Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
RAD > SEC Filings for RAD > Form 10-K on 23-Apr-2014All Recent SEC Filings

Show all filings for RITE AID CORP

Form 10-K for RITE AID CORP


23-Apr-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Net income for fiscal 2014 was $249.4 million or $0.23 per basic and diluted share compared to net income for fiscal 2013 of $118.1 million or $0.12 per basic and diluted share. Contributing to the increase in net income was an increase in Adjusted EBITDA and lower interest expense, loss on debt retirement of $62.4 million versus $140.5 million in the prior year, and lower lease termination and impairment charges. Partially offsetting these improvements is a LIFO charge of $104.1 million in fiscal 2014 compared to a LIFO credit of $147.9 million in fiscal 2013.

Adjusted EBITDA for fiscal 2014 was $1,325.0 million or 5.2 percent of revenues, compared to $1,128.4 million or 4.4% of revenues for fiscal year 2013. The increase in Adjusted EBITDA was driven by increased pharmacy gross profit due to the continued benefit of generic introductions on pharmacy gross margin in the first half of the fiscal year, purchasing efficiencies on generic drugs and strong cost control.

Our operating results are described in more detail in the "Results of Operations" section below. Some of the key factors that impacted our results are summarized as follows:

Sales Trends: Our revenue growth for fiscal 2014 was 0.5% compared to revenue decline of 2.8% for fiscal 2013. Fiscal 2014 revenues were positively impacted by an increase in same store sales, partially offset by a decrease in same store prescription count and a negative impact from generic introductions and continued lower reimbursement rates and store closings.

Gross Profit: Our gross profit was positively impacted by the continued impact of generic introductions, which have a higher gross profit than their brand counterparts, and purchasing efficiencies on generic drugs, offset by a higher LIFO charge. We record the value of our inventory on the Last-In, First-Out (LIFO) method. We recorded a LIFO charge of $104.1 million and a LIFO credit of $147.9 million in fiscal 2014 and 2013, respectively. The current year LIFO charge was due to higher pharmacy inflation rates.

Selling, General and Administrative Expenses: Our selling, general and administrative expenses ("SG&A") decreased in fiscal 2014 due primarily to a lower reversal of certain tax indemnifications assets, lower litigation costs and legal and professional fees, advertising, and depreciation and amortization. These amounts are partially offset by increased salary and benefit costs as well as the prior year $18.1 million favorable payment card interchange fee litigation settlement. Both the current and prior year reversals of $30.5 million and $91.3 million of tax indemnification assets resulting from our settlement with the IRS associated with a pre-acquisition Brooks Eckerd tax audit are offset by an income tax benefit.

Lease Termination and Impairment Charges: We recorded lease terminations and impairment charges of $41.3 million in fiscal 2014 compared to $70.9 million in fiscal 2013. Our charges have been trending lower due to improved results of operations, which reduces our impairment charges, and closing fewer stores that require lease termination charges.

Debt Refinancing and Other Capital Transactions: During fiscal 2014, we continued to take steps to extend the terms of our debt, reduce interest expense and to obtain more flexibility. We expect to engage in similar efforts in the future. During fiscal 2014 and fiscal 2013, we completed several refinancing transactions which caused interest expense to decrease over $90.0 million in fiscal 2014. In March 2014, we completed the refinancing of our Tranche 6 Term Loan with our new Tranche 7 Term Loan which will reduce interest expense by an additional $5.0 million per year. These transactions are described in more detail in the "Liquidity and Capital Resources" section below.


Table of Contents

Income Tax: Net income for fiscal 2014 included income tax expense of $0.8 million, compared to income tax benefit of $110.6 million for fiscal 2013. Income tax expense for fiscal 2014 resulted in an increase in the deferred tax valuation allowance to offset the windfall tax benefits recorded in additional paid-in capital ("APIC") pursuant to the tax law ordering approach, offset by adjustments to unrecognized tax benefits due to the lapse of statute of limitations. The benefit recognized in fiscal 2013 was primarily comprised of recognition of previously unrecognized tax benefits resulting from the Internal Revenue Service ("IRS") and Commonwealth of Massachusetts Appellate Divisions settlements related to the examinations of the Brooks Eckerd fiscal years 2004 - 2007 and fiscal years 2005 - 2007, respectively. This amount was offset by a reversal of the related tax indemnification asset which was recorded in selling, general and administrative expenses as these audits were related to pre-acquisition periods. Additionally, the income tax expense for 2014 and benefit for 2013 was recorded net of adjustments to maintain a full valuation allowance against our net deferred tax assets.

