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Rite Aid Reports Net Income of $127.8 Million and Adjusted EBITDA of $364.2 Million for Second Quarter Fiscal 2015

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Rite Aid Corporation (NYSE:RAD) today reported operating results for its fiscal second quarter ended August 30, 2014. The company reported revenues of $6.5 billion, net income of $127.8 million or $0.13 per diluted share, and Adjusted EBITDA of $364.2 million, or 5.6 percent of revenues.

“In the second quarter, our team of dedicated Rite Aid associates worked together to execute our strategy and deliver results that reflect growth in net income and Adjusted EBITDA and significant increases in same-store sales and prescription count,” said Rite Aid Chairman and CEO John Standley. “Heading forward, while we believe that our key initiatives will continue to drive top-line growth, we are revising our guidance based on lower than anticipated pharmacy margin in the second half of Fiscal 2015. As we navigate these headwinds, we will remain focused on growing our business, generating continued operational efficiencies and positioning our associates to deliver a consistently outstanding experience for our customers.”

Second Quarter Summary

Revenues for the quarter were $6.5 billion versus revenues of $6.3 billion in the prior year’s second quarter. Revenues increased 3.9 percent primarily as a result of an increase in pharmacy same store sales.

Same store sales for the quarter increased 4.1 percent over the prior year, consisting of a 1.1 percent increase

in front-end sales and a 5.6 percent increase in pharmacy sales. Pharmacy sales included an approximate

199 basis point negative impact from new generic introductions. The number of prescriptions filled in same stores increased 3.7 percent over the prior year period. Prescription sales accounted for 68.8 percent of total drugstore sales, and third party prescription revenue was 97.5 percent of pharmacy sales.

Net income was $127.8 million or $0.13 per diluted share compared to last year’s second quarter net income of $32.8 million or $0.03 per diluted share. The improvement in net income resulted primarily from an increase in Adjusted EBITDA, a lower LIFO charge due to pharmacy inventory reductions and a $62.2 million loss on debt retirement in the prior year, partially offset by higher income tax expense.

Adjusted EBITDA (which is reconciled to net income on the attached table) was $364.2 million or

5.6 percent of revenues for the second quarter compared to $341.6 million or 5.4 percent of revenues for the like period last year. Adjusted EBITDA improved due to an increase in front-end and pharmacy gross profit, partially offset by an increase in selling, general and administrative expenses related to our higher level of sales. The improved pharmacy gross profit was driven by the increase in pharmacy revenues and the impact on inventory valuation related to the company’s transition to its new drug purchasing and delivery arrangement with McKesson, partially offset by lower reimbursement rates. The net effect on inventory valuation resulting from the transition to the outsourced McKesson arrangement is not expected to be material to Fiscal 2015 results, but did increase gross profit, Adjusted EBITDA and pre-tax income by approximately $40 million in the second quarter.

In the second quarter, the company relocated 5 stores, remodeled 117 stores and expanded 1 store, bringing the total number of wellness stores chainwide to 1,433. The company also opened 1 store and closed 10 stores, resulting in a total store count of 4,572 at the end of the second quarter.

Rite Aid Lowers Fiscal 2015 Guidance

Based upon current estimates for reimbursement rates and anticipated lower profitability from new generics and generic drugs that recently lost exclusivity, the company is expecting decreases in pharmacy margin in the second half of Fiscal 2015 as compared to its prior estimates and therefore is lowering its guidance for Adjusted EBITDA, net income and net income per diluted share. Adjusted EBITDA (which is reconciled to net income on the attached table) is expected to be between $1.200 billion and $1.275 billion. Net income is expected to be between $223.0 million and $333.0 million and income per diluted share between $0.22 and $0.33. The company is also narrowing guidance for sales and same store sales. Sales are expected to be between

$26.0 billion and $26.3 billion and same store sales to range from an increase of 3.00 percent to an increase of 4.00 percent over Fiscal 2014. Capital expenditures are expected to be approximately $525 million.

