Rite Aid cuts debt versus year ago, will call 10¼% notes next month

By Paul Deckelman

New York, Sept. 19 – Rite Aid Corp. on Thursday reported year-over-year improvements in its liquidity and debt levels during its fiscal 2015 second quarter that were in line with improved overall financial results, including an eighth consecutive profitable quarter.

And the Camp Hill, Pa.-based No. 3 U.S. drugstore chain operator plans to call its $270 million of outstanding 10¼% second-lien senior secured notes due 2019 – its most expensive piece of debt – next month.

Rite Aid’s recently appointed executive vice president and chief financial officer, Darren Karst, told analysts on the company’s conference call following its release of results for the fiscal quarter ended Aug. 30 that those notes, issued in October 2009, will be called when their call premium steps down.

The company can currently redeem the notes only via a costly make-whole call at 75 basis points above Treasuries. However, on Oct. 15, the call price drops to a more manageable 105.125% of the principal amount.

Karst said that Rite Aid will fund that prepayment of the notes with borrowings under its revolving credit facility.

During the question-and-answer portion of the conference call following the formal presentations by Karst, chairman and chief executive officer John T. Standley and president and chief operating officer Kenneth A. Martindale, the CFO answered in the affirmative when asked whether the company’s expectation is to use free cash flow to pay off the revolver borrowings.

He said that Rite Aid expects free cash flow for the full fiscal year that ends Feb. 28 to be in a range of $325 million to $375 million, including the benefit of lower pharmacy inventory and the impact of twin acquisitions that Rite Aid made on undisclosed terms in April of this year – Health Dialog Services Corp., a Boston-based provider of health coaching, shared decision making and health-care analytics, and RediClinic, a Houston-based operator of retail clinics.

More liquidity, less debt

Karst said that at the end of the fiscal second quarter, the company had $1.37 billion of liquidity comprised of $1.32 billion of availability under its revolver and $50 million of invested cash.

He said that represented a $340 million year-over-year improvement.

As of the end of the quarter, total debt stood at $5.75 billion, down from $6.05 billion in the year-ago fiscal second quarter.

Less the invested cash in the latest period versus $1.63 billion a year ago, net debt fell by $348 million year over year to $5.7 billion from $6.05 billion a year ago.

The company’s leverage ratio of net debt as a multiple of trailing 12-month adjusted EBITDA declined in the latest period to 4.4 times from 4.6 times

Rite Aid had $405 million of borrowings outstanding under its $1.8 billion senior secured revolver due 2018 and $72 million of outstanding letters of credit.

According to the company’s most recent 10-Q filing with the Securities and Exchange Commission, which covered the fiscal first quarter ended May 31, besides the revolver, the capital structure included several tranches of term loan bank debt: $1.15 billion of tranche 7 first-lien debt due February 2020, $470 million of second-lien tranche 1 debt due August 2020 and $500 million of second-lien tranche 2 debt due 2021.

Its outstanding bond debt included two secured issues: the $270 million of 10¼% notes due 2019 that are to be called next month and $650 million of 8% senior-lien notes due 2020.

Unsecured but guaranteed bond debt included $905.9 million of 9¼% notes due 2020 and $810 million of 6¾% notes due 2021.

There were three issues of unsecured, unguaranteed notes: $64.19 million of 8½% convertible notes due 2015, $295 million of 7.7% notes due 2027 and $128 million of 6 7/8% notes due 2028.

Lease financing obligations came to $103.77 million.

Better results, lower guidance

For the fiscal second quarter, the company reported revenues of $6.5 billion, up 3.9% from $6.3 billion a year ago.

Same-store sales for the quarter – a key retailing industry performance metric – increased 4.1% over the prior year, consisting of a 1.1% gain in front-end sales and a 5.6% increase in pharmacy sales.

Net income rose to $127.8 million, or 13 cents per diluted share, from $32.8 million, or 3 cents per share, a year ago.

Adjusted EBITDA grew to $364.2 million, or 5.6% of revenues, from $341.6 million, or 5.4% of revenues, for the like period last year.

However, Rite Aid warned investors that based on its current estimates for reimbursement rates and anticipated lower profitability from new generic drugs and those generic drugs that recently lost exclusivity, it is expecting decreases in pharmacy margin in the second half of fiscal 2015, versus its prior estimates, resulting in tighter guidance for sales and same-store sales and lower projected adjusted EBITDA, net income and per-share earnings.

Sales for the year are seen coming in between $26 billion and $26.3 billion, narrower than previous guidance of between $26 billion and $26.5 billion.

Same-store sales are expected to increase between 3% and 4% over fiscal 2014’s results, a narrowing of Rite Aid’s prior prediction of a 2.5%-to-4.5% improvement.

It expects adjusted EBITDA of between $1.2 billion and $1.28 billion, down from an earlier range of $1.28 billion to $1.35 billion.

Net income is expected to be between $223 million and $333 million, down from previous projections of $298 million to $408 million. Full-year per-share earnings, accordingly, are now estimated at 22 to 33 cents, down from earlier guidance of 30 to 40 cents.

Thursday’s lowered guidance was the second such revision this year; citing the same potentially negative factors, the company had lowered its guidance for adjusted EBITDA, net income and per-share earnings in early June.

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