We maintain a full valuation allowance against the net deferred tax assets as a result of a three year cumulative loss position as of March 1, 2014. ASC 740, "Income Taxes" requires a company to evaluate its deferred tax assets on a regular basis to determine if a valuation allowance against the net deferred tax assets is required. A cumulative loss in recent years is significant negative evidence in considering whether deferred tax assets are realizable. Based on the negative evidence, ASC 740 precludes relying on projections of future taxable income to support the recognition of deferred tax assets.

     Results of Operations

     Revenue and Other Operating Data

                                                            Year Ended
                                             March 1,        March 2,        March 3,
                                               2014            2013            2012
                                            (52 Weeks)      (52 Weeks)      (53 Weeks)
                                                      (Dollars in thousands)
Revenues                                   $ 25,526,413    $ 25,392,263    $ 26,121,222
Revenue growth (decline)                            0.5 %          (2.8 )%          3.6 %
Same store sales growth (decline)                   0.7 %          (0.3 )%          2.0 %
Pharmacy sales growth (decline)                     0.9 %          (1.6 )%          1.9 %
Same store prescription count (decrease)
increase                                           (0.3 )%          3.4 %           0.9 %
Same store pharmacy sales growth
(decline)                                           1.2 %          (1.0 )%          2.4 %
Pharmacy sales as a % of total sales               67.9 %          67.6 %          68.1 %
Third party sales as a % of total
pharmacy sales                                     97.0 %          96.6 %          96.5 %
Front-end sales (decline) growth                   (0.4 )%          0.8 %           0.7 %
Same store front-end sales (decline)
growth                                             (0.2 )%          1.4 %           1.1 %
Front-end sales as a % of total sales              32.1 %          32.4 %          31.9 %
Adjusted EBITDA(*)                         $  1,324,959    $  1,128,379    $    942,902
Store data:
Total stores (beginning of period)                4,623           4,667           4,714
New stores                                            -               -               -
Store acquisitions                                    1               -               -
Closed stores                                       (37 )           (44 )           (47 )
Total stores (end of period)                      4,587           4,623           4,667
Relocated stores                                     11              13              15
Remodeled and expanded stores                       409             516             279


--------------------------------------------------------------------------------
    (*)


See Adjusted EBITDA and Other Non-GAAP Measures for additional details


Table of Contents

Revenues

Fiscal 2014 compared to Fiscal 2013: The 0.5% increase in revenue was due primarily to an increase in pharmacy same store sales, partially offset by a decrease in front end sales. The increase in pharmacy same stores sales was driven primarily by brand drug inflation, partially offset by a decrease in same store prescription count, negative impact from generic introductions and continued reimbursement rate pressures. We expect lower reimbursement rates to continue to have a negative impact on our revenues. Same store sales trends for fiscal 2014 and fiscal 2013 are described in the following paragraphs. We include in same store sales all stores that have been open at least one year. Stores in liquidation are considered closed. Relocation stores are not included in same store sales until one year has lapsed.

Pharmacy same store sales increased 1.2%. Pharmacy same store sales were positively impacted by brand drug inflation. The increases were partially offset by a decrease of 0.3% in same store prescription count and the continued impact of generic drug introductions, which have a substantially lower selling price than their brand counterparts but higher gross profit. Pharmacy same store sales were also negatively impacted by continued reimbursement rate pressures.

Front end same store sales decreased 0.2%. The decrease in same store front end sales was impacted by consumer spending habits and the heavy promotional environment, partially offset by the positive impact of our wellness + loyalty program, incremental sales from our Wellness format stores, and other management initiatives to increase front end sales. Active wellness + members, defined as those who have used their cards at least twice during the last twenty-six weeks, was nearly 25 million as of March 1, 2014. We have completed over 1,200 Wellness store remodels as of March 1, 2014.