Conference Call Broadcast

Rite Aid will hold an analyst call at 8:30 a.m. Eastern Time today with remarks by Rite Aid’s management team. The call will be simulcast via the internet and can be accessed through the websites www.riteaid.com in the conference call section of investor information and www.StreetEvents.com. Slides related to materials discussed on the call will be available on both sites. A playback of the call will be available on both sites starting at

12 p.m. Eastern Time today. A playback of the call will also be available by telephone beginning at 12 p.m. Eastern Time today until 11:59 p.m. Eastern Time on Sept. 20, 2014. The playback number is 1-855-859-2056 from within the U.S. and Canada or 1-404-537-3406 from outside the U.S. and Canada with the eight-digit reservation number 96416227.

Rite Aid is one of the nation’s leading drugstore chains with 4,572 stores in 31 states and the District of Columbia. Information about Rite Aid, including corporate background and press releases, is available through Rite Aid’s website at www.riteaid.com.

Statements, including guidance, in this release that are not historical are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” and “will” and variations of such words and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are not guarantees of future performance and involve risks, assumptions and uncertainties, including, but not limited to, our high level of indebtedness and our ability to make interest and principal payments on our debt and satisfy the other covenants contained in our debt agreements, general economic, market and competitive conditions, our ability to improve the operating performance of our stores in accordance with our long term strategy, the impact of private and public third-party payers continued reduction in prescription drug reimbursements and efforts to encourage mail order, our ability to manage expenses and our investments in working capital, outcomes of legal and regulatory matters and changes in legislation or regulations, including healthcare reform. These and other risks, assumptions and uncertainties are described in Item 1A (Risk Factors) of our most recent Annual Report on Form 10-K and in other documents that we file or furnish with the Securities and Exchange Commission, which you are encouraged to read. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. Accordingly, you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made. Rite Aid expressly disclaims any current intention to update publicly any forward-looking statement after the distribution of this release, whether as a result of new information, future events, changes in assumptions or otherwise.

See the attached table for a reconciliation of a non-GAAP financial measure, Adjusted EBITDA to net income, the most comparable GAAP financial measure. We define Adjusted EBITDA as net income excluding the impact of income taxes (and any corresponding adjustments to tax indemnification asset), interest expense, depreciation and amortization, LIFO adjustments, charges or credits for facility closing and impairment, inventory write-downs related to store closings, debt retirements and other items (including stock-based compensation expense, sale of assets and investments and revenue deferrals related to our customer loyalty program).

