Rite Aid has now had 6 consecutive quarters of same store sales growth and adjusted EBIDTA.
The number of Wellness+ members increased by 11 percent over Q1/2012. Wellness+ members accounted for 75 percent of front end sales versus 67 percent in Q1/2012. Wellness+ members accounted for 69 percent of prescriptions in Q1 versus 62 percent in Q1/2012. RiteAid is continuing to see the number of silver and gold level customers grow and those customers are becoming a bigger percentage of its total sales, which is what Rite Aid wants. The silver and gold customers are its best customers.
When asked whether Rite Aid has plans to step up visibility of the Wellness+ benefits when Walgreen's starts with its loyalty card in September, the response was “we're not giving away all our secrets.” Beyond that, Rite Aid will continue to demonstrate the value of the Wellness+ card and use it to tie together the pharmacy and front end sales. It is working on evaluating the information from the Wellness+ program to determine where the incremental opportunities lie. It is in the early stages of that evaluation.
The Load2Card program has been warmly received in test markets and Rite Aid is looking at the program very carefully.
Rite Aid's flu vaccination program last year was very successful. Rite Aid offered a shingles vaccination program in Q1 and doubled the number of shingles vaccinations during the quarter. It is now starting to offer vaccinations for children entering school and will begin flu shots again soon. It expects the flu shot program to expand now that its pharmacists are more experienced in giving the shots and the customers understand the convenience of getting shots at Rite Aid. In the pharmacy, Rite Aid is also using its Prescription Adviser to help patients with medication compliance.
The competition for script file buys has been strong, which impacts the price Rite Aid pays. The price levels are between $10 and $20.
Medicaid is reformulating the average manufacturer price (AMP) rules. Overall, Rite Aid's steepest declines has been with Medicaid. A lot of states are changing Medicaid reimbursement rates and are moving toward managed Medicaid. This has made the Medicaid business much more difficult.
In Q1, Rite Aid remodeled 143 stores to the new wellness format. It expects to remodel a total of 500 stores during fiscal year 2013. It currently has a total of 423 wellness stores. The wellness stores offer new wellness-related products and have expanded clinical pharmacy services. It has 680 Wellness Ambassadors to work in the store. There has been a positive impact on the front end of remodeled stores---more than a 100 basis point increase in sales. In doing the remodels, Rite Aid focused first on its best stores and 8 or 10 of its key markets.
Rite Aid recently converted 2900 products to the Rite Aid Brand. Private brand penetration in Q1/2013 was 17.9 percent, an increase of 2.3 percent. Customers are attracted to private label and it is going to continue to show good value with its private label program.
Financials.
Revenues increased by 1.2 percent over Q1/2012, resulting the fourth consecutive quarter of revenue growth.
In Q1, Rite Aid closed 15 stores
and did not open any new stores. It is operating 52 less stores than
in Q1/2012 and it expects to close 50 stores in fiscal year 2013.
Same store sales increased by 2.5 percent overall. Same store sales increased by 2.7 percent in the front end and 2.4 percent in the pharmacy. Prescriptions increased by 3 percent, primarily due to the dispute between Walgreens and Express Scripts. However, the increase in prescriptions was offset by a 326 basis point negative impact from new generic drugs.
Rite Aid expects pharmacy sales to decline through the rest of the year because the reduction in generic drug costs will cause a reduction in sales per script. Generic penetration is very strong and reimbursement rates are still very challenging and declining year over year.
Overall, Rite Aid expects same store sales for fiscal year 2013 to be between a negative 50 basis points and positive 100 basis points. This reflects the negative pharmacy sales resulting from the new generic prescription products, but is based on the assumption that Rite Aid will be able to keep most of the Express Scripts prescriptions. It believes that the Wellness+ program will help it keep Express Scripts customers if there is a settlement because the customer receives Wellness+ points with every prescription. In return, the customer gets a discount on the front end, which encourages them to be a loyal customer. The Wellness penetration with Express Scripts customers is about the same as the Wellness penetration with the other customers. However, Rite Aid acknowledges the scripts are at risk if there is a settlement.
Adjusted EBIDTA was 4.2 percent of revenues, an increase of 4.3 percent. The increase in EBIDTA was due to strong sales and an increase in pharmacy margin. Pharmacy margin improved because of the increase in generic drugs on the market, since Rite Aid benefitted from lower costs of the generic drugs. Rite Aid's generic drug penetration is now 79 percent, an increase of 3 percent.
The increase in EBIDTA was somewhat offset by a $20.9 million charge to settle class action lawsuits. Rite Aid expects the class action payout to take place in two installments: the first in the late summer and the second at the end of Q3 or beginning of Q4/2013.
In Q1/2013, front end gross margins were down from Q1/2012, although the dollars were up.
Net loss for Q1 was $.03 per share versus a loss of $.07 per shares in Q1/2012. The reduction in net loss was the result of higher EBIDTA and lower depreciation, amortization expenses and lease termination charges. The class action settlement and a $17.8 million loss on debt modifications impacted the net loss by $.04 a share. Rite Aid expects the net loss for fiscal year 2013 to be between $.29 to $.13 per share.
At the end of Q1, Rite Aid had $1.151 billion in liquidity, which includes $102 million of invested cash. Rite Aid had no revolver outstanding and had $125 million in outstanding letters of credit. Total debt increased by $12.5 from Q1/2012.
The full transcript of the earnings conference call can be found on Seeking Alpha at the following link:
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