Fiscal 2013 compared to Fiscal 2012: The 2.8% decrease in revenue was due primarily to one less week in fiscal 2013 and a decrease in same store sales. The decrease in same stores sales was driven primarily by generic introductions and continued reimbursement rate pressures, partially offset by increased same store prescription count, the positive impact of our wellness + loyalty program, and other management initiatives to increase sales. The increase in same store prescription count was driven in part by the Walgreens / Express Scripts dispute which was settled in September 2012, our immunization program and our wellness + loyalty program.

Pharmacy same store sales decreased 1.0%. Pharmacy same store sales were negatively impacted by generic drug introductions and lower reimbursement rates. These decreases were partially offset by an increase of 3.4% in same store prescription count driven in part by incremental prescriptions gained from the Walgreens / Express Scripts dispute and by our immunization program and wellness + loyalty program.

Front end same store sales increased 1.4%. The increase in front end same store sales reflects the positive impact of our wellness + loyalty program, incremental sales from our Wellness format stores, and other management initiatives to increase front end sales.


Table of Contents

     Costs and Expenses

                                                        Year Ended
                                     March 1, 2014     March 2, 2013     March 3, 2012
                                      (52 Weeks)        (52 Weeks)        (53 Weeks)
                                                  (Dollars in thousands)
Costs of goods sold                  $   18,202,679    $   18,073,987    $   19,327,887
Gross profit                              7,323,734         7,318,276         6,793,335
Gross margin                                   28.7 %            28.8 %            26.0 %
FIFO gross profit                         7,427,876         7,170,394         6,982,057
FIFO gross margin                              29.1 %            28.2 %            26.7 %
Selling, general and
administrative expenses              $    6,561,162    $    6,600,765    $    6,531,411
Selling, general and
administrative expenses as a
percentage of revenues                         25.7 %            26.0 %            25.0 %
Lease termination and impairment
charges                                      41,304            70,859           100,053
Interest expense                            424,591           515,421           529,255
Loss on debt retirements, net                62,443           140,502            33,576
Gain on sale of assets, net                 (15,984 )         (16,776 )          (8,703 )

Cost of Goods Sold

Gross profit increased by $5.5 million in fiscal 2014 compared to fiscal 2013. Pharmacy gross profit was higher due to the continued benefit of generic drug introductions, purchasing efficiencies on generic drugs, favorable reimbursement rate adjustments from a decision by California to exclude certain drugs from the retroactive California Department of Healthcare Services (MediCal) reimbursement rate adjustments as well as from certain commercial third party payors and inflation on brand drugs, partially offset by a decrease in same store prescription count and continued reimbursement pressures. Front-end gross profit was slightly higher due to higher vendor promotional funding, partially offset by lower sales and higher promotional markdowns. Gross profit was negatively impacted by a LIFO charge in the current year compared to a LIFO credit in the prior year. Overall gross margin was 28.7% for fiscal 2014 compared to 28.8% in fiscal 2013.

Gross margin was slightly lower due primarily to a LIFO charge this year compared to a LIFO credit last year as well as continued reimbursement pressures and increased promotional markdowns, partially offset by the continued benefit of generic introductions, inflation on brand drugs, purchasing efficiencies on generic drugs and increased vendor promotional funding.

Gross profit increased by $524.9 million in fiscal 2013 compared to fiscal 2012. The overall increase in gross profit was due to a LIFO credit resulting from significant generic deflation during the year, compared to a LIFO charge in the prior year and an overall increase in pharmacy gross profit, partially offset by a slightly lower front end gross profit. Pharmacy gross profit was higher due to increased prescription volume driven, in part, from the Walgreens/ Express Scripts dispute, higher immunizations and our wellness + loyalty program. Front-end gross profit was slightly lower due to higher tier discounts from our wellness + customer loyalty program and other markdowns, partially offset by increased sales.

We use the last-in, first-out (LIFO) method of inventory valuation, which is determined annually when inflation rates and inventory levels are finalized. Therefore, LIFO costs for interim period financial statements are estimated. The LIFO charge for fiscal 2014 was $104.1 million compared to a LIFO credit of $147.9 million in fiscal 2013 and a LIFO charge of $188.7 million in fiscal 2012. The LIFO charge for fiscal 2014 was primarily the result of higher inflation on brand pharmacy products,


Table of Contents

partially offset by deflation on generic pharmacy products, which contributed to overall inflation in fiscal 2014. The inflation in fiscal 2014 compares to overall deflation in fiscal 2013, which was due to significant generic pharmacy product deflation, partially offset by brand pharmacy product inflation.

