Earnings Primer: What’s on Deck
for Rite Aid’s Earnings
Is Rite Aid’s Margin Recovering?
On June 5th, Rite Aid warned investors that its quarterly profit faced headwinds
tied to lower than anticipated reimbursement rates and a delay in realizing the
benefit of generic purchasing power through its new supply deal with
McKesson. In that deal, McKesson assumed all sourcing and distribution
responsibility for generics sold at Rite Aid stores.
In the quarterly earnings report, investors should look for answers to these two
important pharmacy margin questions:
1. Did the McKesson contract begin to support Rx margin in June?
2. Is there any timeline change to when Rite Aid expects to see the full benefit
of the McKesson deal?
What was the impact of the ACA?
Rite Aid reported earlier this month that same store sales during the
quarter ending May increased 3.1% year-over-year.
•Front end sales were flat.
•Pharmacy sales were up 4.6%.
The lift in pharmacy sales was driven by pricing, but total prescription
count did climb by 2.3% in the past year, despite Rite Aid operating
•Store count fell from 4,614 stores last year to 4,581 stores exiting
One key question investors should be asking:
•What percentage of that volume growth is thanks to new
customers signed up under either ACA marketplace plans or
Is the RediClinic rollout progressing?
Rite Aid has trailed CVS and Walgreen in launching in-store clinics.
•CVS operates more than 800 clinics.
•Walgreen plans to operate more than 500 clinics by year end.
•Rite Aid has limited its services primarily to immunizations.
However, Rite Aid acquired RediClinic earlier this year in a bid to spark
its health services platform.
•RediClinic operates 30 clinics in Texas based H.E.B. grocery stores.
•Rite Aid plans to take a two pronged approach to clinics.
•Continue to expand RediClinic in non-Rite Aid stores.
•Begin opening RediClinic in Rite Aid stores.
Investors will hopefully get better insight into a timeline for Rite Aid’s
RediClinic rollout during the quarterly earnings conference call.
Plans to enter new markets?
Rite Aid struggles stem from its 2007 acquisition of Eckerd. That deal saddled
Rite Aid with debt and cannibalized sales in overlapping markets. As part of
Rite Aid’s return to profitability, the company has been focused on shuttering
•Rite Aid’s store count has dropped from 4,800 stores to less than 4,600
stores since 2010.
•Rite Aid’s total debt has fallen from $6.25 billion in 2012 to $5.7 billion.
The store closings and focus on profit has put Rite Aid on more solid ground,
potentially opening up the door for the company to consider expanding into
new markets like Texas (where it only operates RediClinics) and Florida. While
Rite Aid is shrinking, CVS added 22 net new stores in Q1 and Walgreen plans to
open a net 55 to 75 new stores this year. If Rite Aid is going to remain
competitive, it will need to begin growing again.
Will guidance be changed?
Based on forward earnings estimates, Rite Aid’s valuation is in line with peers CVS and
Walgreen. However, that could change if Rite Aid cuts its outlook even further. In June,
Rite Aid lowered its FY15 EPS guidance from between $0.31 to $0.42 to between $0.30
Fool-worthy final thoughts
Few companies have outperformed Rite Aid over the past couple years, but
Rite Aid continues to face some important challenges. While its debt has fallen,
CVS and Walgreen are more financially fit. CVS and Walgreen also boast larger,
national footprints that provide profit-friendly scale that Rite Aid may find
tough to match.
Additionally, CVS and Walgreen’s early lead in clinics provides a competitive
advantage that could threaten Rite Aid’s customer base, particularly if newly
insured patients turn away from hospital emergency rooms to competitors in-
If Rite Aid investors hope to see similar future returns to what they’ve recently
enjoyed, they’re going to need to start seeing Rite Aid talk more about its
growth plans for the future, rather than its restructuring plans for the present.
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