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Rite Aid Corp. (RAD - Analyst Report) posted third-quarter fiscal 2014 earnings of 4 cents per share, which was in line with the Zacks Consensus Estimate. However, results were below the comparable year-ago quarter figure of 7 cents per share primarily due to an increase of 7.6% in diluted weighted average shares.

However, in dollar terms, net income increased 15.5% year over year to $61.9 million primarily driven by higher sales, effective cost management and lower interest expenses.

Rite Aid’s earnings per share for the quarter included a negative impact of 3 cents related to redemption of convertible preferred stock. Notably, the company’s prior year quarter results included a benefit of 2 cents per diluted share related to the settlement of interchange fee litigation. Excluding one-time items, Rite Aid’s adjusted earnings for both the periods came in at 7 cents per share.

Quarterly Details

Rite Aid's third-quarter revenues rose 1.9% year over year to $6,357.7 million and surpassed the Zacks Consensus Estimate of $6,328.0 million. The top-line growth was driven by improved comparable-store sales. Comparable-store sales in the quarter were up 2.3% due to rise in pharmacy sales, slightly offset by weak front-end sales.

During the quarter, pharmacy sale increased 3.5% despite having a negative impact of 88 basis points (bps) due to the introduction of new generic drugs. Additionally, prescriptions filled at comparable stores inched up 0.7% year over year. Prescription sales constituted about 68.6% of total drugstore sales, while third-party prescription revenues accounted for 97.1% of the pharmacy sales. However, Rite Aid’s front-end sales dropped 0.2% in the reported quarter.

Rite Aid's gross profit dipped 0.6% year over year to $1,800.7 million, with gross margin contracting 70 bps to 28.3% primarily due to due to higher cost of goods sold. Selling, general and administrative (SG&A) expenses increased 1.2% to $1,632.3 million while as a percentage of sales, it contracted 10 bps to 25.7% primarily due to effective cost management.

Rite Aid reported adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $282.3 million, down 4.4% from $295.3 million in the prior-year quarter. As a percentage of sales, it fell 30 bps to 4.4%. However, the prior-year period figure included a benefit of $18.1 million related to the settlement of interchange fee litigation. Excluding that, this year’s adjusted EBITDA increased 1.8%. This drugstore chain company, which competes with China Nepstar Chain Drugstore Ltd. (NPD - Snapshot Report), has witnessed 12 straight quarters of improved adjusted EBITDA.

Balance Sheet & Cash Flow

At quarter-end, Rite Aid had cash and cash equivalents of $183.2 million and long-term debt (excluding current maturities) of $5,825.8 million. The company ended the quarter with $1.1 billion of liquidity. Rite Aid had $590.0 million of outstanding debt under its $1.795 billion senior secured credit facility and $88.0 million of outstanding letters of credit.

During the first three quarters of fiscal 2014, the company generated a cash flow of $247.4 million from operating activities and incurred capital expenditure of nearly $336.5 million (gross). For fiscal 2014, the company expects capital expenditure of $415.0 million.

Store Update

Rite Aid stores continue to undergo renovation with 94 outlets being remodeled in the third quarter. Additionally, 4 stores were relocated. At the quarter-end, the company, overall, completed wellness remodels at about 1,117 stores. As of Nov 30, 2013, Rite Aid operated 4,595 stores across 31 states and the District of Columbia.

Revised Fiscal 2014 Guidance

Looking ahead, the company has lowered its fiscal 2014 outlook based on a possible rise in pharmaceutical costs, lower benefit from new generic drugs as most of these drugs are included within the company’s portfolio and persistent reimbursement rate pressure.

This spread negative sentiment among investors and led to a 10.2% fall in the company’s share price.

Rite Aid now expects sales for fiscal 2014 to come in between $25.3 billion and $25.425 billion, down from the previous range of $1,240.0–$1,300.0 million. Comparable-store sales for the fiscal is anticipated to come in the range of 0.35% to 0.85%. Furthermore, Rite Aid lowered its fiscal 2014 earnings guidance range to 17–23 cents per share compared with 18–27 cents projected earlier. Currently, the Zacks Consensus Estimate stands at 22 cents per share, which could witness a downward revision following the company’s reduced guidance.

Moreover, Rite Aid, which trails only Walgreen Co. (WAG - Analyst Report) and CVS Caremark Corp. (CVS - Analyst Report) in size, trimmed its adjusted EBITDA guidance range to $1,250.0–$1,280.0 million from the prior forecast of $1,240.0–$1,300.0 million.

Currently, Rite Aid carries a Zacks Rank #3 (Hold).

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