THOMSON REUTERS STREETEVENTS
RAD - Q1 2021 Rite Aid Corp Earnings Call
EVENT DATE/TIME: JUNE 25, 2020 / 12:30PM GMT
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Byron PurcellRite Aid Corporation - Senior Director of Treasury Services & IRDaniel Dean RobsonRite Aid Corporation - President of EnvisionRxOptionsHeyward Rutledge DoniganRite Aid Corporation - President CEO & DirectorJames Joseph PetersRite Aid Corporation - COO
Matthew SchroederRite Aid Corporation - CFO & Executive VP
CONFERENCE CALL PARTICIPANTS
Bryan Cecil HuntWells Fargo Securities, LLC, Research Division - MD & Senior AnalystCarla CasellaJP Morgan Chase & Co, Research Division - MD & Senior Analyst
George Robert HillDeutsche Bank AG, Research Division - MD & Equity Research AnalystGlen Joseph SantangeloGuggenheim Securities, LLC, Research Division - AnalystKarru MartinsonJefferies LLC, Research Division - Analyst
Lisa Christine GillJP Morgan Chase & Co, Research Division - Senior Publishing AnalystRobert Patrick JonesGoldman Sachs Group Inc., Research Division - VP
William Michael ReuterBofA Merrill Lynch, Research Division - MD
Ladies and gentlemen, thank you for standing by, and welcome to the Rite Aid Corporation FY '21 Q1 Earnings Conference Call. (Operator Instructions) I would now like to hand the conference over to your speaker today, Byron Purcell. Thank you. Please go ahead, sir.
Byron Purcell- Rite Aid Corporation - Senior Director of Treasury Services & IR
Thank you, and good morning, everyone. We welcome you to our fiscal 2021 first quarter earnings conference call. On the call with me today are Heyward Donigan, President and Chief Executive Officer; Jim Peters, Chief Operating Officer; Dan Robson, President of Elixir; and Matt Schroeder, Chief Financial Officer.
On today's call, Heyward will provide introductory comments concerning business trends and our strategy. Jim will provide an update on the retail business. Dan will provide an update on the pharmacy services business. Matt will provide an update on our first quarter results, and then we will take questions.
As we mentioned in our release, we are providing slides related to the material we'll be discussing today. These slides are provided on our website,www.riteaid.com, under the Investor Relations Information tab. We will not be referring to them in our remarks, but hope you find them helpful as they summarize some of the key points made on the call.
Before we start, I'd like to remind you that today's conference call includes certain forward-looking statements. These forward-looking statements are presented in the context of certain risks and uncertainties that can cause actual results to differ. These risks and uncertainties are described in our press release in Item 1A of our most recent annual report on Form 10-K, and other documents that we file or furnish to the Securities and Exchange Commission.
Also, we'll be using certain non-GAAP measures in our release in our accompanying slides. The definition of the non-GAAP measures, along with the reconciliation to the related GAAP measure are described in our press release and the slides. With these remarks, I'd now like to turn it over to Heyward.
Heyward Rutledge Donigan- Rite Aid Corporation - President CEO & Director
Thanks, Byron, and thanks to everyone for joining us. And this was a quarter like no other. The resolve of our Rite Aid associates and the communities we serve is being tested by the unprecedented challenges of COVID-19 and the events surrounding a crucial dialogues about diversity and racial justice.
First, I couldn't be more proud of how our Rite Aid team has responded to these challenges. The events surrounding the death of George Floyd have sparked important conversations within our organization about how we can do better and the actions we can take to be a part of the solution in our local communities. Meanwhile, our teams has been on the front lines of health care during the COVID-19 crisis, showing up every day to fulfill our purpose of serving our communities during this time of great need, including the expansion of COVID testing to 97 stores. And all of this, while working together to advance in new strategies that will position us to serve our communities at an even higher level.
In my eyes, although this work is far from over, our team is more than passing this test and it gives me great confidence that we can continue to fulfill our important role in health care, elevate our role going forward and be an agent for positive change in our communities. In terms of the results for Q1, COVID-19 was the headline. And the crisis impacted our business in a number of unprecedented ways.
At first, in our retail pharmacies, we experienced very favorable results as customers visited our stores for advanced maintenance medications and essential items. Basket size was up significantly and still is, and our team executed at the highest of levels. With only a few exceptions, we kept all of our stores open with all of our usual hours, quickly implemented needed safety measures and kept our supply chain moving and shelf stock as much as was possible, and we know that was a challenge. As a result, and Jim will speak to this later, front end sales, excluding tobacco, grew 16%. We also gained front end market share from our competitors during this time and saw a surge in e-commerce activity. As the quarter went on, we began to see a significant decline in acute prescriptions, as doctors' offices close and elective surgeries were postponed. And we also incurred increased costs necessary in making essential and critical investments to keep our associates and our customers safe.
