Rite Aid Posts Wider-Than-Expected Loss In Q2; Revenues Up 54%; Sees Bigger Loss For FY08 - Update

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Thursday morning, retail drugstore chain Rite Aid Corp. (RAD) widened its loss for the second quarter, citing increases in expenses related to its Brooks Eckerd acquisition that offset a 53.9% jump in revenues. The company now sees a bigger loss for 2008, reflecting recent market changes in interest rates and an increase in amortization expense related to acquired intangible assets.

Second Quarter Results

The Camp Hill, Pennsylvania-based company posted second quarter net loss of $69.6 million, compared to a loss of $0.3 million in the prior year quarter. Net loss attributable to common shareholders widened to $78.2 million from $8.19 million a year ago.

On a per share basis, loss amounted to $0.10, compared to a loss of $0.02 in the prior year quarter. On average, 7 analysts polled by First Call/Thomson Financial expected the company to report a loss of $0.06 per share for the quarter.

Quarterly revenues realized by the company climbed 53.9% to $6.60 billion from $4.29 billion in the equivalent quarter of the previous year. Five Wall Street analysts had a consensus revenue estimate of $6.76 billion for the quarter.

During the second quarter, same store sales rose 1.1%, comprising of a 1.4% pharmacy same store sales increase and a 0.6% growth in front-end same store sales. The number of prescriptions filled in same stores increased 0.4%. Prescription sales accounted for 67.4% of total sales, and third party prescription sales represented 95.9% of pharmacy sales.

The company's adjusted EBITDA was $261.5 million or 4% of revenues, compared to $154.7 million or 3.6% of revenues in the same quarter last year. The company attributed the $106.8 million rise in adjusted EBITDA to the increase in revenues, which came primarily from acquired Brooks Eckerd stores, along with an improvement in gross margin rate.

Rite Aid stated that the increases in adjusted EBITDA of $106.8 million and income tax benefit of $36.1 million were exceeded by the improvement in Brooks Eckerd acquisition related expenses. These expenses included an increase in depreciation and amortization of $65.2 million, additional interest expense of $55.1 million, integration expense of $52.1 million, a one-time financing commitment charge of $12.9 million and a rise in stock-based compensation expense of $6.7 million.

Mary Sammons, chairman of Rite Aid, commented, We had a strong second quarter. We grew our business, improved the gross margin rate and controlled expenses. Our integration of Brooks Eckerd is off to an excellent start, and we're seeing more cost-saving synergies from the acquisition than we initially expected.

Sammons added that the company is converting the acquired stores to Rite Aid and remain on track to open 125 new and relocated stores in 2007.

Cost of good sold were $4.80 billion, compared to $3.14 billion, while selling, general and administrative expenses rose to $1.75 billion from $1.08 billion in the comparable quarter last year.

In the second quarter, the company acquired 1,854 Brooks Eckerd stores, opened 11, relocated 8, acquired one other store and closed or sold 56 stores, which include the 23 divestitures required by the Federal Trade Commission.

Six Months Results

For the six-month period, the company reported a net loss of $41.9 million, compared to a profit of $10.6 million in the year-earlier period. Net loss attributable to common shareholders was $58.7 million, compared to $5.02 million in the similar period of 2006. Loss per share for first half of 2007 totaled $0.09, compared to a loss of $0.01 per share in the year-ago period.

Revenues for the first half increased to $11.1 billion from $8.63 billion recorded in the corresponding period of the year 2006.

FY08 guidance

Looking ahead, the company revised its fiscal 2008 financial target, citing recent market changes in interest rates and an increase in amortization expense related to acquired intangible assets. Rite Aid currently expects annual net loss to be in the range of $78 million - $161 million or a loss of $0.15 - $0.27 per share, compared to the previous net loss guidance of $47 million to $129 million or a loss per share of $0.11 to $0.23.

The company also revised its full year outlook for sales and same store sales based on current sales trends. Annual sales are projected to be between $24.5 billion and $25.1 billion, with the same store sales growth in range of 1.3% - 3.3%. This compares to the previously communicated sales guidance of $25.3 billion - $26.0 billion, with same store sales improving 3.8% - 5.8% over fiscal 2007. Seven Wall Street analysts expect the company to post a loss of $0.12 per share on revenues of $25.33 billion for fiscal 2008.

Further, the company confirmed its fiscal 2008 guidance for adjusted EBITDA, integration expenses and capital expenditures and increased its guidance for acquisition-related cost savings. The company now projects acquisition-related cost savings for fiscal 2008 to be about $200 million, as compared to the prior outlook of about $155 million.

For the year 2008, Rite Aid estimates adjusted EBITDA to be in the range of $1.0 billion - $1.1 billion and integration expense to be $145 million. Capital expenditures for the year are anticipated to be between $825 million and $875 million. Proceeds from sale and leaseback transactions are expected to be about $100 million.

Additionally, the company elevated its guidance for acquisition-related cost savings for fiscal 2009 to $300 million as compared to prior outlook of $225 million. Accretion related to the Brooks Eckerd acquisition in fiscal 2009 is now expected to be $0.12 to $0.14 per share as a result of delay in the timing of closed store charges. Previously the company expected the acquisition to be accretive in fiscal 2009 by $0.18 to $0.20 per share.

Peer Performance

Among Rite Aid's rivals, Woonsocket, Rhode Island-based CVS Caremark Corp. (CVS) is slated to release its third quarter financial results on November 1, 2007. Analysts expect the company to report earnings of $0.44 per share on revenues of $20.67 billion for the quarter.

Another competitor, the Deerfield, Illinois-based Walgreen Co. (WAG) would report its fourth quarter results on October 1, 2007. Analysts have consensus earnings estimate of $0.47 per share on revenues of $13.55 billion for the quarter.

Stock Quotes

Rite Aid is currently trading at $4.82, down 24 cents or 4.65%. During the day, RAD shares touched a high of $4.85 and a low of $4.80. For the past 52-weeks, the stock has been trading between $4.32 and $6.74.

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