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21-06-2012 18:28:00

2nd UPDATE: Rite Aid 1Q Loss Narrows On Improved Same-Store Sales

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--Same-store sales improve for sixth consecutive quarter due to even growth at the front-end and pharmacy

--Full-year same-store sales target lowered as wave of generic drug introductions hurts that metric

--Shares rise as the latest quarterly results exceed Wall Street's expectations

(Updates with details from Rite Aid's conference call and the latest stock quote.)

By John Kell

Rite Aid Corp.'s (RAD) fiscal first-quarter loss narrowed as the drug-store company saw a continued increase in same-store sales and improved margins.

Shares of the drug-store chain, which narrowed its outlook for the year, jumped 8.6% to $1.27 during the regular session as the latest quarterly results exceeded Wall Street's expectations.

The No. 3 U.S. drug-store chain behind Walgreen Co. (WAG) and CVS Caremark Corp. (CVS) has posted losses since its 2007 acquisition of the Brooks and Eckerd chains that saddled it with debt just before consumers reduced spending. Still, the latest period marked the company's sixth consecutive quarter reporting an increase in same-store sales, with 2.5% growth. Front-end sales rose 2.7%, while pharmacy sales climbed 2.4%.

The number of prescriptions filled in same stores increased 3%, benefiting from the dispute between Walgreen and Express Scripts Holding Co. (ESRX). Rite Aid and CVS have each launched marketing campaigns to court customers forced to shift their prescriptions away from Walgreen as a result of the impasse with the pharmacy-benefit manager.

Increasingly contentious contract disputes between payers and providers, as well as reimbursement-rate pressures, had led some analysts to call for consolidation between the top three domestic drug-store chains. Some speculated Walgreen may look to acquire Rite Aid to work around the contract impasse with Express Scripts, though that argument lost luster after Walgreen agreed to buy a 45% stake in pharmacy-led health and beauty retailer Alliance Boots GmbH in a $6.7 billion deal that would give that firm global scale.

For the quarter ended June 2, Rite Aid recorded a loss of $28.1 million, or three cents a share, from the year-ago loss of $63.1 million, or seven cents a share. Revenue grew 1.2% to $6.47 billion as higher same-store sales helped offset store closings.

Analysts polled by Thomson Reuters most recently projected a loss of four cents on revenue of $6.43 billion.

Gross margin rose to 27% from 26.5%.

The latest quarter included a $17.8 million debt modification charge from refinancing, among other things. Rite Aid has benefited from cutting costs and refinancing billions of dollars in debt.

Rite Aid's same-store sales, meanwhile, have been bolstered by the rollout of a loyalty program and store renovations under a new format that expands clinical pharmacy services and offers more health and wellness products. Rite Aid remodeled 143 stores during the latest quarter and has in total converted 423 locations into the new wellness format.

The Wellness+ loyalty program, launched in April 2010, had 25 million active members at the end of the quarter. Card usage by those members--defined as those who have used their card at least twice in the past 26 weeks--increased 11% from a year ago and accounted for 75% of front-end sales and 69% of prescriptions filled in the latest quarter.

Rite Aid said that if it can get customers to sign up for Wellness+, which gives users discounts on the front end and the ability to earn points for prescriptions, the company can hopefully establish a loyal relationship and retain customers that have transferred their prescriptions away from Walgreen.

Chief Executive John Standley also touted efforts to administer more immunizations, as Rite Aid aims to deliver more clinical services at its stores. Flu immunizations during the latest season more than doubled the prior year total, and Mr. Standley said Rite Aid was able to build on that success through a shingles vaccination campaign.

Mr. Standley said Rite Aid is planning to offer more immunizations for kids entering school and will soon be ramping up this year's flu shot program.

"We expect to substantially grow this area of our business, now that most of our pharmacies have had at least one year of providing a variety of immunizations," said Mr. Standley.

Looking ahead, Rite Aid sees a full-year loss of 13 cents to 29 cents a share on revenue between $25.3 billion and $25.7 billion, compared to its April forecast of a loss of 13 cents to 31 cents on revenue of $25.4 billion to $25.8 billion.

Same-store sales are now projected between a 0.5% decrease to a 1% increase, worse than the prior estimate of a 1.5% jump. Rite Aid said the reduction to the sales targets was due to higher than expected demand for new generic drugs hitting the market. The industry's same-store sales have been hurt by that trend, as they carry lower prices than branded products.

-Chelsea Stevenson contributed to this story

Write to John Kell at john.kell@dowjones.com

(END) Dow Jones Newswires

June 21, 2012 12:28 ET (16:28 GMT)

Copyright (c) 2012 Dow Jones & Company, Inc.

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