Taking into account the increase in front end sales, the reduction in acute scripts and those incremental expenses, COVID-19 had a $30 million net negative impact on adjusted EBITDA for the quarter. So now turning to our Pharmacy Services Segment, I'm pleased to announce that we have completed the recruiting and hiring of our entire new leadership team at EnvisionRxOptions, which is soon to be renamed Elixir. Our new team includes just the right combination of experience EnvisionRxOptions leaders with extensive organizational knowledge, and new leaders who bring a fresh perspective along with strong pharmacy services market expertise. Together, this team delivered strong results under challenging circumstances in Q1.
Revenue was up significantly over prior year, primarily driven by an increase in Medicare Part D membership. And adjusted EBITDA grew $18 million from increased gross profit related to improvements in pharmacy network management. And all of this, on top of our efforts to rebuild this organization, including the launch of a new brand, the integration of our assets within Elixir and the integration between Elixir and Rite Aid, all of which is resulting in strong synergies. We're also investing in our sales team and our new digital experiences, which will be rolled out this fall. So overall, for Rite Aid, even with all of this change, revenue increased more than 12% with strong growth in both segments, and we delivered adjusted EBITDA from continuing operations of $107.4 million compared to $110.3 million in the prior year period.
I am encouraged by these results, and I remain bullish about our future. While COVID does create uncertainty, the fundamentals of our business were strong before the crisis, and I believe we are now even better prepared than many to emerge from COVID in a positive way. Our team is doing an extraordinary job of delivering operational excellence. In fact, because of this great work, we remain on schedule with the execution of our bold new RxEvolution strategy. Through this strategy, we are committed to redefining our industry by becoming a dominant mid-market PBM, unlocking the value of our pharmacists and revitalizing our retail and digital experiences.
We are also committed to being a destination for whole being health, where traditional medicine meets alternative remedies to support our customers' mind, body and spirit. We are dialed in on meeting the needs of our new target consumer, millennial and Gen X women who care for multigenerational households, including children, parents and pets. It's an approach I call buy 1 one, get 5 free because these consumers drive and influence the purchasing habits of all those they care for. We have seen a modest increase in the percent of our front-end sales that are attributable to this new growth target shopper, which is really encouraging, given that we're in the beginning stages of our remerchandising initiatives and have not yet launched our new brand.
The COVID crisis has proven just how essential pharmacies are to the communities we serve. And the important role pharmacists have in providing care at the top of their license. In the case of COVID, we are administering testing. We're focused on elevating the roles of our pharmacists and freeing up time, their precious time to provide levels of consumer engagement never be foreseen in health care. And all of this is being supported by our new merchandising and an exciting new brand.
As of this call, we have completed 25 store exterior facade updates with our new logo, our new signs and a fresh new look, and we're on track to implement our new merchandising in concert with our brand launch this fall. And as a reminder, by the end of this year, all of our store exteriors will be completely redone. In addition, and on top of this, we have strong liquidity, expect to generate free cash flow this year and continue taking critical steps to address our debt maturities as reflected by our bond exchange announced this morning. And we continue doubling down on areas where we have momentum, shifting resources to invest in key growth opportunities while reducing corporate expenses and realizing synergies through integration activity at Elixir.
A whole new Rite Aid is coming to life, and we're excited about our vision for the future and the important progress we're making. At the same time, I am amazed by the passion and spirit of our more than 50,000 associates who have come to work every day to serve our customers and clients and demonstrate the crucial role that pharmacy plays on the front lines of health care. So with that, I'd like to introduce Jim Peters. Jim is going to give you some additional updates on our Q1 performance and the exciting details about our strategic progress on the retail pharmacy side. Jim?
James Joseph Peters- Rite Aid Corporation - COO
Thank you, Heyward. As Heyward mentioned, our team was challenged in unprecedented ways during the first quarter. I am so proud of our associates' remarkable response to an unfathomable situation, bravely, tirelessly serving our communities amidst the uncertainties and perils of a global pandemic and civic unrest, all while pushing forward to deploy the RxEvolution strategy. To me, this quarter proved that we can execute at the highest level and signal that decisiveness and nimbleness will continue to emerge as competitive advantages for us. Our associates led the way by swiftly developing and implementing new procedures to keep our stores safe and sanitary, collaborating across the organization and with our supply chain to stay in stock, maintaining store hours wherever possible and managing e-commerce demand that peaked at over 10x historical levels.
