Rite Aid Corp. (RAD), one of the nation’s leading drugstore chains, reported lackluster same-store sales (comps) results, of down 1.7% in May 2010. Rite Aid’s same-store sales continue to move in the wrong direction, with May 2010 marking the 12th consecutive month of negative comps. Rite Aid had last witnessed positive same-store sales of 0.6%, exactly a year ago in May 2009.
Monthly Performance in Details
Rite Aid’s May overall comps declined 1.7%, exacerbated from declines of 1% in April 2010 and 0.1% in March 2010. Pharmacy comps declined 0.8%, hurt by the introduction of new generic drugs to the tune of 124 basis points. Prescriptions filled at comparable stores decreased 2.0% from May 2009.
Across the industry, the rate of pharmacy sales growth has slowed due to the decline in new blockbuster drugs, a longer Food and Drug Administration approval process, drug safety concerns, the loss of individual health insurance as unemployment rises and an increase in the use of generic (non-brand name) drugs, which are lower priced but generate higher gross margins.
Front-end same-stores sales decreased 3.6%. Other than prescription drugs, Rite Aid sells a wide assortment of other merchandise, which its terms as “front end” products, including over-the-counter medications, health and beauty aids, personal care items, cosmetics, etc.
However, on a positive note, Rite Aid’s sales improved 2.75% to $2.439 billion in May 2010. Prescription drugs contributed 68.4% to the total revenue. Rite Aid’s 96.3% of pharmacy sales were from customers covered by third party payors (insurance companies, prescription benefit management companies, etc.).
Performance for the 13-Week Quarter Ended May 29, 2010
Rite Aid’s overall same-store sales for the period decreased 1%. Front-end same-store sales dropped 1.3% and pharmacy same-store sales decreased 0.9%. Prescriptions filled at comparable stores decreased 1.7%.
Total drugstore sales fell 2.1% to $6.368 billion, with prescription revenue accounting for 68.3% of total drugstore sales. Third-party prescription revenue represented 96.3% of pharmacy sales.
As of May 29, 2010, Rite Aid operated through 4,767 stores, down from 4,780 stores as of February 27, 2010 and 4,825 stores in the comparable year-ago period.
Outlook
Rite Aid expects sales to be between $25.2 billion and $25.6 billion for the fiscal year ending February 2011. Same-store sales are expected to range from a decrease of 1% to an increase of 1% year over year. Net loss is projected between $355 – $570 million or a loss per share of 65 – 41 cents.
The Zacks Consensus Estimate for Rite Aid for the fiscal year ending February 2011 currently stands at a loss per share of 52 cents. For the current quarter, the Zacks Consensus Estimate is 13 cents per share.
We believe that the drug retailing sector will benefit over the next several years, from the upcoming surge of higher margin generic drugs as well as the recently passed healthcare legislation, which should expand health insurance to an additional 32 million people in the U.S.
Rite Aid has a number of initiatives currently underway, including the national roll-out of the Wellness Plus loyalty card, reducing distribution costs and other various cost-cutting initiatives. However, the ongoing pressure on pharmacy margins and a significant reduction in reimbursement rates will mitigate most of the gains. We thus maintain our Underperform rating on Rite Aid given the above concerns and weakening comps trend.
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