Rite Aid Corporation RAD delivered in-line bottom-line results and sales beat in second-quarter fiscal 2019. While the bottom line improved after a miss in the last-reported quarter, sales marked the second straight beat. However, the company widened its view for net loss in fiscal 2019 due to inclusion of impairment charges.
Shares of Rite Aid declined about 2.3% in response to the company’s widened net loss view and the general negative sentiment on the stock after the termination of the Albertsons merger. Moreover, this Zacks Rank #4 (Sell) stock has declined 11.4% in the past month against the industry’s increase of 4.9%. Additionally, the stock has slumped 36.6% year to date, courtesy of the company’s two failed mergers with Walgreens WBA and Albertsons, which have made investors wary about the potential of this long-troubled company.
Nonetheless, backed by initiatives under its stand-alone strategy, the company witnessed significant gains in front-end and pharmacy same-store sales in the fiscal second quarter. While front-end sales dipped 0.1% in the fiscal second quarter, it marked an improvement from a decline of 1.8% in the last-reported quarter. Additionally, pharmacy sales rose 1.6% against 0.1% decline in the fiscal first quarter.
After two failed merger deals, Rite Aid is now focused on putting itself back on growth trajectory through the execution of its standalone strategy, aimed at capitalizing on growth potential. The company announced a few changes in its board and governance, concurrent with the earnings release. It nominated three new independent directors to the board and separated the positions of chairman and chief executive officer (CEO).
These independent directors — Robert E. Knowling, Jr., Louis P. Miramontes and Arun Nayar — will now stand for elections at the 2018 Annual Meeting of Stockholders, scheduled for Oct 30. Further, the company appointed Bruce G. Bodaken as the chairman, which would take effect at the 2018 Annual Meeting of Stockholders. Since the termination of the Albertsons merger, Rite Aid has been engaging with its shareholders to revive its structure. These changes are results of valuable inputs and insights from the company’s largest stockholders.
Q2 in Detail
Rite Aid reported adjusted loss per share of 1 cent in second-quarter fiscal 2019, in line with the Zacks Consensus Estimate. However, the bottom line compared unfavorably with the year-ago quarter’s earnings of 2 cents per share.
Rite Aid Corporation Price, Consensus and EPS Surprise
Rite Aid Corporation Price, Consensus and EPS Surprise | Rite Aid Corporation Quote
Revenues improved 1.4% to $5,421.4 million and surpassed the Zacks Consensus Estimate of $5,371 million. During the reported quarter, Retail Pharmacy segment revenues rose 0.2% on account of an increase in same-store sales, partly offset by store closures. Revenues from the Pharmacy Services segment increased 4.6% due to higher Medicare Part D membership.
Retail Pharmacy same-store sales were up 1%, owing to 1.6% increase in pharmacy sales and 0.1% decrease in front-end sales. Pharmacy sales included negative impact of nearly 107 basis points (bps) from the introduction of new generic drugs. Further, prescription count at comparable stores advanced 1.1%. Prescription sales constituted 66.4% of total drugstore sales.
Rite Aid’s adjusted EBITDA improved 8.5% year over year to $148.6 million while adjusted EBITDA margin expanded 10 bps to 2.7%. Adjusted for fees related to the Walgreens transaction, pro-forma adjusted EBITDA for second-quarter fiscal 2018 would have been $160.9 million. Consequently, adjusted EBITDA for second-quarter fiscal 2019 declined $12.3 million from the above-mentioned pro-forma adjusted EBITDA for second-quarter fiscal 2018. This downsize mainly stemmed from declines in adjusted EBITDA for both Retail Pharmacy and Pharmacy Services segments.
Adjusted EBITDA for the Retail Pharmacy segment was hurt by decline in pharmacy gross margin, stemming from lower reimbursement rates, which were not fully recovered with generic drug purchasing efficiencies and script growth. Adjusted EBITDA for the Pharmacy Services segment were impacted by margin compression in the commercial business and other operating investments to support growth.
Store Update
Rite Aid continues to renovate stores, with 33 remodels carried out in the fiscal second quarter. This brings the company’s total wellness-store count to 1,726. Further, it shut eight and opened one store during the reported quarter, consequently taking store count to 2,526 as of Sep 1, 2018.
Financial Status
Rite Aid ended the fiscal second quarter with cash and cash equivalents of approximately $132.5 million, long-term debt (net of current maturities) of $3,481.7 million and total shareholders’ equity of $1,456 million.
Further, the company’s cash used in operating activities was $284.6 million as of Sep 1, 2018.
Outlook
For fiscal 2019, Rite Aid reiterated its sales, same-store sales and capital expenditure forecasts along with the recently lowered adjusted EBITDA view. However, the company widened its net loss expectations, mainly due to inclusion of impairment charges incurred in the fiscal second quarter. Further, it altered adjusted net (loss) income per share view to reflect the change in definition for adjusted net (loss) income, which now adds back all the amortization instead of just amortization of EnvisionRx intangible assets.
Rite Aid continues to estimate sales of $21.7-$22.1 billion for fiscal 2019, with comps anticipated in the range of flat-to-up 1%. Adjusted EBITDA is projected to be $540-$590 million. The company continues to anticipate capital expenditure of nearly $250 million for fiscal 2019.
Rite Aid now expects net loss of $440-$485 million in fiscal 2019 from net loss of $125-$170 million expected earlier. It now projects adjusted net (loss) income per share between loss of 3 cents and income of 1 cent. This compares to the prior guidance of adjusted net loss per share of 4 cents to break-even.
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