Whether or not Rite Aid (RAD) did well last quarter is largely a matter of perspective.
Some owners of RAD stock will see a rising top line and see the glass as half full, while other Rite Aid stockholders will see a significantly smaller GAAP bottom line on the Rite Aid earnings and see the glass as half empty.
The truth is, as usual, somewhere in the middle.
Further muddying the waters are expenses related to Rite Aid’s recent acquisition of benefits manager EnvisionRx — a $2 billion deal — and a significant wave of debt-retirement completed last quarter, taking some rather expensive interest payments off the books.
Either way, a closer look at the numbers (adjusted and unadjusted) is in order.
Rite Aid Earnings
In its second quarter of fiscal 2016, which ended in late August, Rite Aid earned $21.5 million, or two cents per share, on revenues of $7.7 billion.
The top line was bigger than the year-ago sales figure of $6.52 billion, largely thanks to the accretive benefit of the EnvisionRx acquisition, but the bottom line was considerably less than the 13 cents per share of RAD stock, or $127.8 million, the company earned in Q2 of fiscal 2015.
Either way, last quarter’s earnings fell well short of expectations. Analysts were calling for a profit of four cents per share of Rite Aid stock — though the drugstore chain did manage to top revenue estimates of $7.57 billion.
And yet, the bulk of the disappointment stemmed from several unusual or one-time expenses buried in the middle of the Rite Aid earnings statement.
The Rest of the Story
From a revenue perspective, there can be no complaints regarding the upside of the EnvisionRx acquisition. The top line grew 18%, and it wasn’t just the accretive top line that EnvisionRx impacted. The company also saw a 2.1% improvement in same-store sales … mostly driven by pharmacy sales.
But how does a company that boosts its top line to the tune of 18% manage to shrink its bottom line from $127.8 million to only $21.5 million?
Turns out, it’s not that hard to do.
A big piece of the shrinking bottom line was the result of a $33.2 million loss incurred on the retirement of some of Rite Aid’s senior debt, which was costing the company 8% per year. Stripping that out of the picture, Rite Aid stock would have earned $54.7 million, or roughly five cents per share of RAD stock.
The company also faced bigger-than-usual depreciation expenses, most of which were related to the EnvisionRx deal. Although Rite Aid didn’t break it down into the details, we do know that the depreciation/amortization line of the income statement grew from $101.5 million in the comparable quarter a year ago to $127.7 million last quarter. That added $26.2 million in expenses … expenses that grew at a greater pace than sales.
Also, interest expenses themselves grew from $100.9 million to $115.4 million last quarter, taking another $15 million or so off the bottom line.
Without those additional costs alone, Rite Aid would have earned something closer to $96 million in Q2 of the current fiscal year.
As owners of RAD stock are learning the hard way, growth can be very expensive.
But still, EBITDA fell from $364.2 million (or 5.6% of sales) a year ago to only $346.8 million (or 4.5% of sales) last quarter. Doesn’t that point to operational problems above and beyond the acquisition and debt-retirement?
Not really.
It has likely been forgotten, but in the comparable quarter a year ago, EBITDA was boosted by $40 million due to the transition to a new drug-purchase drug-delivery agreement. Taking that benefit out of the equation, Rite Aid only posted an EBITDA of $324.2 million in its second fiscal quarter of last year, meaning EBITDA effectively grew by about 7% last quarter.
Bottom Line
All things considered, last quarter was actually a fairly good one for Rite Aid … so why is RAD stock down more than 10% following the earnings report?
Most plausibly, it was the reeled-in revenue and same-store sales outlooks.
Though it would take some digging, most investors — professional and amateur alike — will do the same math done above and sooner or later recognize the drugstore chain is doing reasonably well now that the EnvisionRx integration has been completed.
The revised full-year outlook, however, was less than inspiring.
Now the company is looking for 2016 sales of between $26.7 billion and $27.0 billion, versus a prior estimated range of $26.9 billion and $27.4 billion. Perhaps worse, the same-store sales growth forecast of between 2.5% and 4.5% for fiscal 2016 has been whittled down to a range of only 1.5% to 2.5%.
One can’t help but wonder, though, if the company is trying to set up an easy target to top.
After all, last quarter’s miss was the first one in years. Earnings beats are the norm for RAD stock.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
