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Rite Aid RAD Suffers an Earnings Headache


Drug store chain Rite Aid Corp. (RAD) reported fourth quarter and full 2010 fiscal year earnings today, and the numbers were softer than expected. The company’s EPS lost -$0.24, compared with consensus estimates of -$0.20. Revenue came in at $6.46 billion, barely lower than estimates of $6.47 billion.

Sector leader CVS Caremark Corp. (CVS) reported a small gain in its most current quarter and second banana Walgreen Co. (WAG) reported a small loss. Rite-Aid trails far behind both CVS and Walgreen in market cap, with $1.5 billion compared with $51.8 billion for CVX and $36.8 billion for Walgreen. The other big players in the field are Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT). Wal-mart reported that 10% of its $405 billion in 2009 sales came from its Health and Wellness division, including pharmacy. Target collects 23% of its revenues, or nearly $15 billion, from its Household Essentials segment, which includes pharmacy.

To add to Rite Aid’s problems, the company forecast an even weaker 2011. The company expects to lose between -$0.41 and -$0.65 per share, with total sales of $25.2 billion-$25.6 billion. That is worse than consensus estimates of a loss of -$0.36 on sales of $25.9 billion.

Pressure on Rite Aid’s profits is coming from weak demand and lower margins on pharmacy sales. Same-store sales were down 0.1% in March, continuing a trend that resulted in a drop of 2.4% in same-store sales in 2010.

Rite Aid could be an instance of a bad house in a good neighborhood. Both Walgreen and CVS are doing much better. Walgreen’s recent announcement that it would purchase 250 Duane Reade stores in New York City brought some hope to Rite Aid shareholders that they could be next.

Rite Aid’s debt grew by about $300,000 in 2010, to $6.19 billion, and its cash position worsened by about $50 million. The company finished the year with about $104 million in cash. These are not particularly gratifying numbers.

One potentially bright spot for Rite Aid and the other pharmacies is that generic versions of Lipitor and Plavix are expected to hit stores in 2011. Margins on generics are generally very high for drug stores for the first two or three years. Where branded drugs might generate 9% margins, generics can post margins as high as 48%.

Can Rite Aid hold on long enough to prosper from the coming boost from generics? Can it attract the older demographic that is growing fast and buying more prescription drugs? The chain owns nearly 4,800 stores, so the footprint is there. But if same-store sales continue to fall, there are rough days ahead for Rite Aid.

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