Prescription for Rite Aid lies in expanding back bench
CAMP HILL, Pa. Beginning with its September monthly results, Rite Aid will no longer break out its Brooks/Eckerd operations separately, Rite Aid executives announced during its second-quarter conference call held late last month. It’s been more than a year since Brooks/Eckerd has been folded into overall Rite Aid operations, and there is no longer a need to differentiate between Rite Aid core stores and Brooks/Eckerd, noted Frank Vitrano, Rite Aid senior EVP, CFO and chief administrative officer. “We do not have internal initiatives that are acquired store specific. The business initiatives are centered around segmentation and other projects and not specific to the Brooks-Eckerd stores,” he added.
There really is no longer any difference between operations, John Standley, president and COO, added. “There isn’t anything particular about Brooks-Eckerd that I could point you to that says it should be under-performing at this point,” he told analysts late September. “When we go through it, they are just isolated kind of store-by-store instances that we have to deal with as part of our under-performing store initiative. It’s not something germane to the whole group of stores.”
For its second quarter fiscal 2010, ended Aug. 29, Rite Aid core stores posted a 0.6% decline in overall comparable store sales, reflecting a 4.9% decline across the front-end balanced by a 2% lift in pharmacy sales. At the former Brooks/Eckerd stores, same-store sales were down 2.3%, with front-end falling 4.7% and pharmacy decreasing 1.4%.
It’s a factor that could lead to a degree of uncertainty among analysts — as they will no longer be afforded a crystal-clear picture of what once was the Brooks/Eckerd chain, and the difference in productivity between the two sides of the operation will be muted.
The adjustment may prove to be a boost to Rite Aid’s perceived performance in the long term, however, and that’s because any of those continued-but-slow improvements across the Brooks/Eckerd base will now be folded into Rite Aid’s overall results. Taken as a whole, Rite Aid trended 0.8% positive across its back bench, and same-store sales of Brooks/Eckerd pharmacy results have been steadily improving since last year; Rite Aid had posted pharmacy same-store sales declines of 4.6% across its Brooks/Eckerd base for second quarter fiscal 2009.
Regardless of perception, the prescription for success at Rite Aid continues to be tied to its back bench, especially as it is increased pharmacy traffic that will help the chain right its front-end sales comps. And that just means that Rite Aid really needs to maintain its improving-pharmacy pace through its planned pharmacy and wellness initiatives.
Mary Sammons, Rite Aid chairman and CEO, noted that prescription metrics had improved through the month of September, whether measured by prescriptions dispensed (140 basis point improvement across comparable stores), sales or customer satisfaction scores.
To help focus on improving pharmacy metrics, Rite Aid last month made a number of moves across its pharmacy team, including the promotion of Robert Thompson to the position of EVP pharmacy. “[Thompson] has a unique background that combines extensive experience in retail pharmacy and store operations with healthcare business development,” Standley said. “He’s been a terrific asset to Rite Aid over the past five years, making many valuable contributions to our company. With this promotion, he is now positioned to bring even greater value in this larger role overseeing all aspects of pharmacy.”
One of Rite Aid’s significant contributors to pharmacy performance is the chain’s Rx Savings Card, now boasting more than 3.5 million members (up 34.6% since first quarter fiscal 2010). The discount card has played a significant role in helping to grow Rite Aid’s prescription count in comparable stores by 1.4% for the quarter, Standley noted.
The central-Pennsylvania drug chain is piloting a loyalty card program that emphasizes pharmacy for a planned launch next year.
And if that’s even half as successful among Rite Aid pharmacy customers as CVS/Caremark’s ExtraCare loyalty program is among its customer base, the new pharmacy loyalty card will drive significant growth across both the front-end and back bench at Rite Aid. CVS’ program boasts 56 million active cardholders, who use their cards for more than 63% of that chain’s front store transaction and accounting for 70% of sales, CVS noted in its second-quarter call in August. According to Larry Merlo, CVS/pharmacy president, every penny invested results in an incremental sales lift of $1.37. ExtraCare also drives shopping frequency for CVS.
Looking forward, Rite Aid hopes to further improve pharmacy performance through increased prescription-file buys in the second half of the year.
“This is a positive, since file buys generate a high return, especially given the amount of excess capacity at many Rite Aid pharmacies,” noted Meredith Adler, Barclays Capital analyst, in a research note following the conference call.
Rite Aid recently expanded its retail clinic program, which is similarly a proven driver of increased prescription counts. Rite Aid and Atlantic General Hospital and Health System last month announced the planned opening of three Atlantic ImmediCare clinics — two in Maryland and one in Delaware — which are slated to open this fall.
“The Atlantic ImmediCare clinics will complement the medication counseling and care provided by our pharmacists and provide the convenience of high-quality, affordable healthcare services to patients who won’t have to wait for an appointment to receive treatment for minor illnesses and get basic medical tests,” Thompson said.
The new clinic deal brings Rite Aid’s total number of convenient care clinics to 18 across five partners.
