Rite Aid’s new loyalty program a major bright spot in tough Q3

Quarterly earnings drop across the board

CAMP HILL, Pa. — What Rite Aid might wish for Christmas is accelerated results borne from its Wellness+ loyalty card program, because even as the chain lowered its guidance for fiscal 2011 sales, it’s that differentiated loyalty program that executives believe is going to buttress sales next year and beyond.

Based on its third-quarter results and its lower expectation for same-store sales in the fourth quarter, Rite Aid lowered its fiscal 2011 guidance for sales and adjusted EBITDA, and increased fiscal 2011 guidance for net loss. Sales now are expected to be between $25 billion and $25.2 billion, with same-store sales expected to range from a decrease of 1.5% to a decrease of 0.9%. Net loss is expected to fall between $655 million, or 74 cents per diluted share, and $525 million, or 60 cents per diluted share.

Even with the lowered guidance, Rite Aid was bullish regarding its Wellness+ program. “[Wellness+] helped fuel a significant turnaround in front-end sales,” John Standley, Rite Aid president and CEO, told analysts Thursday morning during the chain’s third-quarter conference call. “We continue to exceed our enrollment [projections] in Wellness+,” he said.

In the first eight months of the program, more than 29 million customers have opted into a loyalty program that successfully connects the pharmacy business with the front end. Through the first two weeks of December, 70% of front-end sales were connected to a loyal consumer, and 50% of pharmacy sales were transacted with a Wellness+ card. Excluding New York and New Jersey (two states that don’t allow loyalty programs to accumulate points for prescriptions filled), 64% of prescriptions were filled by patients enrolled in the Wellness+ program.

Total market basket of those Wellness+ customers is 50% higher than Rite Aid’s transient customers, versus 40% higher as of the last quarter, Standley said. And while much of the impact of Wellness+ to date has been connected to helping front-end sales, the program bodes well for the back end, too. “As Wellness+ matures, it will help us grow script counts,” Standley said. “Wellness+ retains and attracts good pharmacy customers.”

Other positive initiatives to come out of Rite Aid’s conference call with analysts included its focus on growing its flu vaccine business, its partnership with Supervalu on 10 Save-A-Lot/Rite Aid combination stores in Greenville, S.C., and the chain’s segmentation initiative, particularly among low-volume stores.

Rite Aid projected administering between 700,000 and 750,000 flu shots for the year. And while that’s down from the chain’s original estimates of more than 1 million shots (flu activity has been down versus the H1N1 pandemic last year), Rite Aid will have administered more shots this year than last, and 30% of those patients taking advantage of Rite Aid’s program are new customers. “This business will continue to grow in the future,” Standley said, especially as more Rite Aid pharmacists complete the chain’s immunization program and as awareness that these services are available at Rite Aid increases among the public.

The discount/limited grocery assortment concept in South Carolina is seeing 100% growth in comparable sales across the front end, reflecting an increase in the number of customers now walking through the doors. Standley told analysts that Rite Aid and Supervalu were discussing possibly expanding the program beyond South Carolina going forward. The low-volume segmentation stores, which feature some 9,000 fewer SKUs, a “Wall of Values” and a dollar section, have realized 10% growth in comparable sales.

Rite Aid reported revenues of $6.2 billion, a drop of 2.4% versus last year and a net loss of $79.1 million, or nine cents per diluted share, for the quarter ended Nov. 27. Rite Aid cited a slower start to the cough, cold and flu season, coupled with an increase in workers’ compensation and general liability self-insurance expense, as reasons behind the less-than-expected results. “While the lack of cough, cold and flu had a significant impact on our results, the good news is that our front-end sales began to turn around during the quarter, and our team continued to do a good job of controlling costs,” Standley said.

Same-store sales for the quarter decreased 1.3% over the prior 13-week period, with flat front-end sales and a 1.9% decrease in the pharmacy. Pharmacy sales included an approximate 242 basis point negative impact from new generic introductions, Rite Aid reported. The number of prescriptions filled in comparable stores decreased 1.7% over the prior-year period, negatively impacted 1.3% by the lower incidence of cough, cold and flu. Prescription sales accounted for 68.3% of total drug store sales and third-party prescription revenue was 96.2% of pharmacy sales.

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