Rite Aid says liquidity stays strong despite 'challenging' fiscal Q3

By Paul Deckelman

New York, Dec. 16 - Rite Aid Corp. had what its executives on Thursday called a "challenging" fiscal third quarter. A relatively mild cough, cold and flu season has so far caused a drop-off in pharmacy sales from a year ago, and the Camp Hill, Pa.-based No. 3 U.S. drugstore chain operator lowered its full-year guidance for the current 2011 fiscal year.

But company executives told analysts and investors on their conference call following the release of the results that the company's liquidity position is "strong." It has nearly $1 billion of borrowing capacity, while net debt declined by $153 million from a year ago.

Rite Aid's chief financial officer, Frank G. Vitrano, attributed the solid liquidity status to various company initiatives aimed at limiting working capital, such as inventory-reduction efforts, as well as "spending our capital wisely."

He said that as a result, at the end of the fiscal 2011 third quarter on Nov. 27, Rite Aid had $966 million of liquidity, consisting of $965 million of borrowing availability under the revolving credit facility it entered into in August and about $1 million of invested cash. The company also had $152 million of letters of credit outstanding under the facility.

Vitrano said revolver availability currently stands at $947 million.

No revolver problems seen

In answer to an analyst's question, Vitrano said that Rite Aid has "full access" to its revolver and is "well in compliance" with the fixed-charged coverage ratio written into its borrowing agreement.

Earlier in the year, the CFO had cautioned that although Rite Aid was in compliance with that covenant at that time, it was possible that the company might not meet the requirement in the third and fourth fiscal quarters - a breach that would result in a limit on Rite Aid's ability to access the last $150 million under the facility.

Vitrano told a second analyst that in the event that the revolver were fully drawn, Rite Aid would not have any borrowing capacity for additional secured debt.

In answer to yet another query, Vitrano, who is also Rite Aid's chief administrative officer and senior vice president, said that the company would be able to draw on its revolver to repay junk bonds slated to come due in 2013. The $6.02 million of 9¼% senior notes due June 2013 and $184.77 million of 6 7/8% senior debentures due August 2013 are Rite Aid's nearest bond maturities.

Debt levels decline

As of the end of the third fiscal quarter, Rite Aid's long-term debt, less current maturities, stood at $6.089 billion, versus $6.031 billion at the end of the fiscal second quarter ended Aug. 27, $6.185 billion at the end of the 2010 fiscal year on Feb. 27, 2010, and $6.232 billion at the end of the year-ago fiscal third quarter.

According to its most recent 10-Q report filed with the Securities and Exchange Commission, the company's capital structure includes about $1.4 billion of term-loan debt maturing in June 2014, approximately $2.261 billion of senior secured bonds of various maturities between 2016 and 2020 and the remainder of the unsecured bonds of varying maturities between 2013 and 2028.

In August, Rite Aid entered into the new $1.175 billion revolver due 2015, which replaced a similar-sized facility due 2012 at a more favorable interest rate, and also sold $650 million of new 8% senior secured first-lien notes due 2020, which priced at par on Aug. 9. Proceeds from the bond deal, along with cash on hand, were used to repay a tranche of term-loan debt.

Rite Aid also repurchased $93.812 million of its $158 million of outstanding 8½% convertible notes in July using cash on hand.

Company cuts forecast

For the fiscal third quarter, Rite Aid posted a net loss of $79.1 million, 9 cents per diluted share, versus year-earlier red ink of $83.9 million, or 10 cents per share, with the modest improvement due to lower lease termination and impairment charges, lower inventory expense and lower interest and securitization expense, among other factors.

However, revenues for the 13-week quarter fell by 2.4% to $6.2 billion versus $6.4 billion a year ago due primarily to a 1.3% decline in pharmacy same-store sales at Rite Aids open at least one year - the retailing industry's key performance metric - as a result of the lower incidence of cough, cold and flu cases versus 2009, when the H1N1 swine flu bug was severe enough to be declared a pandemic by health officials. Store closings not counted in the same-stores category also lowered total pharmacy sales, while same-store front-end sales of non-pharmacy items were flat from a year ago.

Adjusted EBITDA was $212.5 million in the latest quarter, well down from $254.2 million a year ago. Besides the impact of the milder flu conditions this year and the resulting drop in prescriptions filled year over year, Vitrano also cited a $29.5 million increase in workers' compensation and general liability self-insurance expense.

Based on its fiscal third-quarter results and its lower expectation for same-store sales in the current fiscal fourth quarter, which will end in late February, Rite Aid lowered its fiscal 2011 full-year guidance for sales and adjusted EBITDA. Sales are now expected to be between $25.0 billion and $25.2 billion as same-store sales are seen dropping between 0.9% to 1.5%. That will likely bring adjusted EBITDA down to between $815 million and $855 million, with an adjusted net loss for the year of between $655 million, or 74 cents per share, and $525 million, or 60 cents per share.

However, Vitrano told an analyst on the call that Rite Aid is sticking with its previous forecast of around $100 million of free cash flow generation for the fiscal year.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.