OPERATOR 1
Good morning, my name is Mandy and I'll be your conference facilitator today. At
this time, I would like to welcome everyone to the Rite Aid second quarter
results conference call. All lines are placed on mute to prevent any background
noise. After the remarks, there will be a question-and-answer session. If you
would like to ask a question, press star and the number 1 on the telephone key
pad. If you would like to withdraw, press the pound key.
I'll now turn the call over to John Standley, Chief Administrative Officer, sir
you may begin.
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 2
Welcome to our second quarter conference call. On the call today with me are
Mary Sammons, our CEO, Chris Hall, our CFO, and Kevin Twomey, our Chief
Accounting Officer.
Before we begin today, I would like to read the following regarding forward
looking statements:
During today's call, forward-looking statements may be made. Such statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those expressed or implied in the forward-looking
statements.
Factors that could cause actual results to differ materially from those
expressed or implied in such forward-looking statements include:
- --Our high level of indebtedness
- --Our ability to make interest and principal payments on our debt and to satisfy
the other covenants contained in our senior secured credit facility and other
debt agreements.
- --Our ability to improve the operating performance of our existing stores in
accordance with management's long-term strategy.
- --Our ability to hire and retain pharmacists and other store personnel.
- --The outcomes of pending lawsuits and governmental investigations.
- --Competitive pricing pressures, continued consolidation of the drugstore
industry, the efforts of third party payers to reduce prescription drug
reimbursements, changes in state or federal legislation or regulations, the
success of planned advertising and merchandising strategies, general economic
conditions and inflation, interest rate movements, access to capital and our
relationship with our suppliers.
Consequently, all of the forward-looking statements made during this call are
qualified by these and other factors, risks and uncertainties. Also during
today's call, non-GAAP financial measures are mentioned. The definition and
purpose for using these measures are described in the Form 8-K that we will
furnish to the SEC. The Form 8-K can be accessed through our website under the
"Our Company" and "Investor Info" tabs. You are also directed to consider other
risks and uncertainties discussed in documents we file with the Securities and
Exchange Commission.
Our agenda for today's call will be as follows:
-Mary Sammons will give an overview of second quarter operations
-I will review the second quarter financial results and comment on our
fiscal 2004 guidance
-And then we will take questions
1
MARY SAMMONS, RITE AID CORPORATION - PRESIDENT AND CHIEF EXECUTIVE OFFICER 3
Thanks John. Good morning.
We're very pleased with our second quarter performance. Our adjusted EBITDA
rose 22 percent over the same period last year as we completed another quarter
with substantial improvement in operating results. And we dramatically reduced
our net loss. Contributing to our success was the excellent job our team did in
leveraging a healthy 5.9% increase in same store sales by growing margins and
containing costs, demonstrating we are now working with a store base and
strategies that give us significant potential for future productivity and
earnings growth.
We had 744 stores affected by the East Coast blackout, but we had healthy front
end sales for that week that more than offset any pharmacy script loss thanks to
the store, field and corporate associates who kept the stores open and stocked
with necessities--often without electricity. Many customers thanked us for
staying open when many other retailers closed.
Pharmacy comp sales for the quarter rose 6.8 percent, with stronger script count
growth and continued improvement in pharmacy contribution. Our growing mix of
generic to brand prescriptions positively impacted pharmacy margins and helped
offset the continued negative effect of lower HRT sales and the Claritin switch
to over the counter. New generic dispensing growth dampened comp sales by
approximately 1.3 percent but contributed to higher gross profits.
During the quarter, we continued our aggressive prescription file buy program
and are ahead of last year's numbers. We piloted our Senior Pharmacy Loyalty
Card in test markets with positive initial reception, and will evaluate
expanding it to additional markets in the coming months. On the technology side,
we added e-prescribing capabilities to 44 more stores, making this service now
available in 346 stores in 14 states. We are also on track to start the roll out
next month of our next generation pharmacy dispensing system, which will
substantially improve efficiency and workflow in the pharmacy. These technology
improvements are part of our commitment to enable our pharmacists to deliver on
their commitment to "Ready When Promised" and "With Us, It's Personal."
Front end margins were particularly strong as we lead the chain drug industry in
front end same store sales gains. Same store sales increased 4.3 percent, thanks
to strong promotion, improved planograms and category selection, and excellent
execution by the stores of our merchandising programs, especially in seasonal
and private brand. Our private brand penetration reached an all time
2
high as we introduced 54 new sku's and our own KidzFun toy brand. Core drugstore
categories were very strong led by gains in upper respiratory, home healthcare
and diagnostic/diabetic. Consumables remained strong and general merchandise
performed well. We had excellent sell through for Back to School.
Photo categories remained difficult although we expect performance to improve as
we continue the expansion of our digital photo capabilities started in August.
