Shares of Rite Aid Corporation (RAD) soared nearly 11.9% during yesterday’s trading after the company posted better-than-anticipated third-quarter fiscal 2015 results and raised its fiscal 2015 outlook.
The company’s robust performance in the quarter is attributed to strong same-store sales (comps) growth driven by a rise in prescription count as well as improved gross margin due to efficient expense management. Further, the company gained from its stringent focus on strengthening its portfolio of health and wellness services which also contributed materially to its performance in the quarter.
The drug store retailer reported earnings of 10 cents per share, which rose over two-fold from the prior-year quarter and was double the Zacks Consensus Estimate.
Rite Aid's third-quarter revenue rose 5.3% year over year to $6,692.3 million and surpassed the Zacks Consensus Estimate of $6,643 million. Top-line growth was mainly driven by a 5.4% increase in comps.
During the quarter, pharmacy comps increased 7.2%, despite a negative impact of 228 basis points (bps) due to the introduction of new generic drugs. Additionally, prescriptions filled at comparable stores increased 4.5%, while front-end comps rose 1.6%. Prescription sales constituted about 69.8% of total drugstore sales, while third-party prescription revenues accounted for 97.6% of the pharmacy sales.
Driven by the strong third-quarter performance, the company raised its sales, adjusted EBITDA, net income and earnings per share guidance for fiscal 2015. The company, which trails only Walgreen Co. (WAG) and CVS Caremark Corp. (CVS) in size, now anticipates sales for fiscal 2015 to be between $26.25 billion and $26.4 billion versus the previous guidance range of $26 to $26.3 billion. It has also raised its comps growth guidance range to 3.75%–4.25% compared with the previously projected range of 3%–4%.
Further, this Zacks Rank #1 (Strong Buy) company now expects adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for fiscal 2015 to range from $1.275–$1.305 billion compared with $1.200–$1.275 billion guided earlier. Net income forecast for the fiscal is slashed to the $315–$370 million range from $223–$333 million.
As a result, full-year earnings per share are estimated to be in the range of 31–37 cents as against the earlier forecast of 22–33 cents. The earnings per share estimate is primarily based on the projected comps range and expectations of improvement in pharmacy margins.
Quarter in Detail
Coming to other financial details, Rite Aid's FIFO gross profit increased 5.4% year over year to $1,924.9 million. Gross margin expanded 4 bps to 28.76%, driven by higher sales and expense leverage. Though selling, general and administrative (SG&A) expenses rose 3.7% to $1,692.4 million, as a percentage of sales it contracted 38 bps to 25.29%, primarily due to effective cost management.
Rite Aid’s adjusted EBITDA increased 17.9% year over year to $332.8 million. Moreover, as a percentage of sales, it expanded 53 bps to 4.97%.
Balance Sheet & Cash Flow
At quarter-end, Rite Aid, which competes with China Nepstar Chain Drugstore Ltd. (NPD), had cash and cash equivalents of $233 million and long-term debt (excluding current maturities) of $5,673.6 million. The company ended the quarter with $944 million of liquidity. Rite Aid had $780 million worth of outstanding debt under its $1.8 billion senior secured credit facility and $71 million worth of outstanding letters of credit.
During the first three quarters of fiscal 2015, the company generated cash flow of $11.7 million from operating activities and incurred capital expenditure of nearly $131.3 million.
For fiscal 2015, the company expects capital expenditure of $525 million, out of which $250 million is anticipated to be deployed toward store remodeling while $100 million will be spent on buying file. Additionally, the company hopes to generate free cash flow of about $325–$375 million in fiscal 2015, on the back of lower pharmacy inventory and the acquisition of RediClinic and Health Dialog.
Store Update
Rite Aid stores continue to undergo renovation, with 103 outlets being remodeled in the quarter. Additionally, the company relocated 3 stores, expanded 1 store, acquired 6 stores and shut down 6 outlets during the quarter. As of quarter-end, the company completed wellness remodels at 1,529 stores. As of Nov 29, 2014, Rite Aid operated 4,572 stores across 31 states and the District of Columbia.
In fiscal 2015, the company intends to open 3 new outlets, relocate 16 stores, acquire 8 outlets and remodel 450 stores.
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