Investors weren't overly happy with Rite Aid Corporation's (NYSE:RAD) first quarter results, which the company announced before the market opened on Thursday. Rite Aid stock closed down more than 3% while the broader indexes soared. Management had a relatively optimistic long-term view during the company's earnings conference call, though. Here are five key points that they want you to know about (quotes courtesy of S&P Capital IQ).
1. No showstoppers for EnvisionRx deal
It's full steam ahead for the plans announced in February to buy pharmacy benefit manager EnvisionRx. Rite Aid chairman and CEO John Standley said that the company has made "tremendous progress in gaining the required regulatory approvals and meeting the customary closing conditions that are needed to close the deal." He expects the acquisition to close in early July.
The management team thinks that there are several big pluses that the EnvisionRx buyout brings to the table for Rite Aid. It gives the pharmacy chain a bigger presence in Medicare Part D, for one. Having a PBM should also help Rite Aid offer better value to customers, particularly with specialty drugs. Probably more than anything else, though, bringing EnvisionRx into the fold will help position Rite Aid to create an integrated healthcare platform to remain competitive in the changing healthcare industry.
2. Plenti launch was a big success
Ken Martindale, Rite Aid's President and Chief Operating Officer, called the launch of wellness+ with Plenti "perhaps the biggest news of the quarter." Plenti has established a coalition of companies that cooperate in a large loyalty rewards program, and joining the group greatly expands the perks to Rite Aid's already-strong loyalty program.
So far, the Plenti launch appears to be a smashing success. Rite Aid has enrolled over 10 million customers, with millions more enrolled by Plenti. Martindale noted that two-thirds of all recent transactions tied to a loyalty card were for Plenti members. Management expects to benefit as customers of other participating companies in the Plenti program shift their business to Rite Aid.
3. Lots of investment for the future
John Standley kicked off the earnings call by mentioning "significant investments" that his company is making. The EnvisionRx acquisition and Plenti launch are only two aspects of this investment.
Expansion of RediClinics in Rite Aid stores is a good example of these investments. The company is also planning to spend $665 million in fiscal year 2016 for capital projects, including remodeling and relocating stores and prescription file buys.
4. Prescription growth might get more difficult
Pharmacy same-store prescriptions grew 1.6% year-over-year during the first quarter thanks to Medicaid expansion in many states and a harsh flu season. However, Rite Aid CFO Darren Karst suggested that year-over-year growth in the second quarter and perhaps even afterwards could face an uphill battle.
Karst noted that "growth comparisons will become more difficult for the next several months." Why? Medicaid expansion kicked into high gear last year, giving prescription volume a big lift. Rite Aid probably won't be able to perform much stronger in the second quarter of this year compared to last year.
5. Don't look for year-over-year profit comparisons to be impressive next quarter
Prescription growth wasn't the only hurdle for the second quarter. Darren Karst also warned that profits next quarter might not compare as favorably against the same period in 2014.
The issue isn't that Rite Aid expects the second quarter to be disappointing. It's just that second quarter profits last year were exceptionally strong due to a positive inventory valuation resulting from the pharmacy chain's relationship with McKesson.
Rite Aid doesn't provide quarterly guidance. However, John Standley stated that, while the second quarter could be tough with regards to year-over-year comparisons, the company expects "to see some strengthening" in the third and fourth quarters.