During the quarter, we completed our second wave of extending store hours and
increased the number of 24-hour stores to make Rite Aid even more convenient for
our customers. We selected a design firm to help us with our new store
prototype, and completed research giving us insights into what customers expect
from a drugstore and specifically from Rite Aid. Developing a new prototype is
part of the new store development program we announced in June. And, our real
estate organization is already actively involved in site selection for the new
store rollout program.
On the expense side, SG&A was down for the quarter, due to effective labor
scheduling in the stores and good cost control at all levels. On-line auctions
for non-retail supplies have already started to deliver dramatic savings.
Inventory content is excellent and stores are already set for both Harvest and
Halloween. Early holiday has shipped to the stores, and the majority of our
holiday product will arrive soon due to earlier scheduled deliveries. Service
level on basics is also excellent in both front end and pharmacy as we continue
to enhance our in- stock position to be a reliable provider. And, we continue to
aggressively support new item introductions as well as promotions.
Going forward, we expect the positive momentum to continue as we remain focused
on our four critical priorities: growing prescription count, achieving front end
sales growth goals, improving customer satisfaction and containing expenses.
Upcoming initiatives for growing our prescription business include the launch of
a comprehensive Diabetes Program, in partnership with the American Diabetes
Association. This fully integrated program, including a website, magazine, point
of sale, circular advertising and events, capitalizes on the fact that most of
our pharmacists have been trained as diabetes specialists. Since more than 17
million people have diabetes and on average, customers with diabetes spend three
times more in the drugstore than those without, you can see why this is an
important market for us. Our pharmacy initiatives also include a new specialty
pharmacy program in partnership with McKesson, and specific strategic
initiatives with key managed care partners to improve the value proposition for
their customers and improve our positioning in their networks. We also have new
customer re-activation programs starting up as well as individual store/market
3
programs. Our number one initiative, however, continues to be our commitment to
deliver the best customer service in our pharmacies.
We're bullish on front end sales as we enter our busiest selling season with
great new items and programs in addition to the positive momentum in our core
categories. Thanks to a tie-in with Universal Studios upcoming "Cat In The Hat"
movie starring Mike Meyers, "Cat In The Hat" will be our winter holiday theme
with exclusive product and endcap offerings, themed toys, books, puzzles and
posters, music and special signage throughout the store. We will expand our new
private brand KidzFun offerings for the holidays. Also in the works for the
third quarter are marketing programs targeted to Hispanics and African
Americans. We expect the strong results we're getting from our new off-shelf
programs introduced in the second quarter to get even better next quarter. And
by the end of November, digital photo capabilities will be in over 1300 stores.
As for our customer satisfaction initiative, we just completed our third year
benchmarking customer survey and we continue to improve our scores by focusing
on areas that customers tell us are important to them. We are focused on the
entire store experience - the environment and the people.
Our containing expenses team continues to identify new areas of savings to
reduce unnecessary costs and has made great progress in areas like utility and
maintenance expenses, bad checks and store supplies. New initiatives include
optimizing inventory investment and reducing debit and credit card fees. We also
have numerous additional online auctions scheduled for the remainder of the
year. Continuing to contain costs is important to us as it frees up dollars to
spend on growth initiatives as well as improve results.
We are confident the combination of exciting merchandising plans, a
multi-dimensioned approach to building script count, a commitment to customer
service, and a disciplined focus on costs will continue to get us the results
for another successful year. And now John will fill you in on a few more details
for the quarter.
4
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 4
Thanks Mary. We are very pleased with our second quarter results.
Total revenues for the 13-week second quarter were $4.05 billion this year,
versus $3.86 billion last year. Revenues increased $195.6 million or 5.1 percent
this year versus last year. We operated 3,386 retail stores at quarter end
versus 3,444 stores at the end of last year's quarter, a net reduction of 58
stores or 1.7 percent.
Same store sales for the quarter were up 5.9 percent with pharmacy comparable
store sales up 6.8 percent and front-end comparable store sales up 4.3 percent.
Pharmacy comparable store sales for the quarter were negatively impacted 1.3% by
an increase in generic sales mix. Although increases in generic sales negatively
impact comp store sales, they increase gross margins. Prescription sales
accounted for 63.8 percent of total sales, and third party prescriptions
represented 93.2 percent of total pharmacy sales.
Gross margins, which include occupancy costs, were $964.2 million or 23.8
percent of revenues for the second quarter this year versus $897.8 million or
23.3 percent of revenues last year. Excluding non-cash LIFO charges of $11.8
million this year and $17.3 million last year, gross profits were $976.0 million
or 24.1% percent of revenues this year versus $915.1 million or 23.7% percent of
revenues last year - an increase of 36 basis points.
