Drugstore chain Rite Aid Corp. (NYSE: RAD) released earnings on Thursday, and unfortunately the results weren’t what the market was looking for. Rite Aid stock fell 5% in early trading, as Rite Aid missed analyst estimates on same-store sales, a critical measure used to analyze retailers which calculates sales at stores open at least one year.
Not only that, Rite Aid also lowered its profit outlook for the remainder of the year. Here’s what investors need to know about Rite Aid’s results.
Rite Aid earned $18.8 million in profit last quarter, or 2 cents per share. Profits fell significantly from the same period last year, when Rite Aid earned 4 cents per share. Rite Aid’s earnings fell short of the 3 cents per share expected by analysts, according to Thomson Reuters I/B/E/S.
Same-store sales rose 2.9%, again missing expectations. The result came in below the 3.8% same-store sales growth expected for last quarter. The company was hurt by the introduction of new generic drugs.
Going forward, Rite Aid expects fiscal 2016 earnings of 14 cents to 22 cents per share. This is a meaningful reduction from management’s prior forecast for 19 cents to 27 cents per share. Analysts expect 24 cents per share in full-year earnings, according to FactSet.
But there is a caveat here, which is that most of the reduction in earnings is due to the integration of pharmacy benefits manager EnvisionRx, which Rite Aid acquired earlier this year. In the quarter, Rite Aid booked $36 million in pre-tax costs tied to its pending buyout.
A Strategic Shift
Still, the acquisition makes a lot of sense for Rite Aid. In an industry that is rapidly consolidating, with Walgreen Boots Alliance (NASDAQ: WBA) conducting a mega-merger this year, Rite Aid needs to keep up with the competition.
This is why, over the past year, Rite Aid has shifted its business focus into new, higher-growth areas. For example, the company is placing bigger emphasis on health and nutritional products, as the industry expands more strongly into the health and wellness sector.
Another key focus area going forward will be managing pharmaceutical costs. Rite Aid is the No. 3 drugstore chain by sales in the United States. Prescription drug sales account for about 69% of its total drugstore sales. Acquiring a pharmacy benefits manager is a vital way to keep costs under control, which is a critical task since prescription drugs costs are rising at a concerning rate.
Moreover, the merger is likely to help the company fill more prescriptions for specialty drugs and other complex medicines. These products are often more expensive medicines, and are a growing source of revenue for drugstore retailers.
Steady Sales Forecasts
Rite Aid maintained its forecast for sales and same-store sales. Fiscal 2016 drugstore sales are expected to clock in at $26.9 billion-$27.4 billion, with same-store sales expected to grow 2.5% to 4.5%.
It’s at least a good sign that the company kept its sales forecasts steady. Costs will rise over the end of this year, which explains why the earnings forecast was cut. But those costs should ease once the acquisition is fully integrated. Rite Aid expects the deal to close by early next month.
Investors shouldn’t be overly concerned about the stock dropping after earnings. Rite Aid’s strategic plan remains firmly on track, and better operating performance should follow as a result. Plus, Rite Aid shares had performed extremely well leading up to earnings. The stock has risen about 19% since the beginning of the year, and 25% over the past year. Therefore, a little bit of profit-taking is nothing to be alarmed with.
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