At Rite Aid, the medicine `is working'

Sales are healthier and losses slimmer, troubled chain says

Shares climb to $3.44

Third-quarter news brings applause for new management

January 10, 2001|By Stacey Hirsh | Stacey Hirsh,SUN STAFF

Rite Aid Corp. reported smaller losses and increased sales for its fiscal third quarter yesterday, and Wall Street reacted kindly to the news, sending the stock price up as much as 21 percent during trading.

The troubled Pennsylvania-based drugstore giant said its loss from continuing operations was $241.2 million, or 74 cents per diluted share, for its fiscal third quarter, compared with a loss of $249.8 million, or $1.00 per share, in the third quarter a year earlier.

But, including a reduction on the loss on the sale of PCS Health Systems Inc., the net loss was $105.7 million, or 34 cents per diluted share.

Revenue in Rite Aid's third quarter, which ended Nov. 25, was $3.5 billion, 7.8 percent more than the $3.3 billion revenue it posted for the year-earlier quarter.

"Our results show our focus is working, and we expect to see continued improvements next quarter and to start fiscal year 2002 positioned for strong results," Rite Aid President and Chief Operating Officer Mary Sammons said during a conference call yesterday.

As the news made its way to Wall Street, shares of Rite Aid climbed as high as $3.63, up 21 percent from its $3 closing price on Monday. Shares closed yesterday at $3.44, up 44 cents.

"The new management team is certainly building up some credibility with the Street," said Sheldon Grodsky, director of research for Grodsky Associates Inc. in New Jersey.

Rite Aid's chairman and chief executive officer, Robert G. Miller, and his team have headed the nation's third-largest drugstore chain since December 1999, taking on a company riddled with debt and accounting irregularities.

In July, Rite Aid restated profit as $1 billion lower in total for fiscal years 1998 and 1999, and reported a $1 billion loss for fiscal 2000, which ended in February.

"The debt is still enormous," said Mark Husson, an analyst who covers Rite Aid for Merrill Lynch Global Securities in New York.

At the moment, Rite Aid's improved cash flow is only being used to cover its interest payments, Husson said.

Grodsky said that paying down its debt is going to be difficult if Rite Aid doesn't sell any assets -- though he said it appears that the drugstore chain may not have to borrow any more money.

"The most important thing in the near term is to get them to the point where they can clearly fund operations from operations," Grodsky said.

During the third quarter, Rite Aid reduced debt by $580.8 million, mostly from the sale of pharmacy benefits manager PCS Health Systems to Advance Paradigm Inc. and the exchange of $92.2 million of debt for equity.

Rite Aid said it had estimated its loss from the sale of PCS would be about $334.7 million. However, because the deal included 6.25 million shares of the newly formed company, Advance PCS, the deal was reappraised after the stock of Advance PCS went up.

Rite Aid didn't open any new stores in the quarter, but it moved 14 drugstores and closed 25. At the end of the quarter, the company had 3,742 stores.

Sales at Rite Aid stores open at least a year were up 7.3 percent in December, compared with December 1999.

Pharmacy sales at those stores were up 8.9 percent, and sales in the rest of the store -- or front-end sales -- were up 5.5 percent, the company said.

"We are excited about the third-quarter results and the improvement we see in areas like customer services, the efforts of our employees to take care of our customers better, the real sales growth we see in the front end, the improved cash flow that we have," Miller said during yesterday's conference call.

"We have a number of initiatives that are just getting started that we expect to strengthen both sales and cash flow in the future."

Reuters contributed to this article.

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