Gross margins were positively impacted by a larger percentage of generic drug
sales versus branded drugs, strong margins on front end products, and better
leveraging of occupancy and depreciation and amortization expenses included in
gross margin.
Selling, general and administrative expenses for the quarter decreased as a
percent to revenues by 40 basis points compared to the prior year. Items
impacting SG&A in the second quarter this year and last year include $2.6
million this year and $3.5 million last
5
year of legal expenses incurred to defend prior management and to defend against
litigation related to the business practices of prior management.
SG&A in the second quarter improved 38 basis points from the prior year, after
adjusting both years for the litigation expense related to prior management.
This improvement is the result of lower payroll expense as a percent to sales in
the stores due to the leveraging of the fixed component of labor, lower
occupancy resulting from a lower number of stores and good cost control in our
stores, distribution centers and the corporate office.
Non-cash stock compensation was a charge of $8.8 million this year versus a
credit of $6.7 million in the prior year. We adopted SFAS 123 at the beginning
of the first quarter on a modified prospective basis to recognize the non-cash
cost of stock options granted to management. The prior year income is the result
of variable plan accounting on certain management stock options and the vesting
of restricted stock grants in the prior year.
Store closing and impairment costs were a credit of $6.7 million this year,
which includes a $9.0 million credit on the face of the operating statement
primarily related to an increase in the risk free rate used to discount the
closed store reserve and $2.3 million of expense in COGS representing inventory
liquidation costs. The prior year store closing and impairment costs totaled
$58.8 million including $0.6 million of inventory liquidation costs included in
COGS and $58.2 million of expense on the face of the operating statement.
Interest expense was $79.4 million for the second quarter vs. $85.0 million in
last year's second quarter.
Cash interest expense was $74.9 million this year versus $75.1 million last year
and non-cash interest was $4.6 million this year versus $9.9 million last year.
Noncash interest is lower than the prior year due to the classification of the
interest on closed store reserves as closed store expense this year versus
interest expense last year and lower debt issue cost amortization this year.
Adjusted EBITDA for the second quarter was $152.9 million or 3.8% of sales, an
increase of $27.5 million over the prior year computed on a consistent basis.
The schedule attached to our press release reconciles our net loss to our
Adjusted EBITDA total.
Net loss for the quarter was $10.6 million or a loss of $.04 per common share
compared to a net loss of $105.3 million or a loss of $.21 per common share. The
loss per common share amount includes $7.9 million in the current year and $2.3
million in the prior year of accretion of declared preferred stock dividends
that are not included in net income or loss.
6
Liquidity remained strong during the second quarter. Cash on the balance sheet
at the end of the quarter was $260 million. Operations used $111 million of cash
during the quarter primarily due to an early seasonal build in inventory,
slightly higher receivables and reductions in the closed store reserve.
Expenditures for property plant and equipment were $29.7 million and we acquired
$2.7 million of script files for a total of $32.4 million of capital
expenditures.
During the quarter, we remodeled 49 stores, relocated 1 store and closed 11
stores.
Guidance for Fiscal 2004
We are updating our adjusted EBITDA guidance to $700 million to $725 million for
fiscal 2004 compared to the prior range of $675 million to $725 million.
Attached to our press release is a table that reconciles our adjusted EBITDA
guidance to our guidance for GAAP earnings. We are also updating our GAAP
earnings guidance ranges from a $4 million net income to a $27 million net loss
compared to the prior range of break even to a net loss of $63 million for
fiscal 2004. Sales are expected to be in the range of $16.5 billion to $16.7
billion based primarily on assumed same store sales growth of between 5.5% and
6.5%.
Capex is expected to be in the range of $170 million to $190 million for fiscal
2004. This does not include the $107 million buyout of the synthetic lease,
completed with the refinancing, that will be classified as capex on our cash
flow statement.
Operator, we're now ready to take questions.
7
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QUESTIONS AND ANSWERS RETURN TO TOP
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OPERATOR 1
At this time I would like to remind everyone, in order to ask a question, please
press star and number 1 on the telephone key pad and we'll pause for a moment to
compile the Q&A roster. Your first question comes from John Heinbachle from
Goldman Sachs.
JOHN HEINBACHLE, GOLDMAN SACHS - ANALYST 2
John, what do you think you do for the full year?
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 3
We got in the budget cap ex of 20 million for the full year. John, I tell you if
we could spend a little bit more than that, we probably would, on --, the
year-to-date is -- is 24. 24. [ INAUDIBLE ] 24 year-to-date and--
JOHN HEINBACHLE, GOLDMAN SACHS - ANALYST 4
24 file by. The cap ex.
MARY SAMMONS, RITE AID CORPORATION - PRESIDENT AND CHIEF EXECUTIVE OFFICER 5
We're ahead of last year by file-by here to date. We have substantial numbers
active in the system right now and some process of being closed and even more
additional leads on top of that. So, we would expect to out extend that amount
in that plan.
