $525 million.