RITE AID CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(unaudited)
August 30, 2014 March 1, 2014
ASSETS
Current assets:
Cash and cash equivalents $ 185,758 $ 146,406
Accounts receivable, net 954,785 949,062
Inventories, net of LIFO reserve of $1,021,670 and $1,018,581 2,922,203 2,993,948
Prepaid expenses and other current assets 131,281 195,709
Total current assets 4,194,027 4,285,125
Property, plant and equipment, net 2,006,872 1,957,329
Goodwill 73,103
Other intangibles, net 411,295 431,227
Other assets 274,047 271,190
Total assets $ 6,959,344 $ 6,944,871
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Current maturities of long-term debt and lease financing obligations $ 113,070 $ 49,174
Accounts payable 1,205,834 1,292,419
Accrued salaries, wages and other current liabilities 1,092,072 1,165,859
Total current liabilities 2,410,976 2,507,452
Long-term debt, less current maturities 5,570,583 5,632,798
Lease financing obligations, less current maturities 68,633 75,171
Other noncurrent liabilities 815,677 843,152
Total liabilities 8,865,869 9,058,573
Commitments and contingencies
Stockholders’ deficit:
Common stock 981,339 971,331
Additional paid-in capital 4,494,704 4,468,149
Accumulated deficit (7,346,553 ) (7,515,848 )
Accumulated other comprehensive loss (36,015 ) (37,334 )
Total stockholders’ deficit (1,906,525 ) (2,113,702 )
Total liabilities and stockholders’ deficit $ 6,959,344 $ 6,944,871
RITE AID CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(unaudited)
Thirteen weeks ended Thirteen weeks ended
August 30, 2014 August 31, 2013
Revenues $ 6,522,584 $ 6,278,165
Costs and expenses:
Cost of goods sold 4,628,005 4,461,804
Selling, general and administrative expenses 1,640,524 1,602,931
Lease termination and impairment charges 7,111 11,390
Interest expense 100,950 106,716
Loss on debt retirements, net 62,172
Gain on sale of assets, net (1,715 ) (1,885 )
6,374,875 6,243,128
Income before income taxes 147,709 35,037
Income tax expense 19,860 2,210
Net income $ 127,849 $ 32,827
Basic and diluted earnings per share:
Numerator for earnings per share:
Net income $ 127,849 $ 32,827
Accretion of redeemable preferred stock (26 )
Cumulative preferred stock dividends (2,772 )
Income attributable to common stockholders – basic 127,849 30,029
Add back – Interest on convertible notes 1,364
Income attributable to common stockholders – diluted $ 129,213 $ 30,029
Denominator:
Basic weighted average shares 970,664 901,992
Outstanding options and restricted shares, net 26,132 44,726
Convertible notes 24,796
Diluted weighted average shares 1,021,592 946,718
Basic and diluted income per share $ 0.13 $ 0.03
RITE AID CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(unaudited)
Twenty-six weeks ended Twenty-six weeks ended
August 30, 2014 August 31, 2013
Revenues $ 12,988,115 $ 12,571,222
Costs and expenses:
Cost of goods sold 9,290,557 8,933,870
Selling, general and administrative expenses 3,284,878 3,212,192
Lease termination and impairment charges 11,959 22,362
Interest expense 201,770 219,780
Loss on debt retirements, net 62,172
Gain on sale of assets, net (2,085 ) (7,065 )
12,787,079 12,443,311
Income before income taxes 201,036 127,911
Income tax expense 31,741 5,422
Net income $ 169,295 $ 122,489
Basic and diluted earnings per share:
Numerator for earnings per share:
Net income $ 169,295 $ 122,489
Accretion of redeemable preferred stock (51 )
Cumulative preferred stock dividends (5,504 )
Income attributable to common stockholders – basic 169,295 116,934
Add back – Interest on convertible notes 2,728 2,728
Income attributable to common stockholders – diluted $ 172,023 $ 119,662
Denominator:
Basic weighted average shares 966,997 897,993
Outstanding options and restricted shares, net 26,141 40,143
Convertible notes 24,796 24,800
Diluted weighted average shares 1,017,934 962,936
Basic income per share $ 0.18 $ 0.13
Diluted income per share $ 0.17 $ 0.12
RITE AID CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(unaudited)
Thirteen weeks ended Thirteen weeks ended
August 30, 2014 August 31, 2013
Net income $ 127,849 $ 32,827
Other comprehensive income:
Defined benefit pension plans:
