Retail drugstore operator Rite Aid Corp. (RAD) Thursday morning reported that it slipped to a loss in the first quarter, hurt by expenses related to the acquisition of the Brooks Eckerd drugstore chains. However, the acquisition led to a 50% increase in quarterly revenues. The company also reaffirmed its forecast for the full-year 2009. Following the announcement, the company's stock is trading down more that 14%.
Like most retailers, drug stores are also in the midst of a weak retail environment as consumers cut back on spending, impacted by higher food and gas prices as well as weak housing and credit markets.
Rite Aid acquired Brooks Eckerd drugstore chains in June 2007 in order to compete with its peers. Among its peers, Rhode Island-based CVS Caremark Corp. (CVS) is scheduled to announce its second quarter results on July 31. Analysts expect the company to report earnings per share of $0.60, higher than $0.47 last year, while revenue for the quarter is estimated to be $21.43 billion.
On Monday, another rival, Walgreen Co. (WAG) had reported a 2% increase in third quarter profit to $572.3 million or $0.56 per share as the company's cost-control efforts helped offset slower growth in prescription sales. Quarterly sales increased 9.6% to $15.02 from the prior-year quarter.
First Quarter Results
The Camp Hill, Pennsylvania-based company reported first quarter net loss of $156.6 million or $0.20 per share, compared to a net income of $27.6 million or $0.04 per share in the prior-year quarter.
On average, eight analysts polled by First Call/Thomson Financial expected the company to report a loss of $0.10 per share in the quarter.
Rite Aid said that the results were also impacted by higher expenses related to the acquisition of the Brooks Eckerd drugstore chains from Canada's Jean Coutu Group Inc. (PJCA.TO) in June last year. The expenses included an increase in depreciation and amortization expense of $77.1 million, additional interest expense of $49.5 million and integration expense increase of $33.3 million.
The company reported a net loss from continuing operations of $153.27 million in the quarter, compared to income from continuing operations of $28.31 million in the prior-year quarter.
During the quarter, the company's adjusted EBITDA came in at $236.4 million, higher than $192.8 million in the year-ago quarter. Rite Aid attributed the increase to the addition of revenues from the acquired Brooks Eckerd stores, along with improved pharmacy gross margin rates.
Revenues for the quarter surged 49.3% to $6.61 billion from $4.43 billion in the same quarter last year, primarily as a result of the acquisition of the Brooks Eckerd stores.
Seven Wall Street analysts had a consensus revenue estimate of $6.65 billion for the quarter.
Quarterly same store sales rose 1.5%, consisting of a 1.4% growth in pharmacy same store sales and a 1.7% increase in front-end same store sales. Pharmacy same store sales included about 366 basis points negative impact from new generic introductions. The number of prescriptions filled in same stores edged up 0.2%.
Rite Aid said that the acquired Brooks Eckerd stores are excluded from the same store sales and prescription growth amounts. Prescription sales contributed to 67.6% of total sales, and third party prescription sales represented 96.2% of pharmacy sales.
During the first quarter, Rite Aid opened 5 stores, relocated 6 stores, acquired 8 stores, remodeled 39 stores and closed 68 stores. At the end of the quarter, the company operates 5,004 stores.
Commenting on the results, Rite Aid chairman, president and chief executive officer, Mary Sammons said, "We increased both pharmacy and front end sales in the core Rite Aid stores during the quarter, and sales trends in our acquired stores continued to improve. We also passed a major milestone in the integration of the former Brooks Eckerd stores by completing the store systems conversion."
Outlook
For fiscal 2009, the company maintains its previous forecast for net loss, sales, same store sales, adjusted EBITDA and capital expenditure.
Rite Aid still forecasts full-year net loss between $260 million and $375 million or a loss per share of $0.34 to $0.48. Eight Wall Street analysts are expecting a loss of $0.40 per share for the year.
The company continues to expect annual sales between $26.7 billion and $27.2 billion with same store sales, including nine months of sales from the Brooks Eckerd stores, improving 2% to 4% over last year. Eight analysts are looking for revenues of $26.86 billion for the year.
Adjusted EBITDA is still expected to be between $1 billion and $1.1 billion. Capital expenditures for fiscal year 2009, excluding proceeds from sale and leaseback transactions, are expected to be about $600 million.
The company noted that though the business environment remains challenging, it expect to complete minor remodels, turning sales positive in the acquired stores and new pharmacy and front end initiatives to contribute significantly to strong results in the second half of the fiscal year.
Other News
In the second week of June, New York Attorney General Andrew Cuomo said his office plans to take legal action against Rite Aid and its peer CVS Caremark for selling expired milk, eggs, medicine and baby formula in their stores across upstate New York. The action stems from an undercover investigation, which began in March, of all major drug store chains in New York State. The investigation found CVS and Rite Aid to be the worst offenders.
Rite Aid immediately instructed all its stores, particularly those mentioned as offenders, to make sure they have no expired products on their shelves, and the company plans to retrain store staff on its policies.
Stock Quote
In Thursday's regular trading session, RAD is trading at $1.50, down $0.25 or 14.29% on a volume of 3.80 million shares. In the past 52-week period, the stock has been trading in a range of $1.67 to $6.51.
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