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Rite Aid Q1 Sees Soft Front End Sales

Drug store chain also starts off fiscal 2024 with higher-than-expected shrink
Marian Zboraj, Progressive Grocer
Rite Aid
Rite Aid Q1 results were driven by strong script growth, solid pharmacy margins and early progress with turnaround program, which offset underperformance on front-end sales.

Despite positive trends in pharmacy for first quarter, Rite Aid’s front end sales proved to be more challenging. For its fiscal quarter ended June 3, the retail chain’s same-store sales increased 8.4% over the prior-year period, consisting of a 13.3% increase in pharmacy sales, partly offset by a 4.4% decrease in front end sales. Front end same-store sales, excluding cigarettes and tobacco products, decreased 3.8%.

“In first quarter, our transactions on a comp-store basis were down 7.9% with the clients in selected health and consumables categories,” said Interim CEO Elizabeth "Busy" Burr during the company’s earnings call. “We believe this was due to three key drivers: Respiratory from allergy, cough, cold and flu wasn't as strong as last year; we faced supply chain challenges related to the supplier transition in many of our perishable consumer goods; and shrink continued to be a significant headwind. We're working with urgency to address these drivers to improve front end performance. Specifically, we recently completed the transition of vendors for perishable consumable items, which we believe should alleviate the pressures we saw in the category in first quarter.”

Rite Aid is also investing in its owned brands, a key area of focus for the company. Earlier this month, it launched Ryshi, an exclusive collection of high-quality, clean beauty and personal care essentials at accessible price points. “We plan to accelerate the rollout of owned brands like these with 81 new items launched year to date and 208 new items scheduled to launch in the remainder of this year,” noted Burr. “We're also collaborating with our supplier partners to ensure we're on track to bring innovative and on-trend products to our consumers.”

Meanwhile, Rite Aid’s shrink is about $9 million over last year, according to EVP and CFO Matt Schroeder. Shrink has become an industry-wide problem. To help lower Rite Aid’s sizable number, the company has made decisions to close stores in high-shrink areas and invest in ways to secure product.

Rite Aid also hired new leadership to address loss prevention. Chad McIntosh recently joined the company as interim VP of asset protection. He brings more than 40 years of experience as a strategic partner with corporate leadership. McIntosh most recently served at Bloomingdale’s as VP of asset protection and risk management. His prior retail loss prevention experience includes Neiman Marcus, The Home Depot, Polo Ralph Lauren and Macy's, Inc.

“We're really trying to think of some innovative ideas for a problem that's always plagued the retail industry. But it's manifested itself, I think, in a different way than it has historically over the last couple of years," observed Schroeder. "So I don't think there's a silver bullet to solving this, but we're excited about the new leader we've brought in. We think he's going to bring some innovative ideas to help us tackle those problems.”

For Q1, Rite Aid also reported a net loss of $306.7 million, or a $5.56 loss per share, and adjusted net loss of $40.1 million, or a 73-cent loss per share. Adjusted EBITDA came in at $92 million versus last year's $100 million.

Revenues for the quarter were $5.65 billion, down from $6.01 billion in the prior year's quarter, largely due to the reduction in the company's Prescription Drug Plan (PDP) membership and the loss of commercial clients at pharmacy benefit management services provider Elixir, a wholly owned subsidiary of Rite Aid. The reduction in revenues for the first quarter was partly offset by growth in retail pharmacy segment revenues, driven by a rise in pharmacy sales.

The retail pharmacy segment's adjusted EBITDA was $70.0 million, or 1.6% of revenues, for the first quarter, compared with last year’s first-quarter adjusted EBITDA of $73.7 million, or 1.7% of revenues. The decline in adjusted EBITDA was due to a decrease in adjusted EBITDA gross profit of $8.4 million, partly offset by decreased adjusted EBITDA selling, general and administrative (SG&A) expenses of $4.8 million. SG&A expenses benefited from lower occupancy and other operating costs due to store closures and cost control initiatives.

“We are ahead of our plan for first quarter despite headwinds that include soft front end sales in the retail pharmacy segment and higher-than-expected medical loss ratio at Elixir Insurance,” said Burr. “We offset these headwinds with strong script growth, [a] better-than-expected recovery rate and generic drug settlements. We also made good progress on our turnaround, particularly in our initiatives to control SG&A spend, grow scripts and reduce drug purchasing costs. The performance acceleration model we put in place at the end of last year is gaining momentum and traction, and we continue to find opportunities to drive growth, increase efficiency and deliver positive results as we execute.

In regard to its fiscal 2024 outlook, Rite Aid is reducing total company adjusted EBITDA guidance by $10 million to be between $330 million and $360 million. Pharmacy services-segment adjusted EBITDA expectations are being lowered by $10 million to be between $90 million and $100 million, due to higher drug costs and a higher medical loss ratio at Elixir Insurance. Retail pharmacy-segment adjusted EBITDA remains unchanged and is expected to be between $240 million and $260 million, which is a result of tougher front end sales trends balanced with cost savings.

Capital expenditures are now expected to be approximately $175 million, with a focus on investments in technology, prescription file purchases and distribution center automation.

Employing more than 6,300 pharmacists, Philadelphia-based Rite Aid operates 2,300-plus retail pharmacy locations across 17 states. The company is No. 22 on The PG 100, Progressive Grocer’s 2023 list of the top food and consumables retailers in North America.

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