During fiscal 2013, we experienced significant price decreases on high volume generic introductions. During the first few months after new generic drugs are introduced, supplier prices tend to decrease as multiple suppliers enter the market place. This resulted in significant deflation on generic pharmacy products which more than offset brand pharmacy product inflation, causing overall deflation in fiscal 2013, and consequently, resulted in a LIFO credit of $147.9 million.

During fiscal 2012, we experienced significant brand pharmacy product inflation, partially offset by generic pharmacy product deflation, which contributed to overall inflation during fiscal 2012. The overall inflation in fiscal 2012 resulted in a LIFO charge of $188.7 million.

Selling, General and Administrative Expenses

SG&A expenses decreased by $39.6 million in fiscal 2014 compared to fiscal 2013 due primarily to a lower reversal of certain tax indemnification assets, lower litigation costs and legal and professional fees, advertising, and depreciation and amortization. These amounts are partially offset by increased salary and benefit costs as well as the prior year $18.1 million favorable payment card interchange fee litigation settlement. Both the current and prior year reversals of $30.5 million and $91.3 million, respectively, of tax indemnification assets resulting from our settlement with the IRS associated with a pre-acquisition Brooks Eckerd tax audit, are offset by an income tax benefit.

SG&A expenses increased by $69.4 million in fiscal 2013 compared to fiscal 2012 due primarily to the reversal of $91.3 million of tax indemnification asset resulting from our settlement with the IRS and certain states associated with pre-acquisition Brooks Eckerd tax issues, which are offset by an income tax benefit as noted below (in "Income Taxes"), litigation charges relating to the settlement of certain labor related actions and increased associate bonus expense. These amounts are partially offset by lower operating costs associated with one less week during the 2013 fiscal year, lower depreciation and amortization, lower self insurance expense due primarily to the impact of the discount rate change on the prior year expense and the favorable settlement related to payment card interchange fee litigation. SG&A expenses as a percentage of revenue was 26.0% in fiscal 2013 compared to 25.0% in fiscal 2012. The increase in SG&A as a percentage of revenues relative to the prior year is due in part to the impact of generic introductions and reimbursement rate pressures which resulted in a lower revenue base to measure our SG&A expenses against.

Lease Termination and Impairment Charges

Impairment Charges:

We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that an asset group has a carrying value that may not be recoverable. The individual operating store is the lowest level for which cash flows are identifiable. As such, we evaluate individual stores for recoverability of assets. To determine if a store needs to be tested for recoverability, we consider items such as decreases in market prices, changes in the manner in which the store is being used or physical condition, changes in legal factors or business climate, an accumulation of losses significantly in excess of budget, a current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection of continuing losses, or an expectation that the store will be closed or sold.

We monitor new and recently relocated stores against operational projections and other strategic factors such as regional economics, new competitive entries and other local market considerations to determine if an impairment evaluation is required. For other stores, we perform a recoverability analysis if they have experienced current-period and historical cash flow losses.


Table of Contents

In performing the recoverability test, we compare the expected future cash flows of a store to the carrying amount of its assets. Significant judgment is used to estimate future cash flows. Major assumptions that contribute to our future cash flow projections include expected sales, gross profit, and distribution expenses; expected costs such as payroll, occupancy costs and advertising expenses; and estimates for other significant selling, and general and administrative expenses. Many long-term macro-economic and industry factors are considered, both quantitatively and qualitatively, in our future cash flow assumptions. In addition to current and expected economic conditions such as inflation, interest and unemployment rates that affect customer shopping patterns, we consider that we operate in a highly competitive industry which includes the actions of other national and regional drugstore chains, independently owned drugstores, supermarkets, mass merchandisers, dollar stores and internet pharmacies. Many of our competitors are spending significant capital and promotional dollars in certain geographies to gain market share. We have assumed certain sales growth from our loyalty program and other initiatives to grow sales. Recent Pharmacy Benefit Management consolidation and efforts of third party public and private payors have reduced pharmacy reimbursement rates in recent years. We expect this rate compression, which currently affects 97% of our pharmacy business, to continue to affect us in the foreseeable future. We operate in a highly regulated industry and must make assumptions related to Federal and State efforts and proposals to affect the pricing and regulations related to prescription drugs, as well as, expected revenues and costs related to the Patient Protection and Affordable Care Act (health care reform).

