What happened
After Rite Aid (RAD +0.00%) released a fiscal second-quarter report Thursday morning showing sales and adjusted net income that were lower year over year, shares of the drugstore chain tumbled, and were off 11.2% at 12:30 p.m. EDT.
So what
Rite Aid spent a lot of time focusing on its now-failed merger plans with Walgreens Boots Alliance (WBA +0.00%), and according to management, that combined with pricing pressure to take a toll on its financial performance.
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The company reported that its sales for the period, which ended Sept. 2, slipped 4.4% to $7.68 billion, and that after adjusting for one-time items, including a $325 million termination fee paid to it by Walgreens, it lost $0.01 per share. Last year, Rite Aid reported earnings of $0.03 per share in its Q2.
Rite Aid's poor performance was driven in part by lower prescription volume, which in turn, reduced front-of-store sales due to lower foot traffic. Same-store sales fell 3.4% year over year, with a 4.6% drop in pharmacy sales and a 0.9% decrease in front-end sales. Revenue from its pharmacy benefit manager unit, EnvisionRx, slipped as expected, but a better proportion of higher-margin clients kept its adjusted EBITDA flat.
Said Rite Aid Chairman and CEO John Standley:
While our performance for the quarter reflects a challenging reimbursement rate environment and the effects of an extended merger and asset sale process, securing regulatory clearance for the amended asset sale agreement with Walgreens Boots Alliance gives us a clear path forward to realize the benefits of the transaction and implement our plans to deliver improved results.
Now what
After regulators blocked its planned merger with Walgreens, Rite Aid cut a deal to sell 1,932 stores and three distribution centers to its former suitor for $4.375 billion in cash. That deal got a regulatory green light, and is expected to be completed by early next year.
The sale should leave Rite Aid leaner, but financially healthier. It built up a mountain of debt via earlier acquisitions, which it plans to use proceeds from the divestiture to shrink. That in turn will lower its interest expenses, which last quarter eclipsed $220 million.
This sell-off could be viewed as an intriguing entry for risk-tolerant investors. Assuming that Rite Aid can rejuvenate its balance sheet and refocus on winning back customers, its weak results from this year should offer easier comparisons in 2018, and if margin improves thanks to lower interest expense, then profits should too.
