Rite Aid: 6 Key Takeaways From The FY 2015 Earnings Call

| About: Rite Aid (RAD)

Summary

Rite Aid is making investments through acquisitions, supply chain improvements and remodeling of stores to position themselves to take advantage of the growing pharmacy retail market.

Fourth quarter revenue growth lagged behind Walgreens, but Walgreens announced plans to close 200 stores in cost reduction efforts.

Management's continued commitment to their turnaround effort makes Rite Aid a strong buy-and-hold investment.

On April 8th, Rite Aid (NYSE:RAD) reported fiscal year 2015 financial results. Revenue totaled $6.8 billion (3.8% growth from fourth quarter 2014) and $26.5 billion (3.9% growth from fiscal year 2014) for the fourth quarter and full year, respectively. In my opinion, these growth rates are a sign of continued progress, but the stock price went lower when Walgreens (NASDAQ:WBA) reported results for the same period the following day.

Walgreens reported revenue that topped $19.6 billion for the quarter which represented a 6.7% growth rate from the same period in 2014. While Rite Aid still has a lot of progress to make if they want to compete with Walgreens, the company reported a third consecutive year of profitability and is seeing positive results from recent investments. While sales growth disappointed in comparison to Walgreens, I believe there are 6 key takeaways from the earnings call.

  1. RediClinic - When Rite Aid acquired RediClinic in April 2014, the Texas-based company operated 30 clinics. During fiscal year 2015, Rite Aid added the first 24 RediClinics to Rite Aid stores with expectations to further the RediClinic initiative going forward. Management expects to open 11 more clinics in the first quarter of 2016 with a total of approximately 50 openings planned during the year. The company is seeing strong customer reception, net new customer additions, and increased prescription fills as a result of the RediClinics expansion.
  2. Conversion to wellness format - Only 36% of the company's total store portfolio (1,634 out of 4,570 total stores) has been converted to the wellness store format. These newly remodeled stores are seeing strong front-end and prescription sales numbers. This was evident in the fourth quarter of 2015 when comparing sales numbers for wellness stores that have been remodeled in the past 24 months versus legacy stores. Front-end and prescription same-store sales growth was approximately 348 basis points and 226 basis points higher than non-wellness stores. In 2016, the company anticipates remodeling 400 stores to this wellness format. These additional 400 stores will increase the total percentage to approximately 45% and will provide for future top line growth.
  3. New Distribution Center - The company is building a new 900,000-square-foot distribution center to be completed early in fiscal year 2016. It is being built in South Carolina with the expectation to employ nearly 600 people when operating at full throttle. It is the consolidation of three current distribution locations - Charlotte, NC; Tuscaloosa, AL; and Poca, WV. This $90 million new distribution center, the first opened by Rite Aid in 15 years, and the conversion of all stores to the new drug purchasing and distribution agreement with McKesson are expected to result in a more efficient supply chain.
  4. EnvisionRx - The acquisition of EnvisionRx offers prescription drug plans to seniors enrolled in Medicare Part D. The Medicare Modernization Act of 2003 (MMA) established a voluntary outpatient prescription drug benefit for people on Medicare known as Part D. Everybody on Medicare has access to the Medicare drug benefit through private plans approved by the federal government. While the average annual Part D per capita growth rate was only 2.3% between 2006 and 2013, it is expected to rise at a more rapid rate of 6% between 2014 and 2023. Over this time period, spending on Part D benefits is projected to rise from 14% to 17% of total Medicare spending (net of offsetting receipts).
  5. Inclusion in Plenti Loyalty Program - Rite Aid is expected to roll their current loyalty program into the Plenti coalition loyalty program in May 2015. The Plenti program will link Rite Aid with other retailers such as AT&T, Exxon, Macy's, Mobil, Nationwide, Direct Energy, and Hulu. I believe this switch to a broader loyalty program is a positive sign that management realized their current loyalty program was not working and puts them on the map with major retailers.
  6. Growth of Private Brand - Rite Aid's private brand penetration increased to 19.1% during the fourth quarter. The company remains committed to increasing the presence of their private brand through new product launches. For example, in the fourth quarter of 2015, the company introduced the Receutics Active Skin Repair line and expects to continue adding products to their portfolio in 2016. The penetration of the private brand is a key initiative for the company to increase top line and bottom line growth rates.

After digesting the company's fourth quarter results and seeing the reaction once the market compared the results to Walgreens, I remain optimistic about the company's position in the growing pharmacy retail market. While Rite Aid is making investments to take advantage of the market, Walgreens announced they are cutting 200 stores amid cost reduction efforts. Even after management announced conservative guidance for FY2016 with sales expected to be between $26.9 billion and $27.4 billion with a same-store sales increase of 2.5% to 4.5%, I believe Rite Aid management gave insight that they will increase guidance after the first quarter when they can better evaluate the impact of the EnvisionRx purchase. In conclusion, Rite Aid has been committed to their turnaround efforts through acquisitions and investments in their stores, supply chain and private brand, which I believe makes Rite Aid a strong buy-and-hold investment going forward.

Disclosure: The author is long RAD.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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