Rite Aid's 4th Quarter Earnings Release - The Growth Story Starts

| About: Rite Aid (RAD)


Rite Aid beats estimates on revenues and earnings; moves out of the turnaround phase.

Management projecting accelerated revenue growth and increased profitability in fiscal 2015.

Recent acquisitions to fuel growth and transform company into a wellness provider.

Rite Aid (NYSE:RAD) reported 4th quarter and fiscal 2014 earnings last Thursday (RAD Press Release), that exceeded analysts' estimates for revenues and profits. The company's guidance for fiscal 2105 also surpassed estimates. Along with the solid results, management provided additional details on several new acquisitions that will accelerate growth and transform Rite Aid into a wellness provider. The company has achieved 2 consecutive years of profits and total company sales are growing again, which is particularly noteworthy due to a lower number of stores. The company has moved beyond the turnaround phase and is now clearly focused on growth. For RAD investors this is an exciting period, as the company's growth story starts to play out.

In my earnings preview article (found here), I highlighted the key focus areas for this quarter's earnings release and management's conference call with analysts. This update is based the quarterly earnings release and management conference call with analysts.

Key points:

· Gross Margins - Margins increased sequentially over Q3 and the prior year's 4th quarter (excluding last year's LIFO credit). I had identified potential lower gross margins (due to the holiday season and Affordability Care Act (ACA) promotions) as the most significant risk to Rite Aid's 4th quarter profits. It was very good news to see that margins appear to be stabilizing.

· McKesson partnership - Management disclosed a working capital savings of $150M, which is anticipated to be fully realized in the 2nd half of the year.

· Health Dialog and RediClinic acquisitions - These acquisitions were acquired for under $100M and the focus for fiscal 2015 will be integrating them into the RAD. Management noted that these acquisitions will not materially impact fiscal 2015 results and "integration investments" are included in their guidance. These acquisitions appear to be mutually beneficial for all parties and the combined synergies will enable all 3 companies to grow faster together vs. stand-alone entities. In the intermediate and longer-term horizon, these acquisitions appear to greatly enhance Rite Aid's growth prospects.

· Wellness store remodeling update - The company had 1, 215 Wellness stores (out of 4,587 total stores) at the end of Q4. The Wellness stores continue to outperform the traditional store formats in both Rx Script count (+1%) and front end sales (+3.2%). RAD will also be increasing the # of Wellness remodels from 400 to 450 in 2015.

· ACA enrollment impact on sales and margins - The Company has been reviewing the impact but it was too early to quantify, as determining the net new customers vs. those that switched from a non-ACA plan to a new ACA plan was on-going.

· Fiscal 2015 guidance - The Company forecasted sales of $26.0B-$26.5B and EPS of $0.31-$0.42, vs. analysts' estimates of $25.8B and $0.35 cents. This was particularly good news for Rad investors as management's forecast showed confidence that growth would continue into 2015. This guidance includes integration costs of the Health Dialog and RediClinic acquisitions.

· Interest expense and debt refinancing - The company noted that they will also call and prepay their 10.25% 2nd lien notes due in 2019. This should further reduce interest expense inn 2015.

· Management discussion - The key theme from the conference call was the repeated emphasis on growth initiatives heading into fiscal 2015. It is clear that management is focused on growth as well as transforming Rite Aid into more of a wellness provider than "just a drug store". Operational improvements are on-going but clearly the turn-around is over and growth is now the focal point. The only cautionary item noted was that earnings growth was going to be relatively stronger in the 2nd half of the year, vs. the 1st half.

Overall, the Q4, 2014 earnings release represents the end of Rite aid's turn-around story and the beginning of the growth phase. The 2 acquisitions are expected to transform Rite Aid into a wellness destination and provide a major impetus for future sales growth and profitability. As I outlined in a previous article, Rite Aid's stock price and fundamental valuation are still comparatively lower than CVS and Walgreen. The current results and fiscal 2015 guidance increase the compelling investment thesis for RAD and I continue to be bullish on the 1-2 year potential return for investors. In future articles I will be providing a more detailed review of the Rite Aid's new wellness opportunities and potential impact on sales and earnings.

Disclosure: I am long RAD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.