JOHN HEINBACHLE, GOLDMAN SACHS - ANALYST 6
I mean, do you think you are getting ramped up here do you think second half,
double that [INAUDIBLE] ber, do 50 or--
MARY SAMMONS, RITE AID CORPORATION - PRESIDENT AND CHIEF EXECUTIVE OFFICER 7
We would expect to do substantially more than that based on what we have active
in the process.
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 8
We built a nice pipeline, John. And [INAUDIBLE] it up and added additional staff
and as you would expect it takes long and second half would be stronger on all
script purchases.
JOHN HEINBACHLE, GOLDMAN SACHS - ANALYST 9
If I think about, just, try to think of the benefits from this, the average
script if, I use the average scripting per file of, say, you know, 600 and
retention rate of, you know, 70%, you know, are those kind of fair, averages or
are they lower?
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 10
I don't know if I have an average on the actual scripts per file purchase.
They're just, you know, very different depending on what you're doing there.
But, if you annualize, you know, 20 million dollars spent, we
figure it's worth, you know, roughly a percentage point of comp store sales.
JOHN HEINBACHLE, GOLDMAN SACHS - ANALYST 11
the pharmacy comps?
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 12
the pharmacy comps, yes.
JOHN HEINBACHLE, GOLDMAN SACHS - ANALYST 13
On the customer reactivation in the pharmacy, what exactly are you going to do,
CVS did this a couple of years ago by sending out mailers and reminders. What
are you guys going to do? Are there a lot of dormant customers you think you
lost you need to reactivate?
MARY SAMMONS, RITE AID CORPORATION - PRESIDENT AND CHIEF EXECUTIVE OFFICER 14
John, our system allows us to track customers we consider to be a lost customer
and we're doing a series of reactivation mailings to get -- encourage them to
come back into the store.
JOHN HEINBACHLE, GOLDMAN SACHS - ANALYST 15
Have you done that before? Or is this the first time?
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 16
Well, the -- the number that we're doing today, is substantially greater than
anything we've done in the past.
MARY SAMMONS, RITE AID CORPORATION - PRESIDENT AND CHIEF EXECUTIVE OFFICER 17
[INAUDIBLE] and what have you -- all right and what have you generally found --
I think they probably found that it was modestly successful in terms of kind of
a redemption rate or something like that.
JOHN HEINBACHLE, GOLDMAN SACHS - ANALYST 18
What have you guys found? Is it kind of a small hit rate or no?
MARY SAMMONS, RITE AID CORPORATION - PRESIDENT AND CHIEF EXECUTIVE OFFICER 19
Yar. I would say it's something that is modest increase, too. There's just one
of the things and that's why with pharmacy there's no one single thing that gets
you what you need to get and that's why we identified, we think, a handful of
[INAUDIBLE] initiatives to grow our script count.
JOHN HEINBACHLE, GOLDMAN SACHS - ANALYST 20
And one final thing, what do you think -- what to you think the pharmacy
environment will look like, say, the next 12, 15, 18 months and a case because
of patent expiration law and the new drug pipeline that you actually get an
acceleration in, you know, [INAUDIBLE] si comps for some period, 12, 15, 18
months before, before the next wave of patent expirations hit. Do you think
that's -- how is that going to play out?
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 21
I don't we've put a number around that. We think that there will be continued to
be challenges in pharmacy as well as opportunities for more growth. And that's
why we worked hard together, [INAUDIBLE] going, because there's always things na
you're working against. At least we're recycling some of the things like
Claritin and the HRF issues. Prilosec will be some impact, not as severe as
Claritin was to the pharmacy, but we feel pretty good about the things we've got
in place to grow our script count.
JOHN HEINBACHLE, GOLDMAN SACHS - ANALYST 22
And you don't think there's a period here where, for all of you, you know, where
the pharmacy numbers pick up because of generic pen penetration [INAUDIBLE]
down?
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 23
I think we'll continue to grow our mix of generics to brands, it just won't be
at the same rate as it had been. But, it will continue to grow.
MARY SAMMONS, RITE AID CORPORATION - PRESIDENT AND CHIEF EXECUTIVE OFFICER 24
I think, now, we continue to believe that the pharmacy is a great business and,
yeah, there's [INAUDIBLE] script [INAUDIBLE] count and great things going on
overall in the pharmacy business.
JOHN HEINBACHLE, GOLDMAN SACHS - ANALYST 25
Okay. Thanks.
OPERATOR 26
Your next question is from Eric Bosshard with Midwest Research.
ERIC BOSSHARD, MIDWEST RESEARCH - ANALYST 27
Good morning. First of all, review the forbase in terms of store count, in the
seblgd half of this year and what the thoughts are next year, gross, when that
opens?
