(RAD) Rite Aid Corporation Earnings Preview

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 first-quarter financial results to be ended on May 28, 2011 before the opening bell on June 23, 2011. The current Zacks Consensus Estimate for the quarter is a loss of 12 cents a share. For the quarter under review, revenue is $6,175.0 million, according to the Zacks Consensus Estimate.

Fourth-Quarter 2011, Summary

Rite Aid posted a net loss of $205.7 million in the fourth quarter of fiscal 2011 compared with a loss of $208.4 million in the year-ago period. The quarterly loss per share of 24 cents though in line with the prior-year figure is higher than the Zacks Consensus Estimate of a loss of 21 cents per share. Higher termination and impairment charges offset the positive impact from improved gross margin coupled with lower selling, general and administrative (SG&A) expense and LIFO charge.

Rite Aid’s revenues came in flat at $6,456.5 million over the prior year. Same-store sales for the quarter showed a marginal increase of 0.9%. Over the quarter, the company relocated 4 stores, remodeled 2 stores and closed 17 stores. Total revenue beats the Zacks Consensus Estimate of $6,379.0 million.

Management Guidance

Rite Aid expects fiscal 2012 revenue to be between $25.7 billion and $26.1 billion based on same-store sales increase of 0.5% to 2.0%. Net loss is now expected to be in the range of $370.0 million to $560.0 million (or 42 cents to 64 cents per share). The Zacks Consensus Estimate for fiscal 2012 is currently pegged at a loss of 49 cents a share.

First-Quarter 2012 Zacks Consensus

The analyst covered by Zacks expects Rite Aid to post a loss of 12 cents a share for the first quarter of fiscal 2012 faring worse than a loss of 9 cents delivered in the prior-year quarter. The current Zacks Consensus Estimate ranges between a loss of 6 cents and 16 cents a share. The current Zacks Consensus Estimate has improved by a penny over the last 30 days.

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 14.3% to positive 35.7%. The average remained at positive 9.9%. This suggests that Rite Aid has beaten the Zacks Consensus Estimate by an average of 9.9% 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 generates higher gross margin. Due to these factors, the company’s same-store-sales are anticipated 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 $10.0 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 its 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 #4 Rank, which translates into a short-term ‘Sell’ rating. Moreover, our long-term recommendation on the stock remains ‘Underperform’.

CVS CAREMARK CP (CVS): Free Stock Analysis Report

RITE AID CORP (RAD): Free Stock Analysis Report

WALGREEN CO (WAG): Free Stock Analysis Report

WAL-MART STORES (WMT): Free Stock Analysis Report

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