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Driven by higher adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) and lower interest expenses, drugstore chain operator Rite Aid Corp. (RAD - Analyst Report) posted a quarterly profit for the fourth consecutive quarter. The company’s second-quarter fiscal 2014 adjusted earnings of 8 cents per share fared better than the Zacks Consensus Estimate of loss of 4 cents and the year-ago comparable quarter’s loss of 5 cents.

Rite Aid’s adjusted earnings per share for the reported quarter does not include a charge of 7 cents from a loss on debt retirement, and a recovery of 2 cents related to settlement of the prescription drug antitrust case. Including the one-time items, Rite Aid’s earnings for the quarter came at 3 cents per share.

This Zacks Rank #3 (Hold) company, which competes with China Nepstar Chain Drugstore Ltd. (NPD - Snapshot Report), has witnessed 11 straight quarters of improved adjusted EBITDA. Better-than-expected quarterly results prompted management to raise its adjusted EBITDA and earnings outlook for fiscal 2014.

Consecutive quarters of positive earnings and an upbeat guidance boosted shareholders’ confidence, which was reflected in the company’s share prices. The stock hit a new five-year high of $4.65 yesterday, before closing at $4.58, approximately 23.5% higher than the previous day’s closing price.

Quarterly Details

Rite Aid's second-quarter revenues inched up nearly 0.8% year over year to $6,278.2 million and surpassed the Zacks Consensus Estimate of $6,265.0 million. The year-over-year increase in the top line was driven by improved comparable-store sales, partially offset by store closures. Comparable-store sales in the quarter were up 1.0% due to rise in pharmacy sales, slightly offset by weak front-end sales.

During the quarter, pharmacy sale increased 1.7% despite having a negative impact of 249 basis points (bps) due to the introduction of new generic drugs. Additionally, prescriptions filled at comparable stores remained flat year over year. Prescription sales constituted about 67.9% of total drugstore sales, while third-party prescription revenues represented 97.0% of the pharmacy sales. However, Rite Aid’s front-end sales dipped 0.3% for the reported quarter.

Rite Aid's gross profit increased 6.2% year over year to $1,816.4 million, with gross margin expanding 148 bps to 28.9%, primarily driven by the launch of new generic drugs. Selling, general and administrative (SG&A) expenses decreased 0.9% to $1,602.9 million while as a percentage of sales it contracted 44 bps to 25.5% primarily due to effective cost management.

Rite Aid reported adjusted EBITDA of $341.6 million, up 56.2% from $218.7 million in the prior-year quarter. As a percentage of sales, it improved 193 bps to 5.4%, gaining from higher gross margin and lower SG&A expenses as a percentage of revenues.

Balance Sheet and Cash Flow

At quarter-end, Rite Aid had cash and cash equivalents of $144.2 million and long-term debt (excluding current maturities) of $5,915.8 million. The company ended the quarter with $1,029.0 million of liquidity. Rite Aid had $677.0 million of outstanding debt under its $1.795 billion senior secured credit facility and $90.0 million of outstanding letters of credit.

During the first half of fiscal 2014, the company generated a cash flow of $263.9 million from operating activities and incurred capital expenditure of nearly $206.5 million (gross). For fiscal 2014, the company expects capital expenditure of $400.0 million.

Store Update

Rite Aid stores continue to undergo renovation with 109 outlets being remodeled in the second quarter. Additionally, 5 stores were relocated. At the quarter-end, the company, overall, completed wellness remodels at about 1,019 stores.

Moreover, during the quarter, the company closed twelve stores and acquired one store bringing the total store count as of Aug 31, 2013 to 4,604 stores.

Fiscal 2014 Guidance

On the back of better-than-expected first-half financial results and the anticipation of a stronger second-half performance than projected earlier, management raised its fiscal 2014 guidance. However, Rite Aid cautioned that the performance may be subdued for the remainder of fiscal 2014 on a year-over-year basis comparison due to a possible rise in pharmaceutical costs, lower benefit from new generic drugs – since most of these drugs are included within the company’s portfolio – and persistent reimbursement rate pressure.

For fiscal 2014, the company raised its adjusted EBITDA guidance range to $1,240.0–$1,300.0 million from $1,090.0–$1,175.0 million projected earlier. Furthermore, Rite Aid raised its fiscal 2014 earnings guidance range to 18–27 cents per share, up from its previous guidance of 1–16 cents. Currently, the Zacks Consensus Estimate stands at 14 cents per share, which could witness an upward revision following the company’s upbeat guidance.

Moreover, Rite Aid, which trails only Walgreen Co. (WAG - Analyst Report) and CVS Caremark Corp. (CVS - Analyst Report) in size, raised its lower-end sales guidance to $25.1 billion from $24.9 billion projected earlier, while the upper-end of the guidance range $25.3 billion remain unchanged. Rite Aid also narrowed its comparable-store sales forecast for the fiscal to the range between a decline of 0.5% and a rise of 0.5% from the earlier range of a decline of 0.75% and an increase of 0.75%.

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