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 28
In terms of, you know, where we are we're going to do a total of 12 reloads for
this year and possibly one new store. Not a big change in store count this year.
There could be a few, kind of cats and dogs closures, nothing substantial there.
For next year, we're targeting 75 additional stores and probably half of those
we're thinking are reloads and about half of those are news. And, again, there
could be a few small closures, not substantial.
JOHN HEINBACHLE, GOLDMAN SACHS - ANALYST 29
And 75 new next year targeted at any particular market or any particular star.
MARY SAMMONS, RITE AID CORPORATION - PRESIDENT AND CHIEF EXECUTIVE OFFICER 30
Existing markets and [INAUDIBLE] key markets we have no plans to enter any new
markets and continue and lots of good opportunities to continue to grow in our
very key markets. The reloads are designed to get at smaller stores, good
product activity that can move to a better score [INAUDIBLE] or something like
that and have a larger store and get our offering in. That's kind of the gist of
it.
ERIC BOSSHARD, MIDWEST RESEARCH - ANALYST 31
Secondly, the front end momentum you've established is pretty impressive can you
talk about a front end mark [INAUDIBLE] year-over-year in first half and second
half and if you're getting more or less aggressive and the components of what
you're doing different?
MARY SAMMONS, RITE AID CORPORATION - PRESIDENT AND CHIEF EXECUTIVE OFFICER 32
Eric, as far as quantity advertising we've really not changed that up from prior
years. We added one coupon book in the Q2 and that ran in August. For the back
hatch of the year, our page count is pretty consistent with prior year, also. We
are experimenting a little bit during some key weeks with standard format as
opposed to the tab circular we usually run and continue to work the same
marketing strategies and we have a good mix of promoting and featuring key
consumables, new items, seasonal offerings and doing event advertising and we
would continue that same strategy.
ERIC BOSSHARD, MIDWEST RESEARCH - ANALYST 33
And, then, lastly, within the gross profit performance, any color on how
front-end margins behaved in the quarter and what the expectation might be
there?
MARY SAMMONS, RITE AID CORPORATION - PRESIDENT AND CHIEF EXECUTIVE OFFICER 34
We had strong front-end growth margins for the quarter and good sales to start
with, and even though, you know, mark downs were a little bit higher and we also
had a lot of promotional support from ads that we ran and that was a plus. And,
we had just overall good results out of front-end margin.
ERIC BOSSHARD, MIDWEST RESEARCH - ANALYST 35
Thank you.
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 36
thanks, Eric.
OPERATOR 37
Your next question comes from Mark Hussin with Merrill Lynch.
MARK HUSSIN, MERRILL LYNCH - ANALYST 38
I want to get on the prescription side again. If there's a weakness to the
store, it's getting prescription count up. Can you talk about, we've seen
improvements in industry scripts and sales in total, can you talk about the
script count and if that's up in posted territory, if you exclude the file
[INAUDIBLE] or if it's taking it there.
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 39
I don't mean to interrupt. The file [INAUDIBLE] aren't material yet. It's
building and we've not bought a ton of files. There will be more impact in the
fourth quarter of next year and really has to do with script count this year. In
terms of disposing script count we don't do that.
MARY SAMMONS, RITE AID CORPORATION - PRESIDENT AND CHIEF EXECUTIVE OFFICER 40
Script doubt improved over Q2 to Q1 is positive.
MARK HUSSIN, MERRILL LYNCH - ANALYST 41
Also, I don't want to spend a lot of time talking about East coast versus cuss
West Coast. Walgreen's is piling in cam city on the West Coast where other drug
store retailers are having a tolerant time in the marketplace can can you talk
about how well your brand is holding up there and whether you had anymore
success in penetrating consumer confidence in the Rite Aid as opposed to the
predecessor brands.
MARY SAMMONS, RITE AID CORPORATION - PRESIDENT AND CHIEF EXECUTIVE OFFICER 42
Mark, we don't give out info about the regions are doing. We're pleased with the
continued performance, overall, in terms of overall [INAUDIBLE] and there's
always some weak part of it, but that was difficult throughout the country.
MARK HUSSIN, MERRILL LYNCH - ANALYST 43
Okay. And, then, struggling to find something you can answer. Going forward, I
guess, historically, on calls like this, you've been able to talk about where
the opportunity may be for life for you, means you got lower operating margins
than a number of other retailers, where the operating opportunity lies on the
gross profit on SG&A do you think you're hitting a glass ceiling at same stage
or do you still see blue skies?
MARY SAMMONS, RITE AID CORPORATION - PRESIDENT AND CHIEF EXECUTIVE OFFICER 44
We still see, Mark, continued opportunities and it's a top line [INAUDIBLE] to
start. Because, you get on these two with the prescription growth and we need to
continue to find a way to grow that. And that will help us leverage the
different fixed expenses. We can fill a lot for scripts in the stores without
adding a lot more cost.
