New structure reflects transformation of Rite Aid

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CAMP HILL, Pa. — A new chapter opened for Rite Aid Corp. in its fiscal 2016 second quarter, as the company began reporting financial results under a new structure that incorporates recently acquired pharmacy benefit manager (PBM) EnvisionRx.

Going forward, Rite Aid will report results in two business segments: retail pharmacy (including Rite Aid drug stores, RediClinic retail clinics and the Health Dialog health coaching and analytics unit) and pharmacy services (EnvisionRx). As evidence of the change, EnvisionRx chief executive officer Frank Sheehy participated in the quarterly earnings conference call with financial analysts.

Executives noted that the new structure reflects Rite Aid’s transformation from a drug store chain to a multifaceted health care provider.

“The second quarter was pivotal for Rite Aid, as we finalized the acquisition of EnvisionRx and worked as a team to accelerate Rite Aid’s transformation into a retail health care company,” Rite Aid chairman and chief executive officer John Standley said in the call.

“In addition to the acquisition of EnvisionRx, we also made other significant investments in our business in the second quarter, including refinancing a portion of our debt, building RediClinics in more locations, converting additional Rite Aid stores to our wellness format and continuing the launch of our new wellness+ with Plenti coalition loyalty program. We are excited about these investments because, while they are having a short-term impact on our results, they are also absolutely critical in positioning Rite Aid for long-term growth.”

The EnvisionRx purchase provided a big boost to Rite Aid’s top line in the second quarter, but expenses related to the deal, a loss on early debt retirement and pharmacy reimbursement pressure took a toll on the bottom line. That led management to reduce its forecasts for drug store sales, same-store sales and earnings per share (EPS).

Net income for the 13 weeks ended August 29 plummeted 83.2% to $21.5 million, or 2 cents per share, from $127.8 million, or 13 cents per share, a year ago.

Chief financial officer Darren Karst explained during the call that the net income drop resulted from a host of factors, including a $33.2 million loss on debt retirement related to the redemption of Rite Aid’s 8.00% senior secured notes. Depreciation and amortization expense increased by $17 million due to EnvisionRx and $9 million for capital spending on the store base, while interest expense rose more than 14% due to $27.6 million in incremental expense from the recent issue of acquisition-related unsecured notes.

In addition, Rite Aid absorbed $9.6 million in transaction costs from the acquisition and cycled a $40 million benefit from its purchasing and delivery agreement with McKesson Corp. in the fiscal 2015 second quarter.

“Taken together, the additional expenses related to the acquisition of EnvisionRx and our financing activity accounted for 5 cents per diluted share,” Karst said.
Backing out those items, net income would have fallen 42.6% to about $73.4 million, or 7 cents per share. Analysts polled by Thomson Reuters expected EPS of 4 cents, on average.

Excluding those factors and other items, adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) decreased 4.8% to $346.8 million, or 4.52% of revenue, down 106 basis points from a year ago. Consolidated revenue jumped 17.5% to $7.66 billion from $6.52 billion in the prior-year period, as the $1.07 billion top-line contribution of EnvisionRx helped push results above the $7.57 billion expected by analysts.

Consolidated gross margin slid 397 basis points to 25.08%, partially offset by a 263-basis-point drop in selling, general and administrative (SG&A) expenses to 22.52% of revenue. Lease termination and impairment charges surged 35.5% to $9.64 million, and interest expense climbed 14.3% to $115.4 million. Rite Aid also booked a $281,000 loss on asset sales versus a $1.72 million gain last year. After factoring in the $33.2 million loss on debt retirement, pretax income tumbled 74.3% to $37.9 million.

At the top line, retail pharmacy segment sales expanded 1.9% to $6.65 billion in the second quarter, as a 2.1% increase in same-store sales was diluted by a year-over-year decline in store count. The same-store gain was driven by a 2.8% gain in the pharmacy that outpaced a 0.3% rise at the front end.

Rite Aid said pharmacy results took a hit of 223 basis points from introductions of new generic drugs. The number of prescriptions dispensed edged up 0.2% on a same-store basis. Prescriptions generated 69.3% of total drug store sales.

Karst noted that the slight increase in script count reflects Rite Aid’s cycling of a strong expansion of Medicaid business a year ago. “We expect same-store script growth comparisons to continue to be difficult for the next several months as we continue to cycle last year’s Medicaid expansion,” he said.

Retail segment gross margin fell 106 basis points to 27.99%, as a $34 million drop in gross profit dollars was triggered by the presence of last year’s $40 million pharmacy margin benefit from the agreement with McKesson. Excluding a LIFO provision that swelled 287.7% to $5.99 million, FIFO gross margin fell 99 basis points to 28.08%.

The segment’s SG&A expenses added 11 basis points to 25.26% of revenue. With that, adjusted EBITDA fell 13.9% to $313.6 million, or 4.72% of sales, down 86 basis points from the fiscal 2015 period.

Revenue for the pharmacy services segment, meanwhile, came in at $1.07 billion for the quarter. With a gross margin of 5.76%, adjusted EBITDA for the segment amounted to $33.2 million, or 3.1% of revenue.

In the second quarter, Rite Aid opened two drug stores, acquired two and closed nine, giving it a total of 4,561 stores as of August 29, a net decrease of 11 units year over year. The company also remodeled 119 stores during the quarter, bringing its total number of wellness locations to 1,859, and opened five RediClinics, which now number 70 overall.


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