Amortization of prior service cost, net transition obligation and net actuarial losses included in net periodic pension cost 660 1,262
Total other comprehensive income 660 1,262
Comprehensive income $ 128,509 $ 34,089
RITE AID CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(unaudited)
Twenty-six weeks ended Twenty-six weeks ended
August 30, 2014 August 31, 2013
Net income $ 169,295 $ 122,489
Other comprehensive income:
Defined benefit pension plans:
Amortization of prior service cost, net transition obligation and net actuarial losses included in net periodic pension cost 1,319 2,525
Total other comprehensive income 1,319 2,525
Comprehensive income $ 170,614 $ 125,014
RITE AID CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL OPERATING AND CASH FLOW INFORMATION
(Dollars in thousands, except per share amounts)
(unaudited)
Thirteen weeks ended Thirteen weeks ended
August 30, 2014 August 31, 2013
SUPPLEMENTAL OPERATING INFORMATION
Revenues $ 6,522,584 $ 6,278,165
Cost of goods sold 4,628,005 4,461,804
Gross profit 1,894,579 1,816,361
LIFO charge 1,544 23,000
FIFO gross profit 1,896,123 1,839,361
Gross profit as a percentage of revenues 29.05% 28.93%
LIFO charge as a percentage of revenues 0.02% 0.37%
FIFO gross profit as a percentage of revenues 29.07% 29.30%
Selling, general and administrative expenses 1,640,524 1,602,931
Selling, general and administrative expenses as a percentage of revenues 25.15% 25.53%
Cash interest expense 96,558 102,556
Non-cash interest expense 4,392 4,160
Total interest expense 100,950 106,716
Adjusted EBITDA 364,166 341,589
Adjusted EBITDA as a percentage of revenues 5.58% 5.44%
Net income 127,849 32,827
Net income as a percentage of revenues 1.96% 0.52%
Total debt 5,752,286 6,051,559
Invested cash 50,577 1,629
Total debt net of invested cash 5,701,709 6,049,930
SUPPLEMENTAL CASH FLOW INFORMATION
Payments for property, plant and equipment 99,291 89,944
Intangible assets acquired 20,437 23,865
Total cash capital expenditures 119,728 113,809
Equipment received for noncash consideration 1,337
Equipment financed under capital leases 2,242 7,744
Gross capital expenditures $ 123,307 $ 121,553
RITE AID CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL OPERATING AND CASH FLOW INFORMATION
(Dollars in thousands, except per share amounts)
(unaudited)
Twenty-six weeks ended Twenty-six weeks ended
August 30, 2014 August 31, 2013
SUPPLEMENTAL OPERATING INFORMATION
Revenues $ 12,988,115 $ 12,571,222
Cost of goods sold 9,290,557 8,933,870
Gross profit 3,697,558 3,637,352
LIFO charge 3,089 35,000
FIFO gross profit 3,700,647 3,672,352
Gross profit as a percentage of revenues 28.47% 28.93%
LIFO charge as a percentage of revenues 0.02% 0.28%
FIFO gross profit as a percentage of revenues 28.49% 29.21%
Selling, general and administrative expenses 3,284,878 3,212,192
Selling, general and administrative expenses as a percentage of revenues 25.29% 25.55%
Cash interest expense 192,993 211,104
Non-cash interest expense 8,777 8,676
Total interest expense 201,770 219,780
Adjusted EBITDA 646,779 686,367
Adjusted EBITDA as a percentage of revenues 4.98% 5.46%
Net income 169,295 122,489
Net income as a percentage of revenues 1.30% 0.97%
Total debt 5,752,286 6,051,559
Invested cash 50,577 1,629
Total debt net of invested cash 5,701,709 6,049,930
SUPPLEMENTAL CASH FLOW INFORMATION
Payments for property, plant and equipment 193,633 170,850
Intangible assets acquired 40,023 35,651
Total cash capital expenditures 233,656 206,501
Equipment received for noncash consideration 1,337
Equipment financed under capital leases 3,925 13,117
Gross capital expenditures $ 238,918 $ 219,618
RITE AID CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA
(In thousands)
Thirteen weeks ended Thirteen weeks ended
August 30, 2014 August 31, 2013
Reconciliation of net income to adjusted EBITDA:
Net income $ 127,849 $ 32,827
Adjustments:
Interest expense 100,950 106,716
Income tax expense 19,860 2,210
Depreciation and amortization 101,484 99,247
LIFO charge 1,544 23,000
Lease termination and impairment charges 7,111 11,390
Other 5,368 66,199
Adjusted EBITDA $ 364,166 $ 341,589
Percent of revenues 5.58% 5.44%
RITE AID CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA
(In thousands)

