By Neil Saunders
Although Rite Aid’s overall revenue lift of 4.8% seems reasonable enough, the underlying numbers show that performance across the company’s two divisions is divergent. The smaller Pharmacy Services Segment, which is a relatively new part of the business, continues to power ahead with a revenue increase of 52%. Despite this being a relatively small part of the operation, the robust rise more than offset declines within the core Retail Pharmacy Segment, where revenues dipped by 2.4%.
Much of the decline in Retail Pharmacy division sales were the result of a 2.5% drop in same-store revenue. While this is disappointing given the work Rite Aid has put into refreshing and reinvigorating its stores via the Genuine Wellbeing format refresh, it is to be expected given the deflation in drugs due to generic introductions. This is something other drugstore retailers have also reported and from which Rite Aid is not immune. These lower prices helped to contribute to a 3.6% decline in pharmacy sales over the period.
But drug deflation does not account for all of the decline. Rite Aid also saw a drop in the number of prescriptions filled over the period—by 1.8% on a same-store basis. This is a worrying trend, especially given that the recently acquired Pharmacy Benefit Management firm, EnvisionRx, was supposed to help drive traffic and sales through the pharmacy network. Rite Aid is falling behind the rest of the market in its quest to create a more integrated healthcare offering which caters to customers’ health needs.
Conversion rates and basket sizes edged up, thanks to a brighter environment, a more logical layout, and more compelling merchandising. However, a 0.1% uplift does not justify the investment. Store productivity is decreasing at a time when more money is being put into shops.
Given the fall in prescriptions filled, the front-of-store number was surprisingly strong, even if it only just nudged into positive territory by 0.1% on a same store basis. Enhancements made to refurbished stores, 85 more of which were refreshed over the period, has helped conversion rates and basket sizes to edge up, thanks to a brighter environment, a more logical layout, and more compelling merchandising.
However, a 0.1% uplift does not justify the investment Rite Aid is making in its stores, especially when viewed alongside the drop in pharmacy sales. Rite Aid is not pulling customers into its shops and is losing traffic to rivals, so store productivity is decreasing at a time when more money is being put into shops. Such an uncomfortable pincer movement is one reason why net income declined by 31% over the prior year.
Unlike its rivals, Rite Aid has not been able to rely on physical expansion to drive growth or economies of scale. Indeed, over the quarter it made net closures of 11 outlets. This reduction follows a trend that has seen store numbers fall by almost 500 since the acquisition of the Brooks Eckerd chain some eight years ago.
There is a sense that despite its best efforts Rite Aid is now falling behind its rivals in terms of economies of scale, innovation, and its ability to create a rounded healthcare proposition. It is fortunate that the pending acquisition by Walgreens, which is expected to close later this year subject to regulatory approval, is on the cards. Without it, Rite Aid’s future would not be under immediate threat, but it would have become increasingly tough as a smaller player in a market that is becoming more competitive and challenging.
Neil Saunders is CEO of research firm Conlumino.