Earlier this year, Rite Aid updated Drug Store News on its expansion of Rite Care, a reimbursed medication-therapy management model pioneered four years ago in the Pittsburgh market. Rite Aid has since expanded those program capabilities across 2,200 Rite Aid stores in virtually all of the markets Rite Aid serves through a specially trained MTM work force comprised of more than 650 pharmacists.
The MTM services provided through Rite Care can cost as much as $120 per hour on the initial visit; however, similar to the pharmaceutical business, more than 90% of those encounters are reimbursed by a third party, and the majority of those represent Medicare Part D participants. The average time of an MTM visit falls between 45 minutes and an hour.
The coveted diabetes patient, and the larger marketbasket associated with that disease state, rank at the top of the list of those patients receiving MTM therapy, followed by patients with cardiovascular disease.
Though the future for Rite Aid looks more sunny than cloudy, the chain lowered its outlook for fiscal 2010 by some 12%, thanks to number of confounding factors: reductions in inventory and labor that may have cut too deep, a recession economy that’s yet to materially recover and increased generic utilization, which on the surface reduces top-line sales significantly even as more revenue from the higher-margin pharmaceuticals drops to the bottom line.
Removing as many controllable costs out of the system has been a key objective for Rite Aid in its latest turnaround effort, including reductions in overhead-like labor, inventory and capital expenditures. That tightened grip on costs has netted Rite Aid inventory reductions of 13.5% versus a sales decline of 1.2%, reflecting both reduced front-end merchandise and 118 fewer stores, Ed Kelly, Credit Suisse research analyst, wrote in a note following the second-quarter conference call. “[And] expense control remains impressive as SG&A dollars declined 5.6% driven by lower labor, supply, insurance and utility costs,” he stated.
“SG&A declined an impressive 135 basis points to 26% of sales compared to 27.4% last year,” Standley said. “Distribution costs were 1.55% of sales our fourth consecutive quarter of improvement versus the prior year.”
However, Rite Aid executives acknowledged that across some locations, they may have done too good a job in reducing SG&A. “Front- end sales may have also been somewhat impacted by the SG&A working capital initiatives we have implemented over the last four quarters,” Standley said. “In fact, the 1,800 bi-weekly delivery stores negatively impacted our front-end comp store sales about 1.4% in the quarter. The good news, however, is that the EBITDA — excluding pharmacy margin in those stores — increased $10 million over the prior year, a big step in the right direction.”
Standley noted that Rite Aid executives were working toward a more balanced approach to reducing SG&A in those impacted stores. “When we get the sales going in these stores, we will get more of the savings from our changes to the operating model to the bottom line,” he said. “To help with sales in these stores, we’ve made some operational changes, including an increase in safety stock to help improve shelf conditions. In addition, we are working on some exciting merchandising changes for these stores that we will be rolling out next year.”
Late-stage clinical trial results: MS drug is effective
ALISO VIEJO, Calif. Patients taking an investigational drug for multiple sclerosis fared better than those taking placebo, according to late-stage clinical results presented Friday at a neurology conference.
Avanir Pharmaceuticals said MS patients taking Zenvia (dextromethorphan and quinidine) in 30 mg/10 mg doses experienced a 11.9% greater reduction in pseudobulbar effect – an MS-related condition also known as PBA that causes sudden, uncontrollable episodes of laughter, crying and other emotional outbursts – than those taking placebo in a 12-week phase 3 trial, results of which the company presented at the 3rd World Congress on Controversies in Neurology in Prague, Czech Republic. Patients taking the 20 mg/10 mg dose did not do better than the placebo group.
“PBA represents an area of high, unmet medical need with no FDA-approved treatments currently available,” study presenter and trial steering committee member Daniel Wynn of the Consultants in Neurology Multiple Sclerosis Center stated. “Although the involuntary emotional outbursts of PBA cause considerable impairment for millions of individuals in the United States, it is under-recognized and commonly misdiagnosed.”
New report projects 12.6% increase of probiotics market
NEW YORK The two takeaways from this story are “the [U.S.] market is expected to grow at a rate of almost 14%” and “the early movers in the industry will benefit in terms of market share.”
That about describes the opportunity in a probiotic nutshell.
The rising interest in probiotics can be credited in part to Dannon’s Activia brand, a line of yogurts and yogurt drinks, which has been heavily advertised to the American consumer with the message that not all bacteria is bad for you — and in fact some bacteria taken on a regular basis can impart some pretty significant health benefits. That advertising message — that probiotics can be an important piece in a healthier-for-you diet — has been all the more reinforced as Bayer supports its probiotic Phillips Colon Health, and as Procter & Gamble rolls out its Align probiotic.
And the consumers already are core drug store shoppers. The ratio of women to men in search of a product delivering digestive benefits is about 2-to-1, according to industry experts. When women hit their 30s and 40s, that’s the point in their lives when they’re looking for a strategy in life to help them manage their digestive issues.