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Rite Aid Corporation (RAD - Analyst Report) – the third-largest retail drugstore in the U.S. based on revenues and number of stores – is scheduled to report its third-quarter 2013 financial results on Thursday, Dec 20, 2012. The Zacks Consensus Estimate projects a loss of 4 cents per share for the third quarter on revenues of $6.209 billion.

With respect to earnings surprises, Rite Aid has a history of missing as well as topping the Zacks Consensus Estimate in the trailing four quarters. The company’s surprise history ranges from negative 41.7% to positive 125.0%, with an average surprise of positive 42.7%.

Looking Back at Second-Quarter 2013

The drugstore chain operator posted a loss per share of 5 cents for second-quarter 2012, which was better than the prior-year loss of 11 cents a share as well as the Zacks Consensus Estimate of a loss of 8 cents a share.

The company’s results mainly benefited from seven straight quarters of improved adjusted EBITDA and same store prescription count. However, this was offset by lower LIFO, store closing & impairment and depreciation & amortization charges.

Rite Aid's revenue of $6.231 billion inched down 0.7% compared with $6.271 billion in the prior-year period. The dip in revenue was attributed to the decline in pharmacy same-store sales as well as store closings. However, total revenue edged past the Zacks Consensus Estimate of $6.200 billion. Same-store sales for the quarter remained flat compared to the year-ago period, driven by a rise in front-end sales, offset by lower pharmacy sales.

Fiscal 2013 Outlook

Rite Aid lowered its fiscal 2013 revenue forecast to $25.1–$25.4 billion range based on same-store sales ranging from a decline of 1.0% to an increase of 0.25% year over year. The lowered sales and comps guidance is mainly due to projected negative impact of 650 basis points in the new generic introductions on pharmacy same store sales.

Based on the above assumptions, the company projects net loss in the range of $69 – 196 million, with loss per share ranging between 9 cents and 23 cents.

Third Quarter Sales Results So Far

Rite Aid’s quarterly comps (13 weeks ended Dec 1) were down 1.5%, with sales declining 2% to $6.213 billion in the quarter. The quarterly comps were mainly pulled down by a 2.7% decline in Pharmacy comps, somewhat offset by a 1.1% increase in front-end comps. Moreover, Prescription count at comparable stores rose 3.6% during the quarter.

During the quarter, Prescription sales accounted for about 67.8% of total drugstore sales, while third party prescription sales represented 96.5% of pharmacy sales.

Agreement of Estimates

In the last 30 days, 1 out of 5 estimates have been revised downward for the third quarter, while none of the estimates were revised in the opposite direction. Moreover, no movement in estimates has been noticed over the last 7 days for the same quarter.

Further, estimates for fiscal 2013 have not been revised in either direction over the last 7 and 30 days.

Magnitude of Estimate Revisions

Negative earnings revisions by an analyst in the last 30 days increased the Zacks Consensus Estimate of a loss by a penny for the third quarter to a loss of 4 cents. For fiscal 2013, the Zacks Consensus Estimate remains unchanged at a loss of 16 cents per share, over the last 7 and 30 days.

Our Recommendation

Of late, Rite Aid has also been focusing on improving store-level performance, as part of its turnaround strategy. Apart from initiating programs like the Wellness+ program for diabetes and the Flu Immunization program, the company is implementing various cost-cutting initiatives to improve near-term as well as long-term profitability.

Rite Aid is working toward expanding its generic drug portfolio in order to boost its top line as well as market share. Generally, generic (non-brand) drugs are less expensive, but generate higher gross margin. Rite Aid’s positioning as the third largest retail drugstore in the U.S. – based on revenues and number of stores – provides it an edge over its competitors to accomplish this goal.

However, Wal-Mart Inc.’s (WMT - Analyst Report) foray into the retail generic drug market is exerting pressure on Rite Aid’s pharmacy margin. Moreover, an increased debt burden resulting from the acquisition of Brooks Eckerd has limited of its ability to generate additional funds.

Rite Aid currently holds a Zacks #3 Rank, implying a short-term Hold rating on the stock. We maintain our long-term Neutral recommendation on the stock.

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