MARK HUSSIN, MERRILL LYNCH - ANALYST 45
I guess the top line growth question, which is still the issue, you're not
adding an awful lot of space, can't afford to at this stage. Return of capital
on this level of EBIT margin is not very exciting, or is it? I mean, are the
recent reason on the invested better excluding script count?
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 46
Sure they are. They're much better, we have the substantial amount of capital to
do it and the return on capital is moving up very rapidly. I think that's a
positive that we have, is is that our situation is actually we have great
opportunity just like Mary said to continue a leverage to the cost structure
that we have without pulling on the capital to do it.
MARK HUSSIN, MERRILL LYNCH - ANALYST 47
Over the next couple of years, what can you see, space growth, actually turning
into positive space growth and what sort of rate of growth?
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 48
I think it's still go be very moderate. Next we are we'll be up in store count
slightly, maybe, or just even. Not going to be a huge amount of space growth.
Truly it's growing stores.
What you'll see when we start up the new store program we have probably two or
three years of earnings growth opportunity by continuing to mature the existing
store base and we'll gradually increase the store's development program so that
as we, our stores reach maturation level we're prepared to continue to grow
earnings through square footage growth if we need to do that.
MARK HUSSIN, MERRILL LYNCH - ANALYST 49
Thank you.
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 50
You're welcome.
OPERATOR 51
Next question is from Lisa Cartwright with CitiGroup.
LISA CARTWRIGHT, CITIGROUP - ANALYST 52
Good morning.
MARY SAMMONS, RITE AID CORPORATION - PRESIDENT AND CHIEF EXECUTIVE OFFICER 53
Hi, Lisa.
LISA CARTWRIGHT, CITIGROUP - ANALYST 54
Hi. Can you talk a little bit on how you stand with the issue of mail order and
filling 90 day prescriptions at the store and how you feel about being able to
provide that to Medicare, patients, if, perhaps, that benefit
allows for picking up prescriptions at retail. Some of the other chains have
commented on that, [INAUDIBLE], I will a follow-up question.
MARY SAMMONS, RITE AID CORPORATION - PRESIDENT AND CHIEF EXECUTIVE OFFICER 55
Well, I think it still remains to be seen what comes out of the Medicare issue
that -- debate that's going on in the conference committee. But I think we've
been advocates along with the rest of the major chains in having that equal
opportunity there, relative to filling 90 day scripts at retail. So, that is
something that we believe need to be part of the program.
LISA CARTWRIGHT, CITIGROUP - ANALYST 56
Do you think you're -- you're -- I don't know who you would put it, but, the
level of robotics that you have in your stores, which at one point might in the
have been seen as a huge positive, early on, but, going forward, might actually
be a big positive for you, if there is some sort of transition to filling 90 day
at retail?
MARY SAMMONS, RITE AID CORPORATION - PRESIDENT AND CHIEF EXECUTIVE OFFICER 57
It absolutely is going to be a plus in the future because as we grow script
count we got the robotics there, whether filling 0 day scripts or additional new
scripts and, again, without adding a lot of extra help.
LISA CARTWRIGHT, CITIGROUP - ANALYST 58
Okay and, just switching gears, you mentioned that some cost saving
opportunities in the future lie with [INAUDIBLE] inventory or inventory
[INAUDIBLE] are you looking at soft ware and can you elaborate on that and is
that something you think will help you deliver the same type of gross profit
increases or help you lower your inventory?
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 59
It would help lower the inventory.
MARY SAMMONS, RITE AID CORPORATION - PRESIDENT AND CHIEF EXECUTIVE OFFICER 60
And, again, making sure you got it in the right stores and the right categories.
You know, we started the supply chain initiative three years ago and we continue
to impress the provide es of getting product to the store and committed to
in-stock on basics as well as promotion and new items and we want to improve the
inventory turns and free up as much working capital to fund either growth or pay
down debt or improve results.
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 61
And I think in terms of systems, we have a professional inventory management
system and what we're basically do is modifying it and making improvements to
it.
LISA CARTWRIGHT, CITIGROUP - ANALYST 62
So, just heading into next year, if you look out at all of the projects that
you're talking about doing and look at your, you know, the possibility for
continuing this same type of EBITDA growth, where do you think the majority of
the benefit is going to come from? Is it going to be the same as it was--
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 63
It's going to be primarily driven by sales growth.
LISA CARTWRIGHT, CITIGROUP - ANALYST 64
Okay. Thank you very much.
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 65
You're welcome.
OPERATOR 66
Your next question comes from Mark Wilitimuse with Morgan Stanley.
