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18 Can’t-Miss Quotes From Rite Aid’s Earnings Call
3 Quotes concerning the McKesson headwind 3. “As announced in February, we are transitioning to a new drug sourcing and distribution process through our expanded partnership with McKesson. This new process is expected to deliver long-term drug cost savings and will provide our pharmacies with direct to store delivery five days a week, which will provide significant working capital benefits,” said Standley. 2. “As we transition to our new purchasing model, we expect lower pharmacy gross margin during the transition period, because we are unable to negotiate lower drug cost as we normally would do to offset reimbursement rate pressure and generic drug cost increases. This increased vulnerability to reimbursement rate changes and generic drug cost increases will continue during a portion of the second quarter as we complete the transition,” said Standley. Quarterly profit was weaker due to delays in realizing cost benefits from shifting generic buying and distribution to McKesson in February. 1. “[T]he timing of savings realized from the McKesson agreement is slower than our original estimates,” said CEO John Standley.
5 Quotes regarding Obamacare’s impact on sales 1. “[T]here are indications that the Affordable Care Act is beginning to have a positive impact as we're experiencing growth in states that have expanded Medicaid,” said Standley. 4. “Pharmacy same-store comp scripts were up 230 basis points, reflecting higher utilization, particularly in Medicaid expansion states,” said Vitrano. 2. “We expect script growth benefits from ACA ,” said CFO Frank Vitrano 5. “[I]n terms of exchange-based plans, probably 70% of the people that we can identify related to an exchange-based plan came from another plan where we already had them as customers,” said Standley. 3. “In the Medicaid expansion states, we've seen strong script growth,” said Standley.
3 Quotes on remodeling and expansion 1. “We continue to make significant progress with our key initiatives, as we transition our strategy to more aggressively pursuing opportunities for long-term growth,” said Standley. 3. “Our Wellness store program is a foundational element of this strategy as we continue our remodeling efforts and build up our real estate pipeline for relocations and new stores,” said Rite Aid President Martingale. 2. “In the first quarter of fiscal '15, front-end same-store sales in the Wellness stores exceeded the non-Wellness stores by 265 basis points and script growth in the Wellness stores exceeded the non-Wellness stores by 120 basis points,” said Vitrano.
4 Quotes on launching in-store healthcare clinics 3. “Wellness stores will also serve as the foundation for expanding our healthcare offering, including…adding Rite Aid clinics to Rite Aid stores,” said Standley. 1. “We're now actively engaged in site selection for adding our first RediClinic to Rite Aid stores,” said Standley. 4. “[W]e plan to open an additional 70 RediClinics over the next 18 months,” said Vitrano. 2. “[W]e're estimating about $200,000 to put a RediClinic in,” according to Vitrano.
3 Quotes on guidance for the rest of the year 2. “[W]e expect that the second half of fiscal '15 to be stronger than the first two quarters due in part to the strength of fiscal '14's first half as well as the introduction of new generics in the second half of fiscal '15,” said Vitrano. 1. “This year, we are forecasting to generate $400 million to $450 million of free cash flow that'll help us to begin to pay down our debt here,” said Vitrano. 3. “We increased our expected working capital benefit to $250 million from $150 million as a result of the McKesson agreement. We are seeing early results reflecting lower store pharmacy inventory as a result of more frequent direct store deliveries. Previous guidance only included the distribution center inventory reductions. The working capital benefit will not be fully realized until the fourth quarter of fiscal '15.
Fool-worthy take away Rite Aid shares are under pressure as investors digest whether short term profit headwinds tied to transitioning generic buying and distribution will continue, but it seems that management remains confident that the benefits will be realized by year end. Obamacare has had a marginal impact on script volume, but the bigger impact is coming from Medicaid expansion. Rite Aid’s new Wellness format is more profitable than its legacy format, suggesting the company could generate growth if it begins to open more new stores. Rite Aid appears on schedule to roll-out in-store healthcare clinics in its stores this year, better positioning it to challenge competitors CVS and Walgreen. Rite Aid management seems to be suggesting that the second half of the fiscal year will be better than the first half. If so, investors should consider buying weakness through summer.
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