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CAMP HILL, Pa. — Rite Aid Corp. surpassed Wall Street’s earnings forecast for its fiscal 2015 second quarter but lowered its profit outlook for the full year, citing slimmer margins from generic drugs.
Rite Aid Corp. surpassed Wall Street’s earnings forecast for its fiscal 2015 second quarter but lowered its profit outlook for the full year, citing slimmer margins from generic drugs.
Rite Aid said Thursday that net income for the second quarter ended Aug. 30 came in at $127.8 million, or 13 cents per diluted share, compared with $32.8 million, or 3 cents per diluted share, a year earlier.
On average, analysts had projected adjusted earnings of 6 cents per share, with estimates ranging from a low of 5 cents to a high of 7 cents, according to Thomson Financial.
The drug chain said the improvement stemmed mainly from increased adjusted EBITDA (earnings before interest, taxes, depreciation and amortization), a lower LIFO charge from pharmacy inventory reductions, and a $62.2 million loss on debt retirement a year ago, partially offset by higher income tax expense.
Adjusted EBITDA totaled $364.2 million, or 5.6% of revenue, in the second quarter versus $341.6 million, or 5.4% of revenue, in the prior-year period. Rite Aid said the gain resulted from increased front-end and pharmacy gross profit, partially offset by an rise in selling, general and administrative expenses related to higher sales.
Rite Aid noted that the improved pharmacy gross profit was fueled by increased pharmacy revenue and the impact on inventory valuation related to the its transition to a new drug purchasing and delivery arrangement with McKesson Corp., partially offset by lower reimbursement rates. The drug chain said the net effect on inventory valuation from the transition to the outsourced McKesson arrangement isn’t expected to be material to fiscal 2015 results but lifted gross profit, adjusted EBITDA and pretax income by about $40 million in the second quarter.
On the revenue side, second-quarter sales climbed 3.9% to $6.5 billion from $6.3 billion a year earlier, driven by a rise in comparable pharmacy sales, according to Rite Aid.
Overall same-store sales for the second quarter were up 4.1% year over year, reflecting gains of 1.1% in the front end and a 5.6% in the pharmacy. Rite Aid said introductions of new generic drugs, which have lower margins, negative impacted comparable pharmacy sales by 199 basis points.
Prescription count in comparable stores rose 3.7% in the quarter, and prescription sales represented 68.8% of total drug store sales.
"In the second quarter, our team of dedicated Rite Aid associates worked together to execute our strategy and deliver results that reflect growth in net income and adjusted EBITDA and significant increases in same-store sales and prescription count," Rite Aid chairman and chief executive officer John Standley said in a statement.
"Heading forward, while we believe that our key initiatives will continue to drive top-line growth, we are revising our guidance based on lower than anticipated pharmacy margin in the second half of fiscal 2015," Standley added. "As we navigate these headwinds, we will remain focused on growing our business, generating continued operational efficiencies and positioning our associates to deliver a consistently outstanding experience for our customers."
Rite Aid said that, compared with its earlier projections, it expects decreases in pharmacy margin in the second half, based on current estimates for reimbursement rates and an expectation for lower profitability from new generics as well as generics that recently lost exclusivity. As a result, the company is is lowering its guidance for net income and adjusted EBITDA.
The company now forecasts fiscal 2015 net earnings at $223 million to $333 million, or 22 cents to 33 cents per diluted share. Its previous guidance was for net income of $298 million to $408 million, or 30 cents to 40 cents per diluted share.
Before Rite Aid issued its second-quarter report, analysts on average had forecast the drug chain’s earnings at 34 cents per share, with projections running from a low of 30 cents to a high of 42 cents, according to Thomson Financial.
Rite Aid said it now expects adjusted EBITDA for fiscal 2015 to come in at $1.2 billion to $1.275 billion, compared with its earlier estimate of $1.275 billion to $1.35 billion.
The company also narrowed its sales guidance, projecting full-year sales at $26 billion to $26.3 billion and same-store sales growth of 3% to 4% year over year. Capital expenditures are expected to total $525 million.
In the second quarter, Rite Aid relocated five drug stores, remodeled 117 stores and expanded one store, bringing the total number of its "wellness store" locations to 1,433. The company also opened one store and closed 10 stores, resulting in a total store count of 4,572 as of Aug. 30.
