Rite Aid cost cuts help narrow 3rd-quarter loss

AP News
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Posted: Dec 17, 2009 2:59 PM

Rite Aid Corp.'s third-quarter loss narrowed as the drugstore operator cut expenses, but the company said Thursday cost-conscious consumers and price-slashing competitors continued to weigh on its results.

The Camp Hill, Pa., company said sales in the front end of its stores, which includes non-pharmacy items like food and cosmetics, fell 2.5 percent due to the recession.

"The economy, the 10 percent unemployment rate and the increasingly competitive environment continued to hurt front end sales as customers searched for bargains and cut back on discretionary items," Chairman and CEO Mary Sammons said.

She said the behavior shift affected all major retail events in the third quarter, including back-to-school shopping, Halloween and Black Friday sales.

Rite Aid lost $86.1 million after preferred dividends, or 10 cents per share, in the three months that ended Nov. 28. That's down from a loss of $248.7 million, or 30 cents per share, in the same quarter last year.

Revenue fell 2 percent to $6.35 billion from $6.47 billion.

The results beat Wall Street expectations, sending Rite Aid shares up 17 cents, or 12.8 percent, to $1.50 in afternoon trading. The stock has ranged from 20 cents to $2.35 over the past year.

The drugstore operator has worked to improve store performance and cut debt. Rite Aid said it trimmed selling, general and administrative expenses 6 percent, to $1.6 billion in the fiscal third quarter from $1.7 billion in the same quarter last year.

"The victory of the quarter was impressive cost controls," said Deutsche Bank analyst Bill Dreher Jr. Deutsche owns Rite Aid securities and does investment banking work for the company.

Rite Aid officials attributed the decrease in costs in part to better management of labor expenses and lower utility and maintenance expenses.

The company also recorded an income tax benefit of $4.3 million during the quarter, compared with income taxes of $29.5 million paid in the year-ago quarter.

Rite Aid closed 14 stores in the latest quarter, leaving the company with 4,801 at the end of November. Company officials said they have closed 116 stores so far this year and plan to shut 134 in fiscal 2010.

While the company reduced expenses, sales at stores open at least a year declined less than 1 percent. The metric is seen as a key indicator of retailer health because it measures growth from existing locations rather than newly opened ones.

"Without meaningful sales improvement we may see a return to more challenging times ahead for operations," UBS analyst Neil Currie and associate analyst Doug Cooper wrote in a note to investors.

The company has faced intense competition, especially with promotions, according to Deutsche's Dreher. He said Wal-Mart, in particular, has been "very loud in banging a promotional drum, and Rite Aid's had to participate in that."

Promotions that force companies to lower prices cut into their profit margins.

Rite Aid also said the number of prescriptions filled, which accounts for 69 percent of total drugstore sales, rose 1.5 percent in the quarter. But an increase in generic drugs hurt sales.

Rite Aid also narrowed its fiscal 2010 outlook Thursday. The company now expects to post a loss between $413 million and $542 million, or 50 cents to 66 cents per share.

In September, the company forecast a full-year loss of $390 million to $615 million, or 48 cents to 74 cents per share.

Rite Aid expects total sales of between $25.6 billion and $25.9 billion.

Analysts predict a loss of 57 cents per share on $25.72 billion in revenue for fiscal 2010.

Rite Aid is the nation's third-largest drugstore operator, trailing Walgreen Co. and CVS Caremark Corp.