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Rite Aid Corporation (NYSE:RAD) reported a positive fiscal Q4 2013 earning surprise yesterday that exceeded consensus and company guided projections. Quarterly results benefited from continued cost containment efforts and improved per store performance, though total revenues continued to erode.

Revenues declined by 9.7% year-over-year to $6.455 billion in the company's fiscal Q4, and fiscal 2013 revenues declined by 2.8% to $25.392 billion from fiscal 2012, respectively. Revenues for the year did exceed the company's most recently updated guidance of $25.15-$25.30 billion, but fell below our $25.5 billion estimate.

The reported fiscal Q4 revenue total was in-line with the consensus $6.45 billion estimate, though it fell short of our $6.6 billion projection by approximately $150 million or 2.2%.

Earnings in the company's fiscal Q4 totaled $124 million or $0.13 on a diluted per share basis. Fiscal year 2013 earnings were reported at $107 million or $0.12 per share. Rite Aid's reported revenues exceeded previous company guidance of negative $38 million to positive $33 million, and the per share total also eclipsed the guided ($0.05) to +$0.03 adjusted per share forecast as well as the ($0.02) consensus estimate.

Rite Aid earnings benefited from a nearly 18% year-over-year cut in cost of sales expenditures and a 4.8% decrease in SG&A, as well as additional accounting measures that afforded the company a net tax benefit of approximately $46.8 million.

The increase in diluted shares was identified as a variance against our model, and we viewed the company's disclosure to increase CAPEX to $400 million (from $300 million in fiscal 2013) and the conversion of 797 Wellness stores (17.2% of total stores) as additional positives in the report.

2014 Revenue Guidance Modestly Disappoints:

Rite Aid offered fiscal 2014 guidance that continues to suggest ongoing softness, with revenues ranging between $24.9 billion-$25.3 billion. The company indicated that the potential also exists for ongoing improvement in same store sales based on the provided range of a decrease of 0.75% to an increase of 0.75% over fiscal 2013.

The company also built in fairly broad bandwidth for expense management, and has forecast that earnings will range from $0.04 to $0.20. Potential catalysts behind the positive fiscal year earnings would be continued sales being generated by the new Wellness format and decreased interest expenditures related to the debt refinancing efforts that took place in early 2013.

Our Forecast:

The reported positive earnings, which came as a notable surprise, though we continue to maintain a focus on the company's revenue, shrinking footprint and cash flows.

Our fiscal 2014 forecast calls for Rite Aid revenues to total $25.4 billion, slightly exceeding the high-end of the company guided range, and in-line with the $25.2 billion consensus figure.

We believe that the company will continue to demonstrate improvement in its reported margin profile, with benefits being witnessed from the McKesson Corp (NYSE:MCK) supply agreement, as well as the ongoing expense management initiatives. These will serve also as the primary catalysts behind our forecast gross margin expansion of 2.5% to 31.1% in fiscal 2014, and operating margins to doubling from 2.8% to 5.7% in 2014. Our earnings forecast is for $0.18 on a diluted per share basis, which is at the high end of the company guided range and exceeds the $0.02 consensus estimate.

Source: Rite Aid Reports Earnings Surprise As Revenues Continue To Slide