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Rite Aid (RAD) Reports Narrower-Than-Estimated Loss in Q4

Zacks

Rite Aid Corporation RAD delivered better-than-expected bottom-line results for fourth-quarter fiscal 2018, marking a considerable improvement from its recent trend. However, the top line continued to disappoint, lagging the estimates and declining year over year.

The company’s improved bottom-line results can be attributed to the stabilization of reimbursement rates, a decline in drug purchasing costs and a record number of immunizations that enhanced pharmacy margins for the quarter.

Other key highlights of the quarter were solid results at the Retail Pharmacy Segment with higher adjusted EBITDA, strong start to Pharmacy Services segment in the new commercial selling season just after the fourth quarter, completion of the sale of 1,932 stores to Walgreens Boots Alliance Inc. WBA and a merger agreement with Albertsons Companies.

As of Mar 27, 2018, Rite Aid completed the transfer of 1,932 stores and related assets to Walgreens for $4.157 billion. It now plans to transfer the three distribution centers and related inventory, starting Sep 1, 2018. With the cash proceeds, management has been lowering debt. As a result, its debt, net of cash, was $2.9 billion as of Mar 3, 2018.

Additionally, the company agreed to merge with Albertsons on Feb 20, 2018. So far, the boards of directors of both the companies have approved the transaction and the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 has expired. The companies expect to close the merger in the second half of calendar year 2018.

Though the transfer of stores to Walgreens and the merger with Albertsons are positives for the stock, it has declined 31.8% in the last three months, probably because of the lack of robust operating results. Moreover, the decline in share price reflects an underperformance from the industry’s fall of 16.6%.



Q4 in Detail

Rite Aid reported adjusted loss per share of 1 cent in fourth-quarter fiscal 2018 against earnings per share of 2 cents in the year-ago quarter. However, results beat the Zacks Consensus Estimate of a loss per share of 2 cents. While the bottom line was hurt by a decline in adjusted EBITDA, higher costs relating to the Walgreens deal, and increased lease termination and impairment charges, it was negated higher LIFO credit and improved reimbursement rates.

Rite Aid Corporation Price, Consensus and EPS Surprise

Rite Aid Corporation Price, Consensus and EPS Surprise | Rite Aid Corporation Quote


Revenues dropped 8.6% to $5,394.3 million, falling short of the Zacks Consensus Estimate of $5,540 million. During the quarter, Retail Pharmacy segment revenues declined 10.1% on account of soft same-store sales and an extra week in the prior year’s fourth quarter. Moreover, revenues from the Pharmacy Services segment declined 4.3% due to changes in the composition of Medicare Part D membership and a fall in commercial business.

Retail Pharmacy same-store sales dipped 1.7%, owing to 2.3% fall in pharmacy sales and 0.6% decrease in front-end sales. Pharmacy sales included a negative impact of nearly 138 basis points (bps) from the introduction of new generic drugs. Further, prescription count at comparable stores slipped 1.8% due to the omission of some pharmacy networks from the prior-year quarter. Prescription sales constituted 64.9% of total drugstore sales.

Rite Aid’s adjusted EBITDA dropped about 6.1% year over year to $157.4 million while adjusted EBITDA margin expanded 10 bps to 2.9%. This was due to lower adjusted EBITDA at the Pharmacy Services segment; offset by favorable results for the Retail Pharmacy segment, primarily driven by improved reimbursement rates and enhanced generic purchasing. Pro-forma adjusted EBITDA, adjusted for fees related to the Walgreens transaction and the extra week in fiscal 2017, was $173.2 million, down 4.2% year over year.

Store Update

Rite Aid continues to renovate stores with 38 remodeled and six relocated outlets in the fourth quarter. This brings the company’s total wellness-stores count to 1,805. Further, it sold 1,554 stores to Walgreens and shut 19 stores during the quarter, consequently taking the total store count to 2,831 as of Mar 3, 2018. Additionally, store count related to continuing operations were 1,651 and 2,550, respectively, for wellness stores and total stores.

Financial Status

Rite Aid ended fiscal 2018 with cash and cash equivalents of approximately $447.3 million, long-term debt (net of current maturities) of $3,340.1 million and total shareholders’ equity of $1,601 million.

Further, this Zacks Rank #3 (Hold) company’s cash from operating activities was $87 million as of the end of fiscal 2018.

Outlook

Following the strong closure of fiscal 2018, Rite Aid outlined its initial view for fiscal 2019. Going forward, the company anticipates benefiting from generic drug purchasing efficiencies, a stable reimbursement-rate environment than witnessed in fiscal 2018, TSA fees related to the Walgreens deal as well as other initiatives to grow sales and drive operational efficiencies. However, the company’s guidance does not include any impact of the pending transaction with Albertsons.

Rite Aid estimates sales of $21.7-$22.1 billion in fiscal 2019 with comps anticipated in the range of flat-to-up 1%. Adjusted EBITDA is projected to be $615-$675 million. Further, the company expects net loss of $40-$95 million in fiscal 2019. Adjusted net income per share is expected to be in the range of 2-6 cents compared with a loss per share of 2 cents reported in fiscal 2018. Additionally, it expects capital expenditures of nearly $250 million in fiscal 2019.

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