Rite Aid Misses Street Views, Hurt by Reimbursement Rates, Generic Drugs

By Anne Steele 

Rite Aid Corp.'s earnings fell below estimates in the latest quarter as pharmacy reimbursement-rate pressure and generic drugs dragged the top line to an unexpected decline.

Chief Executive John Standley pointed to a "difficult operating environment created by the extended duration" of the merger process with Walgreens Boots Alliance Inc., but highlighted strength in the front-end business and continued growth at its pharmacy benefit manager.

Same-store sales fell 3.4% in the quarter from a year ago as a 0.4% slip in retail sales was further weighed on by a 4.7% decrease in pharmacy sales. The company said new generic drugs, which are generally cheaper and less profitable, were responsible for much of the pharmacy decrease. Prescription revenue, which make up 98% of pharmacy sales, fell 2.4%.

"Reimbursement rates remain our largest challenge and we expect that to continue for the remainder of the fiscal year," said Mr. Standley.

In all for the November quarter, Rite Aid reported a profit of $15 million, or a penny a share, compared with $59.5 million, or 6 cents, a year prior. Excluding certain items, per-share earnings fell to 2 cents a share from 8 cents a year earlier.

Revenue edged 0.8% lower to $8.09 billion.

Analysts polled by Thomson Reuters had forecast adjusted earnings of 4 cents on $8.23 billion in revenue.

The third-largest drugstore chain agreed last October to merge with No. 1 Walgreens in a $9.4 billion deal. Earlier this week, under pressure from antitrust regulators, the merger partners said they agreed to sell 865 Rite-Aid locations to Fred's Inc. , leaving the proposed combination with just under 12,000 stores. The deal is expected to close in early 2017 -- pushed back from an initial deadline as the companies continue discussions with the Federal Trade Commission.

Rite Aid, like its rivals, has expanded into the health and wellness sector. During the quarter it remodeled 95 wellness stores, which offer organic food and natural personal-care options and feature consultation rooms for discussions with pharmacists. On Thursday, Mr. Standley said the company will remain focused on improving clinical services like immunizations and medication adherence, converting additional stores.

In February 2015, Rite Aid agreed to buy pharmacy-benefit manager Envision Pharmaceutical Services for about $2 billion. That helped revenue in its pharmacy services segment rise 9.7% to $1.65 billion. But revenue in its retail pharmacy segment -- a much larger contributor to the top line -- fell 3.1% to $6.54 billion.

Rite Aid shares, which have gained 8% so far this year, edged 0.3% lower premarket to $8.45.

Write to Anne Steele at [e-mail]

(END) Dow Jones Newswires

December 22, 2016 08:22 ET (13:22 GMT)

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