Rite Aid Treading Water as Regulators Examine Acquisition

Rite Aid Corp. (NYSE: RAD) reported third-quarter fiscal 2016 results before markets opened Thursday. The drug store chain posted quarterly diluted earnings per share (EPS) of $0.06 on revenues of $8.2 billion. In the same period a year ago, Rite Aid reported EPS of $0.10 on revenue of $6.7 billion. Third-quarter results also compare to the Thomson Reuters consensus estimates for EPS of $0.06 and $8.18 billion in revenue.

The company said that it would not update its guidance again for fiscal 2016 or issue guidance for fiscal year 2017 while the transaction with Walgreens Boots Alliance Inc. (NASDAQ: WBA) is being reviewed. Rite Aid said it expects the transaction to close in the second half of calendar year 2016. Although the companies are confident that the merger will occur, antitrust concerns may be intensifying.

At the end of its previous quarter, Rite Aid forecast full fiscal year 2016 revenue in a range of $30.8 billion to $31.1 billion, with drugstore sales in a range of $26.7 billion to $27 billion. Same-store sales were expected to rise in range of 1.5% to 2.5% and EPS was forecast in a range of $0.12 to $0.19. The guidance included the acquisition of Envision Rx but did not include the transaction with Walgreens.

The company attributed the lower net income to lower income tax expense in the prior year as a result of an adjustment to the company’s deferred tax valuation allowance of $45.9 million, an increase in interest and amortization expense related to the company’s purchase of EnvisionRx and transaction expenses of $9.8 million related to the company’s pending merger with Walgreens. Net income dropped from $104.8 million in the year-ago third quarter to $59.5 million.

Adjusted EBITDA increased $40.4 million to $373.2 million or 4.6% of revenues for the third quarter, compared to $332.8 million or 5% of revenues for the third quarter of 2015.
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Same-store sales rose 0.9% in the quarter. Front-end sales rose 0.3% and pharmacy sales were up 1.2%, including a negative impact of 252 basis points due to new generic drug introductions. The number of prescriptions filled at same stores rose 0.2%, and prescription sales accounted for 69.9% of total sales. Third-party prescription revenue totaled 97.9% of pharmacy sales.

Shares traded up about 1.3% in premarket trading Thursday, at $8.00 in a 52-week range of $5.88 to $9.47. Thomson Reuters had a consensus analyst price target of $9.15 before the results were announced. Walgreens is paying $9.00 a share in its acquisition of Rite Aid.