Rite Aid Q1 Earnings Fall Y/Y, Rev Improves - Analyst Blog

Rite Aid Corporation RAD yesterday came up with mixed results for the first quarter of fiscal 2015, wherein its top-line improved year over year but profits declined steeply from the comparable year-ago quarter. This made investors slightly cautious resulting in a 3.5% fall in the company's share price during yesterday's trading session.

The company's earnings of 4 cents per share for the first quarter declined 55.6% from the prior-year earnings of 9 cents primarily due to high cost of drugs and lower reimbursement rate. However, quarterly earnings were in line with the Zacks Consensus Estimate.

Quarterly Details

Rite Aid's first-quarter revenues rose 2.7% year over year to $6,465.5 million and surpassed the Zacks Consensus Estimate of $6,430.0 million. Top-line growth was driven by improved comparable-store sales (comps). Comps in the quarter rose 3.1% due to rise in pharmacy sales.

During the quarter, pharmacy sales increased 4.6% despite a negative impact of 143 basis points (bps) due to introduction of new generic drugs. Additionally, prescriptions filled at comparable stores increased 2.3% year over year. Prescription sales constituted about 68.4% to total drugstore sales while third-party prescription revenues accounted for 97.4% of the pharmacy sales. However, Rite Aid's front-end sales remain flat year over year.

Rite Aid's FIFO gross profit decreased 1.6% year over year to $1,804.5 million, while gross margin contracted 122 bps to 27.91% primarily due to high drug prices. Selling, general and administrative (SG&A) expenses rose 2.2% to $1,644.4 million while as a percentage of sales it contracted 14 bps to 25.43% primarily due to effective cost management.

Rite Aid's adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) decreased 18% year over year to $282.6 million breaking the record of 13 straight quarters of improved adjusted EBITDA. Moreover, as a percentage of sales, it contracted 111 bps to 4.37% primarily due to lower reimbursement rates along with higher salary and payroll expenses.

Balance Sheet & Cash Flow

At quarter-end, Rite Aid which competes with China Nepstar Chain Drugstore Ltd. NPD had cash and cash equivalents of $166.0 million and long-term debt (excluding current maturities) of $5,519.6 million. The company ended the quarter with $1.368 billion of liquidity. Rite Aid had $351.0 million of outstanding debt under its $1.8 billion senior secured credit facility and $88.0 million of outstanding letters of credit.

During the first quarter, the company generated cash flow of $239.7 million from operating activities and incurred capital expenditure of nearly $179.2 million. 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 on buying file.

Store Update

Rite Aid stores continue to undergo renovation with 105 outlets being remodeled in the quarter. Additionally, the company relocated 3 stores while it shut down 7 outlets during the quarter. At quarter-end, the company completed wellness remodels at 1,325 stores representing 29% of total locations.

Looking ahead, for fiscal 2015, the company intends to open 1 outlet, relocate 19 stores and remodel 450 stores. As of May 31, 2014, Rite Aid operated 4,581 stores across 31 states and the District of Columbia.

Reaffirms Fiscal 2015 Guidance

The company has reiterated its guidance for fiscal 2015, which was updated on Jun 5, wherein, based on the projections for the first quarter and anticipated reductions in generic purchase price for the rest of the year, the company trimmed its adjusted EBITDA, net income and earnings per share forecasts for fiscal 2015. However, it retained its sales, comps and capital expenditure targets for the year.

The company, which trails only Walgreen Co. WAG and CVS Caremark Corp. CVS in size, now expects adjusted EBITDA for fiscal 2015 to range from $1.275–$1.350 billion compared with $1.325–$1.4 billion guided earlier. Net income forecast for the fiscal year is slashed to $298–$408 million range versus $313.0–$423.0 million expected earlier.

As a result, full year earnings per share are now estimated in the range of 30–40 cents as against the earlier forecast of 31–42 cents. Currently, the Zacks Consensus Estimate for the fiscal is pegged at 33 cents per share.

Rite Aid continues to expect 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%.

At present, Rite Aid has a Zacks Rank #4 (Sell).