Earnings Preview: Rite Aid

Rite Aid Corporation (RAD), the third largest retail drugstore in the U.S. based on revenues and number of stores, is scheduled to report its fourth-quarter 2011 financial results before the opening bell on April 07, 2011. The current Zacks Consensus Estimates for the quarter is a loss of 21 cents a share. For the quarter under review, revenue is $6,379.0 million, according to the Zacks Consensus Estimate.

Third-Quarter 2011, Summary

Rite Aid’s third-quarter net loss lowers to $81.5 million compared with a loss of $86.1 million in the year-ago period. The quarterly loss per share of 9 cents was an improvement over the Zacks Consensus Estimate of a loss of 13 cents.

Rite Aid’s revenue declined 2.4% year over year to $6.2 billion from $6.4 billion, primarily due to a 1.3% decrease in same-store sales. During the quarter, the company opened 1 new store, relocated 11 stores, remodeled 15 stores and closed 17 stores.

Management Guidance

Rite Aid expects fiscal 2011 revenue to be between $25.0 billion and $25.2 billion based on same-store sales decline of 1.5% to 0.9%. Net loss is now expected to be in the range of $525 million to $655 million (60 cents to 74 cents per share).

Fourth-Quarter 2011 Zacks Consensus

The analyst covered by Zacks expects Rite Aid to post fourth-quarter 2011 loss of 21 cents a share faring better than a loss of 24 cents delivered in the prior-year quarter. The current Zacks Consensus Estimate ranges between a loss of 8 cents and 26 cents a share.

The current Zacks Consensus Estimate has improved by a penny over the last 30 days, as 1 out of 6 analysts have upgraded its estimates.

With respect to earnings surprises, Rite Aid has missed as well as topped the Zacks Consensus Estimate over the last four quarters in the range of negative 26.3% to positive 35.7%. The average remained at positive 6.9%. This suggests that Rite Aid has beaten the Zacks Consensus Estimate by an average of 6.9% in the trailing four quarters.

Our View

In the United States, pharmacy sales growth has slowed down due to longer FDA approval process, drug safety concern, loss of individual health insurance resulting from unemployment and an increase in the use of non-brand drugs, which are less expensive but generate higher gross margin. Due to these factors, the company’s same-store-sales are expected to remain weak. The company has reported loss for the last fourteen consecutive quarters.

Moreover,Rite Aid’s generic drug sales are negatively affected by Wal-Mart Stores Inc.’s (WMT) strategy of entering the retail generic drug market. Due to Wal-Mart’s broad array of manufacturers in India, Israel, and the U.S., the mass merchant can offer generic drugs at a discounted price compared with the average $10 generic drug co-pay.

Additionally, Rite Aid is a highly leveraged company (with a 135% debt-to-capitalization ratio), limiting cash flow availability and the company’s ability to obtain additional financing. The debt burden from the Brooks Eckerd acquisition has increased the interest expense, which has been weighing upon the bottom line. This has put the company at a competitive disadvantage relative to its competitors with less indebtedness.

Besides, due to intense competition in pharmaceutical business and an unmet demand for pharmacist in certain regions of the United States, such as CVS Caremark Corporation (CVS) and Walgreen Co. (WAG), it is becoming extremely tough for Rite Aid to retain its skilled workforce. The company is offering competitive compensation plans to retain and attract current and future pharmacist, which is putting extra pressure on its performance.

Currently, Rite Aid maintains a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating. Moreover, our long-term recommendation on the stock remains ‘Underperform’.

RITE AID CORP (RAD): Free Stock Analysis Report

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