MARK WILTIMUSE, MORGAN STANLEY - ANALYST 67
Good morning.
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 68
Good morning.
MARY SAMMONS, RITE AID CORPORATION - PRESIDENT AND CHIEF EXECUTIVE OFFICER 69
Good morning.
MARK WILTIMUSE, MORGAN STANLEY - ANALYST 70
I want to follow 47B up with the front end sales [INAUDIBLE] could you give us a
sense of what's is he-driven through a plan 0 grams and new [INAUDIBLE] and how
much of that is the economy getting a little better?
MARY SAMMONS, RITE AID CORPORATION - PRESIDENT AND CHIEF EXECUTIVE OFFICER 71
I think it's hard to put a number on it. I think there has been a little bit of
an up tick in customer confidence in terms of purchasing, but I think the
majority of if is we have been gaining traction with the [INAUDIBLE] and con
[INAUDIBLE] offering value out there and we got really good plan a grams and
we've updated all of them, I think, over the last year time period and we'll
continue to introduce new items and get better at merchandising and our field
people are getting stronger at executing the programs and plans. So, I think
it's a combination.
MARK WILTIMUSE, MORGAN STANLEY - ANALYST 72
And have you seen any abatement of discounting or promotional activity from any
of the competitors over the past couple of quarters?
MARY SAMMONS, RITE AID CORPORATION - PRESIDENT AND CHIEF EXECUTIVE OFFICER 73
No, not really.
MARK WILTIMUSE, MORGAN STANLEY - ANALYST 74
Okay and to [INAUDIBLE] on to the pharmacy side brief [INAUDIBLE]. If you look
earlier this year, January through march there was a market slowdown for most of
the players in the industry, in terms of pharmacy sales and I guess there's
speculation that some of this could have come from the new company plans coming
into effect with three-tier co pays, do you think that's a fair assessment of
what might have happened there and is there a chance that may reoccur this year?
MARY SAMMONS, RITE AID CORPORATION - PRESIDENT AND CHIEF EXECUTIVE OFFICER 75
I think the multi tiered co-pays was a definite factor everyone had to deal W. I
don't know to what level it will repeat itself. I mean, I think the employers
have to be careful of how much additional cost they keep passing back to their
associates. But, I think we can keep expecting there will be pressures and a lot
of parts of pharmacy and that's why we got to work on things like disease
management and find ways to keep getting customers in the store.
MARK WILTIMUSE, MORGAN STANLEY - ANALYST 76
Okay. Thank you.
OPERATOR 77
Your next question is from Robert Urkwart with Oppenheimer.
ROBERT URKWART, OPPENHEIMER - ANALYST 78
I'm looking at the website financial statements you provided and I'm wondering
if I'm missing something. There doesn't seem to be a cash flow statement, is
there somewhere I could go to get the cash flow.
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 79
We'll file the 10HG shortly and it will be there. Actually, the cash used from
operations is $111 million. That's the key number I think you're looking for.
ROBERT URKWART, OPPENHEIMER - ANALYST 80
Say that, again, I'm sorry?
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 81
Cash operations used cash 111 million. We built inventory in the quarter if you
look and that's Morse of it there.
ROBERT URKWART, OPPENHEIMER - ANALYST 82
Okay, thank you.
OPERATOR 83
Your next question is from John Fykes with Zucora.
JOHN FYKES, ZUCORA - ANALYST 84
What is the pre cash flow guidance for the year?
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 85
You know, we haven't -- we're not providing free cash flow guidance but we give
awe [INAUDIBLE] table that reb [INAUDIBLE] the adjusted and income and all of
the components that you need there to derive the actual number.
JOHN FYKES, ZUCORA - ANALYST 86
Should I -- so.
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 87
If you go to the press release and go back to the schedules there.
JOHN FYKES, ZUCORA - ANALYST 88
Right.
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 89
You'll see there's a reconciliation that goes from the adjusted to -- guidance
and you can see there all of the components that you need that we highlight that
impact our cash flow [INAUDIBLE], then, you would need to look at the cap EX
guidance.
JOHN FYKES, ZUCORA - ANALYST 90
What about working capital changes.
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 91
Working capital changes, I don't think we give specific guidance on.
JOHN FYKES, ZUCORA - ANALYST 92
Okay. Just one other question, I guess, or something that maybe you care to
comment on. But, consumer reports had done sort of a, I guess, rating, in their
October issue of "drug store chains," and, you know, Rite Aid didn't exactly
rate too well in that study. So, I'm just curious what you're customer
satisfaction surveys are saying? And, really, just trying to get, I guess, some
comment as to the study that they did.