Twenty-six weeks ended

Twenty-six weeks ended

August 30, 2014

August 31, 2013

Reconciliation of net income to adjusted EBITDA:
Net income $ 169,295 $ 122,489
Adjustments:
Interest expense 201,770 219,780
Income tax expense 31,741 5,422
Depreciation and amortization 204,589 200,493
LIFO charge 3,089 35,000
Lease termination and impairment charges 11,959 22,362
Other 24,336 80,821
Adjusted EBITDA $ 646,779 $ 686,367
Percent of revenues 4.98 % 5.46 %
RITE AID CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
Thirteen weeks ended Thirteen weeks ended
August 30, 2014 August 31, 2013
OPERATING ACTIVITIES:
Net income $ 127,849 $ 32,827
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization 101,484 99,247
Lease termination and impairment charges 7,111 11,390
LIFO charge 1,544 23,000
Gain on sale of assets, net (1,715 ) (1,885 )
Stock-based compensation expense 5,736 3,837
Loss on debt retirements, net 62,172
Excess tax benefit on stock options (16,536 )
Changes in operating assets and liabilities:
Accounts receivable (40,906 ) (41,054 )
Inventories 9,542 (102,861 )
Accounts payable (113,074 ) 51,747
Other assets and liabilities, net 41,448 (58,955 )
Net cash provided by operating activities 122,483 79,465
INVESTING ACTIVITIES:
Payments for property, plant and equipment (99,291 ) (89,944 )
Intangible assets acquired (20,437 ) (23,865 )
Acquisition of Health Dialog and RediClinic, net of cash acquired (4,487 )
Proceeds from dispositions of assets and investments 4,229 3,088
Net cash used in investing activities (119,986 ) (110,721 )
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 1,310,000
Net proceeds from revolver 54,000 135,000
Principal payments on long-term debt (8,180 ) (1,317,593 )
Change in zero balance cash accounts (48,967 ) (4,452 )
Net proceeds from the issuance of common stock 3,887 5,519
Financing fees paid for early debt redemption (45,636 )
Excess tax benefit on stock options 16,536
Deferred financing costs paid (18 ) (16,317 )
Net cash provided by financing activities 17,258 66,521
Increase in cash and cash equivalents 19,755 35,265
Cash and cash equivalents, beginning of period 166,003 108,902
Cash and cash equivalents, end of period $ 185,758 $ 144,167
RITE AID CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)

Twenty-six weeks ended

Twenty-six weeks ended

August 30, 2014

August 31, 2013

OPERATING ACTIVITIES:
Net income $ 169,295 $ 122,489
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization 204,589 200,493
Lease termination and impairment charges 11,959 22,362
LIFO charge 3,089 35,000
Gain on sale of assets, net (2,085 ) (7,065 )
Stock-based compensation expense 9,892 8,077
Loss on debt retirements, net 62,172
Excess tax benefit on stock options (27,058 )
Changes in operating assets and liabilities:
Accounts receivable 441 6,743
Inventories 68,917 (95,926 )
Accounts payable (26,750 ) 36,200
Other assets and liabilities, net (50,058 ) (126,633 )
Net cash provided by operating activities 362,231 263,912
INVESTING ACTIVITIES:
Payments for property, plant and equipment (193,633 ) (170,850 )
Intangible assets acquired (40,023 ) (35,651 )
Acquisition of Health Dialog and RediClinic, net of cash acquired (69,793 )
Proceeds from sale-leaseback transactions 3,989
Proceeds from dispositions of assets and investments 6,102 9,698
Net cash used in investing activities (297,347 ) (192,814 )
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 1,152,293 1,310,000
Net proceeds from revolver 5,000 12,000
Principal payments on long-term debt (1,165,623 ) (1,321,971 )
Change in zero balance cash accounts (57,545 ) (5,319 )
Net proceeds from the issuance of common stock 14,791 12,263
Financing fees paid for early debt redemption (45,636 )
Excess tax benefit on stock options 27,058
Deferred financing costs paid (1,506 ) (17,720 )
Net cash used in financing activities (25,532 ) (56,383 )
Increase in cash and cash equivalents 39,352 14,715
Cash and cash equivalents, beginning of period 146,406 129,452
Cash and cash equivalents, end of period $ 185,758 $ 144,167
RITE AID CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION
RECONCILIATION OF NET INCOME GUIDANCE TO ADJUSTED EBITDA GUIDANCE
YEAR ENDING FEBRUARY 28, 2015
(In thousands, except per share amounts)
Guidance Range
Low High
Sales $ 26,000,000 $ 26,300,000
Same store sales 3.00 % 4.00 %
Gross capital expenditures $ 525,000 $ 525,000
Reconciliation of net income to adjusted EBITDA:
Net income $ 223,000 $ 333,000
Adjustments:
Interest expense 393,000 393,000
Income tax expense 55,000 45,000
Depreciation and amortization 418,000 416,000
LIFO charge 15,000
Store closing and impairment charges 50,000 46,000
Loss on debt retirement 18,000 18,000
Other 28,000 24,000
Adjusted EBITDA $ 1,200,000 $ 1,275,000
Diluted income per share $ 0.22 $ 0.33

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