And while we realized there is much more important work to do in turning our company around, I am more confident than ever before that we can and will achieve our vision of becoming the destination for whole being health and a growing differentiated thriving organization.
In terms of the quarter, the COVID-19 prices put our pharmacy business in unchartered territory. With all of the factors that Heyward mentioned earlier, we were able to grow same-store prescription count by 40 basis points. And this came despite a nearly 15% reduction in acute prescriptions. While it's simply too early to tell if these trends will hold with the uncertainty surrounding COVID-19, we're beginning to see some positive trends as additional parts of the country continue to reopen. A key area of success was the growth of our prescription delivery business, which we expanded to all stores during the quarter as we began providing free home delivery. And as a result, prescription deliveries increased 86% in Q1 compared to our baseline, and we look forward to continuing to leverage this service to meet the needs of our customers.
Immunization rates dropped during the quarter, not surprisingly, as the CDC issued guidance to defer adult immunizations to minimize exposure to COVID. The CDC has recently updated its guidance to resume immunizations according to its immunization schedule put forth by its advisory committee on immunization practices, and we have directed our field leadership and store teams to resume vaccinating with robust protocols.
We're looking forward to helping our customers protect themselves from the flu once the vaccine hits the market later this summer. While stay-at-home orders affected traffic to our stores, we drove heightened engagement with customers at home through clinical services like medication therapy management. Customers were more willing to engage with their trusted Rite Aid pharmacists, and we, in fact, experienced 3 record weeks for MTM during this quarter.
I spoke earlier about strong execution and nowhere was that more apparent than our rapid and successful launch of 97 COVID testing sites at Rite Aid stores. Through our partnership with the United States Department of Health and Human Services, we now have the capacity to conduct more than 48,000 tests each week to help our customers during a time when they need us most. Our response highlights the key evolving role our pharmacists can play as clinical extensions of our customers' care teams.
Our Rite Aid pharmacists continue to prove they are fully prepared and capable of expanding their role in ways that help our customers, communities and key health care stakeholders. As you know, pharmacy is at the heart of our new strategy, which is designed to fundamentally change Rite Aid's role in health care.
As I've mentioned before, consumers visit Rite Aid stores up to 30 times per year, and we believe there is a significant opportunity to leverage these everyday type interactions to activate and engage consumers in their own health and support health plans and health care providers as true partners on the front lines in the communities they serve.
We believe Rite Aid will play an increasingly important role in helping to guide consumers' decisions in between doctors' visits and serve as a conduit to better health outcomes and lower costs. Moving forward, we will continue to aggressively build a more robust set of capabilities that supports a connected care experience and whole being health solutions that include prescriptions, products and services.
In our retail business, we had a strong quarter with front end same-store sales increasing by 16% when excluding tobacco items. This growth was driven by general cleaning products, sanitizers, wipes, paper products, over-the-counter products, liquor and summer seasonal items. In addition, own brand penetration increased to 19.56%, an increase of 119 basis points, as we continue efforts to launch additional own brand items that support whole being health.
We're also seeing strong progress in our offering of own brand items through the Amazon marketplace, which we feel is a testament to the quality of the products and the demand of the marketplace. But most importantly, the outstanding execution of our team drove some notable gains in front-end market share as our associates work passionately to serve our customers during the COVID-19 crisis. According to IRI reports, which exclude tobacco, cigarettes and greeting cards, our in-store front end retail sales and unit market share increased by 270 basis points within the drugstore channel in Q1. These important market share gains were delivered across all major business segments, including health, beauty, consumables, general merchandise and liquor. And these market share gains were delivered across all of our major markets, with California and New York City markets among key contributors to the increase.
We know we're going to have to work hard to continue these trends going forward, but rest assured that we are recognizing our associates for this success so that they can see the results of their dedication, commitment and perseverance. This gives us critical momentum as we continue to overhaul our merchandising assortment to fully live up to the elevated health and wellness standard that will differentiate Rite Aid from the competition.
In terms of marketing, we're very excited to be building assets that support our front-end fresh new brand in preparation for a full-scale new brand launch this fall. As Heyward mentioned, as we sit here today, the first wave of store exterior refreshes is actively underway with 25 already completed. Over the next several months, our communities will begin to notice our fleet being updated as facades are cleaned and pylons and signage replaced with ones reflecting our new brand identity.
Commencing this work is an exciting milestone for our Rite Aid team and an outward signal of exciting changes to come as we build up to our official brand launch this fall. We are laser-focused on meeting the needs of our new growth target consumer, millennial and Gen X women, who take care of themselves, their children, their parents and their pets. And as mentioned earlier, we are already beginning to see growth in front-end