Rite Aid repurchased $27 million 7 1/8% notes after quarter, may continue to de-lever

By Paul Deckelman

New York, June 24 - Rite Aid Corp. bought back about $27 million of its 7 1/8% senior notes due 2007 after the end of the fiscal first quarter, the company's chief financial officer said Thursday, and it may - or may not - "opportunistically" continue to de-leverage.

"Our balance sheet is strengthening as we continue to improve results," enthused CFO John Standley on a morning conference call following the release of results for the fiscal first quarter ended May 29. "We're excited about that."

Rite Aid, a Camp Hill, Pa.-based operator of one of the largest national drugstore chains, with more than 3,300 outlets nationwide, had what the company's president and chief executive officer, Mary Sammons, described on the call as "another great quarter."

Rite Aid - which has spent the last several years bouncing back from accounting difficulties in the late 1990s that ultimately led to the ouster and the later criminal prosecution of former CEO Martin Grass, as well as sagging performance and over-expansion fueled by too much debt - had net earnings for the quarter of $63.3 million (10 cents a share), a sharp turnaround from a year earlier, when it had lost $38.8 million (eight cents a share). The strong results surprised Wall Streeters, who had been expecting earnings of about a nickel a share.

Same-store sales (sales at stores that were open at the same time the previous year, a key measure of profitability in the retailing industry) were up 5.3% in the quarter. Revenues for the period rose to $4.2 billion from $4 billion a year ago, and adjusted EBITDA was $223.7 million, a 27.8% gain from $171.1 million a year earlier.

Standley told the conference call that the company's liquidity "remained strong during the quarter," with $500 million of cash on the balance sheet at the end of the period. Operations, he said, had generated $217 million of cash during the quarter, primarily due to strong adjusted EBITDA, a decrease in accounts receivable, receipt of about $37 million of income tax refunds and an increase in accounts payable.

Interest expense on Rite Aid's more than $3 billion of debt was $77.8 million in the first quarter, off slightly from $78.9 million a year earlier. While the company's cash interest expense was unchanged at $72.1 million, its non-cash interest expense was reduced to $5.7 million in the quarter from $6.8 million last year, due to lower debt-issue cost amortization.

During the question-and-answer portion of the proceedings, an analyst asked about Rite Aid's free cash flow, following such items as capital expenditures, and asked if it would come in somewhere close to the $200 million level.

Standley did not explicitly agree with that figure - but nor did he contradict it, asserting only that any calculation would have to include "a modest increase in working capital in there, [and] you need to consider closed stores, probably in the $40 to $45 million range as well, besides cash interest and EBITDA." The bottom line, though, he said was "we will have some free cash flow, yes."

Use of cash flow

When asked by another analyst what Rite Aid planned do with that cash, the CFO replied "we plan to opportunistically deploy our cash to improve our business and to de-leverage."

He noted the repurchase of the $27 million of 7 1/8% notes after the May 29 quarter's end, but stopped short of projecting any further debt paydowns, only saying "again, we'll use the cash as it makes the most sense to improve our business."

At the end of the fiscal first quarter, Rite Aid showed some $3.25 billion of long-term debt, less current maturities, on its balance sheet, down sequentially from about $3.45 billion in the 2004 fiscal fourth quarter ended Feb. 28. It had some $220.78 million of current maturities of long-term debt and lease financing obligations, up sequentially from around $23.97 million in the fourth quarter.

Rite Aid had shown about $210 million of the 7 1/8% notes still outstanding on its balance sheet as of the end of the fourth quarter, out of the $350 million of the securities which were originally issued in December 1996, an amount since reduced by other previous buybacks.

Looking ahead for the full 2005 fiscal year, Rite Aid confirmed its adjusted full-year EBITDA guidance of between $800 million and $850 million, and raised its net income guidance for the year to a range of between $121 million and $167 million, up from its previous forecast of $112 million to $157 million.

However, in line with company warnings that the pharmacy industry environment remains challenging, Rite Aid lowered its fiscal 2005 sales estimates to a range of $17.2 billion to $17.4 billion from $17.4 billion to $17.6 billion previously, and likewise reduced its growth estimates for same-store sales to a 4.5% to 5.5% range from prior projections of growth between 5.5% and 6.5%.

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