Despite posting strong second-quarter fiscal 2015 results, shares of Rite Aid Corporation (RAD) fell the most in the last five years, after the company cut its fiscal 2015 earnings forecast yesterday. The lowered guidance was based on anticipated decline in reimbursement rates and lower profitability from generic drugs in the second half of the fiscal. The stock closed trade at $5.41, witnessing a fall of 18.5% from the previous day’s closing price of $6.64.
The company, during its second-quarter fiscal 2015 conference call, revealed that the profitability from the new generics has not met its expectation and anticipates falling profitability from generics to weigh on its pharmacy margins in the remaining period of the fiscal.
Therefore, Rite Aid trimmed its sales, adjusted EBITDA, net income and earnings per share forecasts for fiscal 2015. However, it has retained its median comparable-store sales (comps) guidance as well as the capital expenditure targets for the fiscal.
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 billion and $26.3 billion versus previous guidance range of $26–$26.5 billion. Though the company has narrowed its comps growth guidance range to 3%–4% compared with previously projected range of 2.5%–4.5%, median of both are same at 3.5%.
Further, Rite Aid now expects adjusted EBITDA for fiscal 2015 to range from $1.200–$1.275 billion compared with $1.275–$1.350 billion guided earlier. Net income forecast for the fiscal is slashed to $223–$333 million range versus $298–$408 million expected earlier.
As a result, full-year earnings per share are now estimated in the range of 22–33 cents as against the earlier forecast of 30–40 cents. Currently, the Zacks Consensus Estimate for the fiscal is pegged at 32 cents per share.
Second-Quarter Fiscal 2015 in Detail
Coming to second-quarter performance, the company’s top and bottom lines both came ahead of the Zacks Consensus Estimate and mark a significant year-over-year improvement. Driven by increased revenue along with improved margins, Rite Aid’s earnings of 13 cents per share surpassed the Zacks Consensus Estimate of 6 cents.
Rite Aid's second-quarter revenue rose 3.9% year over year to $6,522.6 million and surpassed the Zacks Consensus Estimate of $6,486 million. Top-line growth was mainly driven by a 4.1% rise in comps.
During the quarter, pharmacy comps increased 5.6%, despite a negative impact of 199 basis points (bps) due to introduction of new generic drugs. Additionally, prescriptions filled at comparable stores increased 3.7% year over year. Prescription sales constituted about 68.8% of total drugstore sales, while third-party prescription revenues accounted for 97.5% of the pharmacy sales. Further, Rite Aid’s front-end comps improved 1.1% year over year.
Rite Aid's FIFO gross profit increased 3.1% year over year to $1,896.1 million, while gross margin expanded 12 bps to 29.05%, primarily driven by higher sales. Though selling, general and administrative (SG&A) expenses rose 2.3% to $1,640.5 million, as a percentage of sales it contracted 38 bps to 25.15%, primarily due to effective cost management.
Rite Aid’s adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) increased 6.6% year over year to $364.2 million. Moreover, as a percentage of sales, it expanded 14 bps to 5.58%.
Balance Sheet & Cash Flow
At quarter-end, Rite Aid, which competes with China Nepstar Chain Drugstore Ltd. (NPD), had cash and cash equivalents of $185.8 million and long-term debt (excluding current maturities) of $5,570.6 million. The company ended the quarter with $1.37 billion of liquidity. Rite Aid had $405 million of outstanding debt under its $1.8 billion senior secured credit facility and $72 million of outstanding letters of credit.
During the first half of the fiscal, the company generated cash flow of $362.2 million from operating activities and incurred capital expenditure of nearly $303.4 million. For fiscal 2015, the company expects capital expenditure of $525 million, out of which $225 million is anticipated to be deployed toward store remodeling while $90 million will be spent on buying file.
Store Update
Rite Aid stores continue to undergo renovation with 117 outlets being remodeled in the quarter. Additionally, the company relocated 5 stores, expanded 1 store, opened 1 store and shut down 10 outlets during the quarter. At quarter-end, the company completed wellness remodels at 1,433 stores, representing nearly 31% of total locations.
Looking ahead, during fiscal 2015, the company intends to open 2 outlets, relocate 16 stores, acquire 7 outlets and remodel 450 stores. As of Aug 30, 2014, Rite Aid operated 4,572 stores across 31 states and the District of Columbia.
At present, Rite Aid has a Zacks Rank #4 (Sell).
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