Rite Aid Swings to Loss

Operating results fall due to increase in amortization expenses related to EnvisionRx

Source: Company's Website
Source: Company’s Website

Rite Aid Corp. (NYSE: RAD), announced its financial results for Q1 FY17 on June 16th, 2016. Incorporated in 1968, Rite Aid is the third largest drugstore chain in the U.S. The Company operates under two segments: Retail Pharmacy and Pharmacy Services. The Retail Pharmacy segment sells prescription drugs; and other merchandises such as over-the-counter medications, health and beauty aids, cosmetics, and other convenience products. The Pharmacy Services segment provides pharmacy benefit management services and pharmacy-related services. Headquartered in Camp Hill, Pennsylvania, the Company operated 4,560 stores in over 31 states in the U.S. and in the District of Columbia as of as of May 28th, 2016. Rite Aid has a strategic alliance with GNC. Its subsidiaries include Envision Insurance Company, RediClinic, and Health Dialog. Read more about the financial performance of Rite Aid below.

Q1 FY17 financial highlights

Rite Aid’s Q1 FY17 revenues shot up 23.1% to $8.18 billion, compared to $6.65 billion in the prior year period. Retail Pharmacy segment revenues increased 0.4% to $6.7 billion compared to the year-ago period, primarily due to higher same store sales. Revenues in the Company’s Pharmacy Services segment, which was acquired on June 24th, 2015, were at $1.6 billion for Q1 FY17. Pharmacy sales were negatively impacted to an extent of 198 basis points from new generic introductions. Same store sales for Q1 FY17 inched up 0.4% compared to the year-ago period, comprising of a 0.1% increase in pharmacy sales and a 1.2% increase in front-end sales. The number of prescriptions in same stores inched up 0.6% over the prior year period. Prescription sales constituted 68.9% of total drugstore sales and third-party prescription sales accounted for 98% of pharmacy sales.

On the negative side, during Q1 FY17, Rite Aid faced challenges in pharmacy reimbursement rates, which the Company was unable to offset due to inefficiencies in drug purchases. While drug cost reductions continued to be a drag on revenues, the Company anticipates improvements in H2 FY17.

Rite Aid’s Q1 FY17 adjusted EBITDA came in lower at $286 million compared to $299.3 million in the prior year quarter. This is mainly on account of a $54.4 million decline in the Retail Pharmacy Segment owing to lower pharmacy margins.

As a result, Rite Aid’s Q1 FY17 adjusted net income nosedived to $14.5 million, or $0.01 per share compared to adjusted net income of $23.7 million, or $0.02 per share, in the year-ago period. The decline in adjusted results was due to a decrease in adjusted EBITDA, partially offset by lower income tax and interest expenses.

Consequently, Rite Aid swung to a Q1 FY17 net loss of $4.6 million compared to net income of $18.8 million in the comparable period last year, primarily due to higher amortization expenses related to EnvisionRx, a higher LIFO charge, and a decline in adjusted net income. The Company reported breakeven on a per share basis in the quarter under review compared to profit of $0.02 in the year-ago period.

Cash, Debts and Shareholder’s Equity Status

Rite Aid ended Q1 FY17 with cash and cash equivalents of $144.8 million, long-term debt (excluding current maturities) of $6,899 million, and total shareholders’ equity of $591.5 million. The Company’s cash flow stood at $159.9 million from operating activities and gross capital expenditure amounted to nearly $124.6 million during the quarter under review.

Store Update

During Q1 FY17, Rite Aid remodeled 79 outlets and relocated 4, and opened 4 stores. This brings the Company’s total wellness stores count to 2,126. Further, the Company acquired one store and shut six stores during Q1 FY17. With this, Rite Aid operated 4,560 stores across 31 states and the District of Columbia as of May 28th, 2016. Also, the Company opened two clinics, taking its total clinics count to 80.

Guidance; Acquisition Update

Rite Aid stated in December 2015 that it would not update issue guidance for FY17 while its $17.2 billion deal to be acquired by Walgreens Boots Alliance Inc. (NASDAQ: WBA), the largest drugstore chain in the U.S., is pending approval by antitrust regulators. The merger is expected to be completed in the second half of 2016. The combination of Walgreens and Rite Aid would create the largest pharmacy chain with more than 12,800 stores across the U.S. It now remains to be seen how many stores Walgreens will have to divest to gain regulatory approval for the Rite Aid acquisition. Walgreens will likely need to sell 170-500 stores to a Federal Trade Commission (FTC) approved list of buyers, which would give Walgreen’s 40-50% market share, much more than that of rival CVS Health Corp. (NYSE: CVS). R2

Stock Performance

R3Rite Aid’s stock stood at $7.78 at the close on Friday, June 17th, 2016, having reached an intraday high of $7.85 and sliding to a low of $7.75 during the trading session. The stock’s trading volume was at 17,172,806 for the day. The Company’s market cap was at $8.19 billion as of Friday’s close.

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