Rite Aid posts Q2 profit, completes refinancing; is "very comfortable" with capital structure

By Paul Deckelman

New York, Sept. 23 - Rite Aid Corp. reported a second-quarter profit versus a year-ago loss and announced Thursday that it had completed a big refinancing transaction that cuts the Camp Hill, Pa.-based drugstore chain operator's debt load by $634 million. That having been done, a Rite Aid executive told analysts and investors on the conference call that followed release of the numbers that the company is "very comfortable" with its new capital structure - and added that although it would consider further debt reductions it might just as easily take its excess cash and invest it back in the business.

"We try to balance our investments in the business with debt reduction," the company's chief financial officer, John Standley, said in answer to an analyst's query about whether further reductions of near-term debt might be on tap.

While he did not flatly rule out trying to get rid of some $214 million of two series of bonds coming due next year - the 7 5/8% senior notes maturing on April 15 and the 6% seniors scheduled to come due next Dec. 15 - he did say that "it's not all about debt reduction. It's a balance of debt reduction with investing the right money back into the business.

"And we are increasing our capital plans, not only for this year, but on a going-forward basis. So I think you'll see us be very focused on improving our store base and growing in existing markets, in terms of use of capital, " rather than necessarily spending its free cash flow all on paying down debt.

It is perhaps understandable that Rite Aid apparently feels that it has for now done enough to trim its debt, following the latest refinancing, which brought the company's overall debt load down to $3.2 billion. At the same time that it announced its quarterly results, Rite Aid also said that it had completed the previously announced refinancing, which includes a new $1.4 billion senior secured credit facility and a $400 million three-year securitization facility. The new credit facility consists of a $450 million term loan, and a $950 million revolving credit facility maturing in September 2009, while the new accounts receivable securitization facility will mature in September 2007.

The company said that proceeds of the new credit and securitization facilities, plus about $330 million of available cash on hand, was used to repay the company's existing $1.15 billion senior secured credit facility scheduled to come due in April 2008, and to replace the company's existing $700 million revolving credit facility. The new $950 million revolving credit facility will be drawn down by some $60 million at closing.

Cuts borrowings costs $27 million

Rite Aid said that the refinancing lowers its overall borrowing costs by about $27 million annually, and reduces overall debt by $634 million. Standley told an analyst on the call that this consisted of about $330 million of debt paid down with the company's excess available cash, "since we've been sitting on a fair amount of cash, and it's more productive to use it to pay down debt," as well as some $305 million of debt paid off using the proceeds from the sale of receivables through its new A-R securitization facility.

"Over the next three years, we'll continue to sell receivables to the securitization participants, and generate cash that way," he said.

The company said that its refinancing will result in a pre-tax charge of approximately $16 million at closing - an $11.5 million prepayment penalty and a non-cash charge of $4.5 million for the write-off of deferred debt issuance costs.

Bond buybacks in quarter

While "the bulk" of the debt refinanced and paid down in the transaction concluded Wednesday was term loan debt, the Rite Aid executive said, he noted that there had been some paydown of bond debt as well during the quarter. Rite Aid bought back about $26 million of 7 1/8% due 2007, bringing to about $65 million the amount of bonds which have been bought back so far this year. That latter figure includes some of Rite Aid's 7 5/8% notes due 2005 and 6 7/8% debentures due 2028.

Standley noted that the new credit agreement gives the company broad leeway to make further repurchases of debt - although he also said that Rite Aid might focus more on investing money back into the business than in further reducing debt.

Under the terms of the agreement, Rite Aid can purchase any debt it wants that is scheduled to mature before the credit facility's September 2009 maturity provided it has at least $300 million of availability on its credit revolver - although, as one analyst pointed out, as a practical matter, the company doesn't have that much short-term debt on its books any more relative to its total debt load.

"In a good position"

"I think we're very comfortable with the capital structure today, with the level of debt we have relative to our cash flow from operations and EBITDA," said Standley. "It puts us in a position where we have a lot of free cash flow to invest in our business, which we think is important on a going forward basis.

"From a capital structure perspective, we feel pretty good about where we are right now. We're always looking at it. If there are opportunities, for things that can be done to improve it, we're going to do that - but we're in a good position today."

For the quarter, Rite Aid showed net earnings of $9.8 million, or zero cents per diluted share, versus its year-ago quarterly net loss of $10.6 million (a four cent per share loss). The company said the improvement was due partly to an $18.3 million increase (12%) in adjusted EBITDA, partially offset by a $13.9 million store closing and impairment charge. Adjusted EBITDA amounted to $171.2 million, or 4.2% of revenues, well up from $152.9 million (a 3.8% EBITDA margin) a year earlier.

Revenues totaled $4.12 billion, a 1.8% gain over $4.05 billion in the year-ago quarter, with same-store sales - the key economic metric in the retailing industry - showing a 2.2% increase over sales in stores that had also been open in the year-earlier period.

Interest expense was $76.5 million in the latest quarter, down from $79.5 million a year ago. The interest expense consisted of $71.6 million of cash interest, down from $74.9 million last year, and non-cash interest of $4.9 million, up slightly from $4.6 million last year

Liquidity "was strong for the quarter," Standley said, with $407 million of cash on the balance sheet at the end of the quarter - a good portion of which was used to pay down debt as part of the refinancing transactions concluded Wednesday.

Rite Aid confirmed its' previously projected fiscal 2005 guidance for sales, net income and adjusted EBITDA, based on the second-quarter results and current trends. The company said it expects adjusted EBITDA of between $770 million and $800 million, and net income of between $122 million and $150 million, which translates to between 16 cents and 22 cents per diluted share. Rite Aid further anticipates sales to be between $16.9 billion and $17 billion, with same store sales improving between 2.75% and 3.25%.

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