Rite Aid Reaches 52-Week High on Q4 Earnings Beat - Analyst Blog

Shares of drugstore chain retailer, Rite Aid Corporation RAD soared to a new 52-week high of $7.39 during yesterday's trading session after the company posted better-than-expected fourth-quarter fiscal 2014 results and provided an impressive guidance for fiscal 2015.

The company's adjusted earnings of 10 cents per share for the quarter registered year-over-year growth of 42.9% and handily surpassed the Zacks Consensus Estimate of 4 cents. The improved bottom-line results were primarily attributable to strong revenues and Rite Aid's key turnaround initiatives.

Rite Aid's adjusted earnings for the quarter did not include LIFO charge of $44.1 million resulting from pharmacy inflation. The year-ago comparable quarter does not include LIFO credit of $175.4 million due to generic deflation and a loss of $122.7 million on debt retirement. Including these one-time items for both the periods, earnings per share came in at 6 cents in the quarter compared with 13 cents in the year-ago comparable quarter.

Quarterly Details

Rite Aid's fourth-quarter revenues rose 2.2% year over year to $6,597.5 million and surpassed the Zacks Consensus Estimate of $6,551.0 million. Top-line growth was driven by improved comparable-store sales (comps). Comps in the quarter rose 2.1% due to rise in pharmacy sales, slightly offset by weak front-end sales.

During the quarter, pharmacy sale increased 3.5% despite having a negative impact of 123 basis points (bps) due to introduction of new generic drugs. Additionally, prescriptions filled at comparable stores fell 1.8% year over year owing to a 1.3% decline in flu-related prescriptions and flu shots. Prescription sales constituted about 67.5% of total drugstore sales while third-party prescription revenues accounted for 97.1% of the pharmacy sales. However, Rite Aid's front-end sales dropped 0.7% in the reported quarter.

Rite Aid's FIFO gross profit increased 3.1% year over year to $1,929.9 million, with gross margin increasing 24 bps to 29.25%. Selling, general and administrative (SG&A) expenses rose 2.0% to $1,682.3 million while as a percentage of sales, it contracted 4 bps to 26.02% primarily due to effective cost management.

Rite Aid's adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) increased 4.7% year over year to $356.3 million. Moreover, as a percentage of sales, it improved 13 bps to 5.40% primarily benefiting from higher pharmacy gross profit. This drugstore chain company, which competes with China Nepstar Chain Drugstore Ltd. NPD, had witnessed 13 straight quarters of improved adjusted EBITDA.

Fiscal 2014 Performance – A Synopsis

The company's revenues for fiscal 2014 inched up 0.5% year over year to $25,526.4 million and surpassed the Zacks Consensus Estimate of $25,477.0 million primarily driven by improved comps. Comps for the period rose 0.7% driven by a 1.2% increase in pharmacy sales, partially offset by a 0.2% drop in front-end sales. Earnings for the fiscal increased nearly twofold to 23 cents per share from 12 cents posted in fiscal 2013 and beat the Zacks Consensus Estimate by a couple of cents.

Balance Sheet & Cash Flow

At fiscal-end, Rite Aid had cash and cash equivalents of $146.4 million and long-term debt (excluding current maturities) of $5,632.8 million. The company ended the fiscal with $1.3 billion of liquidity. Rite Aid had $400.0 million of outstanding debt under its $1.795 billion senior secured credit facility and $80.0 million of outstanding letters of credit.

During fiscal 2014, the company generated cash flow of $702.0 million from operating activities and incurred capital expenditure of nearly $442.1 million (gross). For fiscal 2015, the company expects capital expenditure of $525.0 million, out of which $225.0 million is anticipated to be deployed toward store remodeling while $90.0 million will be spent for buying file.

Store Update

Rite Aid stores continue to undergo renovation with 405 outlets being remodeled in the fiscal. Additionally, the company acquired one store while relocating 11 stores and expanding 4 stores during the fiscal. At the fiscal-end, the company, overall, completed wellness remodels at 1,215 stores.

Looking ahead, for fiscal 2015, the company intends to open 1 outlet, relocate 19 stores and remodel 450 stores. Rite Aid currently operates approximately 4,600 stores across 31 states and the District of Columbia.

Fiscal 2015 Guidance

Rite Aid expects sales for fiscal 2015 to range between $26.0 billion and $26.5 billion, with comps growth in the band of 2.5% to 4.5%. Furthermore, adjusted EBITDA for the fiscal is anticipated to be in the range of $1.325–$1.40 billion.

Rite Aid, which trails only Walgreen Co. WAG and CVS Caremark Corp. CVS in size, expects its net income for fiscal 2015 to be between $313.0 million and $423.0 million or 31–42 cents per share. Currently, the Zacks Consensus Estimate stands at 32 cents per share, which could witness an upward revision following the company's guidance.

Acquisition of RediClinic

Along with its fourth-quarter earnings release, Rite Aid announced that it had acquired RediClinic, one of the major retail clinic operators in the U.S. This Houston-based company currently operates 30 clinics in Austin, San Antonio and greater Houston. Neither Rite Aid nor RediClinic have revealed the terms of the deal. We believe that the acquisition is part of the company's strategic initiatives to enhance its partnerships in the industry to boost the top and bottom lines.

At present, Rite Aid has a Zacks Rank #1 (Strong Buy).