MARY SAMMONS, RITE AID CORPORATION - PRESIDENT AND CHIEF EXECUTIVE OFFICER 93
Okay. I'll address that. The -- known of the drug stores fared 2 well. It's old
data and the survey was completed April 2002 and it was also one of the areas
that we have focussed on extraordinarily hard with our people and, if anything,
we've been getting very positive customer feedback and several other 0, much
more positive articles, too.
If we look at our bench marking survey and our customer comments are telling us,
our satisfaction has gone up and we're going to continue to focus on it we think
it's a key priority. So, you know, we read that article, too, and take it with a
grain of salt. And, you know, you keep working and making it better.
JOHN FYKES, ZUCORA - ANALYST 94
Okay. All right. Thanks.
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 95
You're welcome.
OPERATOR 96
Your next question comes from Carla Cassella with JP Morgan.
CARLA CASSELLA, JP MORGAN - ANALYST 97
a question on the operating cash flee does that include the $107 million from
the repurchase of the synthetic lease?
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 98
the cap ex doesn't add that.
CARLA CASSELLA, JP MORGAN - ANALYST 99
the 111 million you [INAUDIBLE], does that include that?
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 100
No.
CARLA CASSELLA, JP MORGAN - ANALYST 101
Okay. Thank you.
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 102
You're welcome.
OPERATOR 103
The next question from Lewis Cann with Cann & Company.
LEWIS CANN, CANN & COMPANY - ANALYST 104
Two quickies -- cash interest, repeat that number, again.
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 105
74.9, I believe.
LEWIS CANN, CANN & COMPANY - ANALYST 106
Versus?
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 107
75.6, I think. Let me find it.
LEWIS CANN, CANN & COMPANY - ANALYST 108
Okay.
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 109
75.1, story.
LEWIS CANN, CANN & COMPANY - ANALYST 110
Availability in total availability of what?
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 111
What's that?
LEWIS CANN, CANN & COMPANY - ANALYST 112
Availability on the [INAUDIBLE]?
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 113
Yeah. The [INAUDIBLE] is undrawn.
LEWIS CANN, CANN & COMPANY - ANALYST 114
Okay.
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 115
There's 105 of letters of credit.
LEWIS CANN, CANN & COMPANY - ANALYST 116
Okay. A question about the focus of your promotions. I sie assume you look at
what you think or know your major competitors are doing. Do you look much at
some of the larger local changes.
For example, I [INAUDIBLE] in visiting stores in my area, that the local chains
consistently beat you on the prices certain promotional products. Do you guys
look at that?
MARY SAMMONS, RITE AID CORPORATION - PRESIDENT AND CHIEF EXECUTIVE OFFICER 117
We always take a look at what our competition is doing.
LEWIS CANN, CANN & COMPANY - ANALYST 118
I'm talking about the local chains now.
MARY SAMMONS, RITE AID CORPORATION - PRESIDENT AND CHIEF EXECUTIVE OFFICER 119
Well, we look at what we would consider the key regional players, yeah.
LEWIS CANN, CANN & COMPANY - ANALYST 120
Right.
MARY SAMMONS, RITE AID CORPORATION - PRESIDENT AND CHIEF EXECUTIVE OFFICER 121
and, but, we do work our own abstract, Jim. You'd have to have an ad strategy
that you believe gives the customer value and really represents what the store
has to offer and I believe we have strong promotional offerings [INAUDIBLE] all
as well as a strong assortment of what our store is all about.
LEWIS CANN, CANN & COMPANY - ANALYST 122
All right. Thank you.
OPERATOR 123
Your next question comes from Daryl Cassolina, Private Investor.
DARYL CASSOLINA - ANALYST 124
Hi guys. I shop on the 5 or 6 of the Rite Aid stores in the Los Angeles I notice
one of the stores, a carry-over from when you purchased in '50 and make it is
more of a community store. That is, Rite Aid Beryl hills and I was -- Beryl
[INAUDIBLE] I was wondering if you put signage underneath the name of Rite Aid
in each of the local communities to make it community owned and individual. Nice
touch, that's what I thought about that.
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 125
It's an interesting comment. It's probably quite frankly a significant amount of
capital expenditure to do that.
DARYL CASSOLINA - ANALYST 126
Really?
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 127
You all of our sign vs to confirm what's allowed on the various places we
operate. In general, we're also trying to brand our company with the signage,
also. I think we'll take one more question, operator and I think we're done.
OPERATOR 128
At this time there's no further questions.
JOHN STANDLEY, RITE AID CORPORATION - SENIOR EXECUTIVE VICE PRESIDENT AND CHIEF
ADMINISTRATIVE OFFICER 129
Perfect. Okay, thank you very much everyone for dialing in today. We appreciate
it.
MARY SAMMONS, RITE AID CORPORATION - PRESIDENT AND CHIEF EXECUTIVE OFFICER 130
Thank you.
OPERATOR 131
This concludes today's conference call and you may now
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