Zacks_Analysts' Blog : Earnings Scorecard: Rite Aid - Analyst Blog

Rite Aid Corporation (RAD">RAD), the third largest retail drugstore in the U.S. based on revenues and number of stores, posted its second-quarter 2012 results.  Street analysts had nearly a week to ponder the news.

In the subsequent paragraphs, we cover the recent earnings announcement, analysts' estimate revisions as well as the Zacks Rank and long-term recommendation on the stock.

Quarterly Review

On December 15, 2011, Rite Aid reported a loss per share of 6 cents, which not only improved from the prior-year loss of 9 cents but also outpaced the Zacks Consensus Estimate loss of 12 cents. Growth in same-store sales and reduced selling, general & administrative (SG&A) expenses had a positive influence on its recent results.

Rite Aid's revenues came in at $6,312.6 million compared with $6,202.4 million in the prior-year period. The marginal increase of 1.8% was mostly attributable to growth in same-store sales, partially offset by store closings. Same-store sales for the quarter showed an increase of 2%. Total revenue beats the Zacks Consensus Estimate of $6,278 million.

Management's Guidance for 2012

Looking ahead, Rite Aid expects fiscal 2012 revenue to be between $25.85 billion and $26 billion based on same-store sales increase of 1.15% to 1.75%. Currently, net loss is expected to be in the range of $325 million to $440 million (or 37 cents to 50 cents per share) instead of $345 - $495 million (or 40 cents to 56 cents per share), forecasted earlier.

Agreement of Analysts

Estimate revision trend for the upcoming fourth-quarter 2012 and first-quarter 2013 portrayed positive sentiments among most of the analysts covering the stock. Over the last 7 days, 2 out of 5 analysts revisited their estimates and have upgraded the same for the upcoming fourth-quarter 2012. Moreover, for the first quarter of 2013, 1 analyst revisited its estimate and has upgraded the same.

Moreover, over the last 7 days, 2 analysts each revisited and upgraded their estimates for fiscals 2012 and 2013, respectively.

Magnitude of Estimate Revisions

The magnitude of estimate revisions for Rite Aid depicts an optimistic outlook for fourth-quarter 2012 and first-quarter 2013 and fiscals 2012 and 2013. Over the last 7 days, estimated loss for fourth-quarter 2012 and first-quarter 2013 was lowered by a penny to 15 cents and 3 cents, respectively.

Moreover, for fiscals 2012 and 2013, estimated loss has been decreased by 3 cents and 2 cents to 41 cents and 31 cents, respectively, over the last 7 days.

Our Recommendation

Generic (non-brand) drugs are less expensive but generate higher gross margin. Recent trend in the U.S. is witnessing a growing demand for generic drugs. The company is expected to expand its generic drug portfolio in order to boost its top-line as well as market share. Rite Aid has an edge over its competitors as it is the third largest retail drugstore in the U.S. based on revenues and number of stores.

Moreover,the company is in the process of various cost cutting initiatives including centralized indirect procurement of drugs, administrative headcount requirements, reducing supply chain costs, reducing debt, etc. which will certainly benefit the company to improve its bottom-line.

However, 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-branded drugs, which are less expensive but generate higher gross margin. Due to these factors, the company's same-store sales are expected to remain weak. The company has reported losses for the last fourteen consecutive quarters.

Moreover, Rite Aid's generic drug sales are negatively affected by Wal-Mart Stores Inc.'s (WMT">WMT) strategy of entering into 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 average $10 generic drug co-pay.

Rite Aid, which competes with CVS Caremark Corporation (CVS) and Walgreen Co. (WAG), currently, holds a Zacks #3 Rank, implying a short-term Hold rating on the stock. The company retains a long-term Neutral recommendation on the stock.