Rite Aid Corporation RAD, which is on track to acquire rival Walgreens Boots Alliance Inc. WBA, reported adjusted earnings of 3 cents a share in the second quarter of fiscal 2017, in line with the Zacks Consensus Estimate but down 50% from the year-ago figure of 6 cents. The decline in bottom line was mainly attributed to a fall in adjusted EBITDA, offset by lower taxes and interest expense.

During the quarter, the company was encouraged by the performance of its Pharmacy Services segment as well as its front-end business. Moreover, the company’s results benefited from an improvement in prescription drug costs. However, the company stated that challenges relating to the pharmacy reimbursement rate weighed on the results and the trend is expected to continue through the rest of the fiscal year.

The company witnessed a 4.8% jump in total revenue to $8,029.8 million but missed the Zacks Consensus Estimate of $8,086 million. During the quarter, the company’s top line gained from strength in the Pharmacy Services segment, while revenues from the Retail Pharmacy segment  disappointed.

RITE AID CORP Price, Consensus and EPS Surprise

RITE AID CORP Price, Consensus and EPS Surprise | RITE AID CORP Quote

Deeper Insight

Sales at the Retail Pharmacy Segment fell 2.4% to $6,485.5 million, chiefly due to lower comparable store sales (comps). Sales at the Pharmacy Services segment, which was acquired on Jun 24, 2015, were $1,634.9 million.

The company’s comps declined 2.5%, owing to a 3.6% fall in pharmacy comps neutralized by a 0.1% rise in front-end comps. Pharmacy comps included a negative impact of 101 basis points (bps) due to the introduction of new generic drugs. Also, prescription count at comparable stores dipped 1.8%. Prescription sales constituted 68.5% of total drugstore sales and third-party prescription sales accounted for 98.1% of pharmacy sales.

Rite Aid’s adjusted EBITDA slumped 9.8% year over year to $312.7 million, whereas adjusted EBITDA margin contracted 60 bps to 3.9%. The decline in adjusted EBITDA, in dollar terms, was mainly due to a fall in adjusted EBITDA contributions from Retail Pharmacy segment owing to lower pharmacy gross profit and higher SG&A expenses. This was partially compensated by strong contribution from the Pharmacy Services segment.

Financials

Rite Aid, which trails CVS Health Corporation CVS in size, ended the fiscal second quarter with cash and cash equivalents of $136.1 million, long-term debt (excluding current maturities) of $7,173.7 million, and total shareholders’ equity of $616.7 million.

In second-quarter fiscal 2017, the company used cash flow of $147.1 million in operating activities and incurred gross capital expenditure of nearly $133.6 million.

Store Update

Rite Aid stores continue to renovate, with 85 outlets remodeled and six relocated in the fiscal second quarter. Additionally, the company opened three stores. This brings the company’s total wellness stores count to 2,214. Further, the company acquired one store and shut 14 stores during the reported quarter. With this, Rite Aid operates 4,550 stores across 31 states and the District of Columbia as of Aug 27, 2016. Additionally, the company opened 10 clinics in the quarter, taking its total clinics count to 90.

Zacks Rank

Rite Aid currently carries a Zacks Rank #3 (Hold). A better-ranked stock in the retail-drugstore industry is Herbalife Ltd. HLF, with a Zacks Rank #2 (Buy). Herbalife looks like a promising investment, with a positive surprise trend over the last four quarters. The average beat for the trailing four quarters is 21.6%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Confidential from Zacks

Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
RITE AID CORP (RAD): Free Stock Analysis Report
 
CVS HEALTH CORP (CVS): Free Stock Analysis Report
 
HERBALIFE LTD (HLF): Free Stock Analysis Report
 
WALGREENS BAI (WBA): Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research