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Drugstore chain operator, Rite Aid Corp. (RAD - Analyst Report), posted third-quarter 2013 earnings per share of 7 cents that fared better than both the prior-year quarter loss of 6 cents as well as the Zacks Consensus Estimate of a loss of 4 cents a share. The positive earnings in the quarter are mainly attributed to the rise in adjusted EBITDA and lower LIFO charge. The company continues to benefit from eight straight quarters of improved adjusted EBITDA and same store prescription count.

Quarterly Details

Rite Aid's revenue of $6,237.8 million declined 1.2% compared with $6,312.6 million in the prior-year period. The decline in the top-line was attributable to the effect of introduction of low cost generics on pharmacy same store sales and shuttering of outlets. However, total revenue swept past the Zacks Consensus Estimate of $6,209 million. Same-store sales were down 1.5% compared to the year-ago period, driven by lower pharmacy sales, offset slightly by a rise in front-end sales.

During the quarter, front-end sales improved 1.1%, while pharmacy sales decreased 2.7% due to the introduction of new generic drugs that adversely impacted the sales by 924 basis points. Besides, prescriptions filled at comparable stores augmented 3.6% from the year-ago quarter, including gains from the incremental prescriptions filled due to the Walgreens/Express Scripts dispute. Prescription sales made for about 67.8% of total drugstore sales, while third party prescription revenue represented was 96.5% of pharmacy sales.

Rite Aid's gross profit elevated 8.4% year over year to $1,811.3 million, with gross margin expanding 250 basis points to 29.0%. SG&A expenses as a percentage of sales expanded 70 bps to 25.8%.

Rite Aid reported adjusted EBITDA of $295.3 million, up 33.3% from $221.5 million in the prior-year quarter, gaining from higher front-end sales, favorable script trends that strengthened prescription count growth and increased Pharmacy gross margin driven by new generic introductions.

Balance Sheet and Cash Flow

At quarter-end, Rite Aid had cash and cash equivalents of $263.4 million and long-term debt of $5,827.9 million. The company ended the third quarter with $1.2 billion of liquidity, consisting of $1.075 billion in credit facility and $167 million of invested cash. There was no borrowing outstanding under its $1.175 billion revolver credit facility while the company had $118 million of outstanding letters of credit.

Cash flow for operating activities for thirty-nine weeks ended on Dec 1, 2012, was $599.2 million, while the company expended nearly $288.7 million (gross) towards capital expenditures.

Changes to Rite Aid’s stores continued as it relocated 3 stores, remodeled 114 stores and closed 10 stores during the third quarter. The company also completed wellness remodels at about 687 stores as of the end of the quarter. As of Dec 1, 2012, Rite Aid operated about 4,633 stores.

Guidance

Rite Aid revised its fiscal 2013 revenue forecast to range to $25.150 billion – $25.300 billion, from previous guidance of $25.1 billion – $25.4 billion, based on same-store sales ranging from a decline of 0.9% to a decrease of 0.3% year over year.

Further, the company upped its fiscal 2013 adjusted EBITDA forecast to $1.050 – $1.075 billion from $950 – $1.025 billion guided previously. Currently, net loss/income is expected to be in the range of a loss of $38 million to a net income of $33 million, while the company earlier projected a net loss in the range of $965 – $1,025 million. Consequently, the company’s loss/earnings per share projections range between a loss per share of 5 cents and earnings per share of 3 cents, up from the previous guidance of loss per share between 9 cents to 23 cents.

In fiscal 2013, the company now expects to incur capital expenditure of $360 million, up from $300 million guided earlier, mostly on store remodels and prescription file buys.

The company competes with retail drugstore chains, independently owned drugstores, supermarkets, mass merchandisers, discount stores, dollar stores, and mail order pharmacies. Competitive pressures in the industry are unlikely to subside with continued consolidation, new store openings, and increased mandatory mail orders. The company's direct competitors are Walgreen Co. (WAG - Analyst Report) and CVS Caremark Corporation (CVS - Analyst Report).

Currently, Rite Aid maintains a Zacks #3 Rank, which translates into a short-term Hold rating. Moreover, we retain a long-term Neutral recommendation on the stock.

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