Additionally, we take into consideration that certain operating stores are executing specific improvement plans which are monitored quarterly to recoup recent capital investments, such as an acquisition of an independent pharmacy, which we have made to respond to specific competitive or local market conditions, or have specific programs tailored towards a specific geography or market.

We recorded impairment charges of $13.1 million in fiscal 2014, $24.9 million in fiscal 2013 and $52.0 million in fiscal 2012. Our methodology for recording impairment charges has not changed materially, and has been consistently applied in the periods presented.

At March 1, 2014, approximately $1.9 billion of our long-lived assets, including intangible assets, were associated with 4,587 active operating stores.

If an operating store's estimated future undiscounted cash flows are not sufficient to cover its carrying value, its carrying value is reduced to fair value which is its estimated future discounted cash flows. The discount rate is commensurate with the risks associated with the recovery of a similar asset.

An impairment charge is recorded in the period that the store does not meet its original return on investment and/or has an operating loss for the last two years and its projected cash flows do not exceed its current asset carrying value. The amount of the impairment charge is the entire difference between the current carrying asset value and the estimated fair value of the assets using discounted future cash flows. Most stores are fully impaired in the period that the impairment charge is originally recorded.

We recorded impairment charges for active stores of $11.7 million in fiscal 2014, $24.0 million in fiscal 2013 and $43.4 million in fiscal 2012.

We review key performance results for active stores on a quarterly basis and approve certain stores for closure. Impairment for closed stores, if any (many stores are closed on lease expiration), are recorded in the quarter the closure decision is made and approved. Closure decisions are made on an individual store or regional basis considering all of the macro-economic, industry and other factors discussed above, in addition to, the operating store's individual operating results. We currently have no plans to close a significant number of active stores in future periods. In the next fiscal year, we currently expect to close approximately 40 stores, primarily as a result of lease expirations. We recorded


Table of Contents

impairment charges for closed facilities of $1.3 million in fiscal 2014, $0.9 million in fiscal 2013 and $8.6 million in fiscal 2012.

Included in the impairment charges noted above were charges of $0.8 million in fiscal 2014, $0.6 million in fiscal 2013 and $5.9 million in fiscal 2012 for existing owned surplus property. Assets to be disposed of are evaluated quarterly to determine if an additional impairment charge is required. Fair value estimates are provided by independent brokers who operate in the local markets where the assets are located.

The following table summarizes the impairment charges and number of locations, segregated by closed facilities and active stores that have been recorded in fiscal 2014, 2013 and 2012:

                                                              Year Ended
                                       March 1, 2014        March 2, 2013        March 3, 2012
                                     Number     Charge    Number     Charge    Number     Charge
Closed facilities:
Actual and approved store closings        31   $    531        29   $    325        55   $  2,283
Actual and approved relocations            -          -         -          -         2        499
Existing surplus properties                7        798         5        594        12      5,863


Total impairment charges-closed
facilities                                38      1,329        34        919        69      8,645
Active stores:
Additional current period charges
for stores previously impaired in
prior periods(1)                         378      4,162       469      5,835       591      9,822
Charges for new, relocated and
remodeled stores that did not meet
their asset recoverability test in
the current period(2)                      1      4,028        14      9,190        19     18,926
Charges for the remaining stores
that did not meet their asset
recoverability test in the current
period(3)                                 17      3,558        47      8,948        53     14,605


Total impairment charges-active
stores                                   396     11,748       530     23,973       663     43,353
Total impairment charges-all
locations                                434   $ 13,077       564   $ 24,892       732   $ 51,998




Total number of active stores          4,587                4,623                4,667
Stores impaired in prior periods
with no current charge                   709                  588                  428
Stores with a current period
charge                                   396                  530                  663


Total cumulative active stores
with impairment charges                1,105                1,118                1,091


(1)
These charges are related to stores that were impaired for the first time in prior periods. Most active stores, requiring an impairment charge, are fully impaired in the first period that they do not meet their asset recoverability test. However, in each prior period presented, a minority of stores were partially impaired since their fair value supported a reduced net book value. Accordingly, these stores may be further impaired in the current and future periods as a result of changes in their actual or projected cash flows, or changes to their fair value estimates. Also, we . . .
  Add RAD to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for RAD - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.