Rite Aid: Most improved?

WHAT IT MEANS AND WHY IT'S IMPORTANT — During Rite Aid’s second-quarter 2012 earnings call last week, at least two analysts congratulated the company on its performance. It’s little wonder: As president and CEO John Standley said, the quarter saw the first increase in total sales in 13 quarters, with much of the improvement driven by the Wellness+ loyalty card program.

(THE NEWS: Rite Aid expands Wellness+ program, Wellness stores in Q2. For the full story, click here)

Some analysts nevertheless continue to see signs of trouble. Credit Suisse analyst Edward Kelly noted that despite its success, Wellness+ had a negative impact of 33 bps on gross margin and wrote that the company “continues to sacrifice profitability in order to drive top-line improvements” in a report released after the call. He also called the decision not to expand on the Rite Aid/Save-a-Lot co-branded stores — made due to the stores’ inability to generate sufficient margins, despite good sales lift — “premature.” Meanwhile, Moody’s Investors Service said in a report released in February that while initiatives designed to drive sales, such as Wellness+ “make sense,” they might not be enough to stem market share losses.

Still, February was a long time ago, and Kelly’s report noted that Wellness+ has continued to gain traction despite its negative effect on gross margin. The program has helped drive sales, with members showing significantly larger basket sizes than nonmembers. Meanwhile, as Standley noted when the company released its first quarter 2012 report in June, sales at the Wellness stores were already trending between 100 and 200 basis points higher than the rest of the chain. Since then, the concept has been expanded to several new markets, including Seattle, Baltimore and Boston.

Indeed, CFO Frank Vitrano said, the chain would “ideally” like to have all the stores in the chain remodeled in five years. While conceding that such a goal likely would not be realistic, Vitrano said it was conceivable that 78% to 80% of the chain could be remodeled “over the next couple of years” with the right increases in capital expenditure investment.

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