Rite Aid Corporation (RAD) Earnings Call Transcript & Summary

Good morning. My name is Lisa Gill, and I'm the Healthcare Technology and Distribution Analyst with JPMorgan. It is with great pleasure to welcome you to the 39th Annual JPMorgan Healthcare Conference. With me this morning I have Rite Aid. Presenting for Rite Aid will be CEO, Heyward Donigan; COO, Jim Peters; and CFO, Matt Schroeder. Heyward's going to make a few opening comments, and then we're going to have more of a fireside type format. So Heyward, thank you, and welcome. I know you couldn't make it to the conference last year. So this is your first JPMorgan conference. I so wish we were together in San Francisco, but I really appreciate your time.

Well, thank you for including us. And yes, I mean, different times, but you've rallied superbly. So it's great to all be together virtually. So thanks for hosting us here today. Jim, Matt and I are looking forward to answering your questions, giving the audience further insight into Rite Aid. Before we begin the presentation, we've included 2 slides regarding forward-looking statements. Pretty standard stuff. You all know the drill, and please feel free to revisit them at your leisure. So it's a new day at Rite Aid. It truly is. I know this seems a bit cliché, but we really are a remarkably different company from when I first arrived in August of 2019. We've been moving with great urgency to turn this company around, reduce our debt, free up cash, reduce expenses and get our business growing again. We're pleased with our early results, but understand we have a lot of work to do ahead of us even now. On the next few slides, we'll dive into a bit more on where we are. And the strategic pillars that we're driving on what we call our RxEvolution. As we look at Slide 5, for those of you who aren't familiar with us, we are a healthcare company, consisting of 3.7 million-member pharmacy benefits manager, which we rebranded to Elixir this year. Combined with a bicoastal retail pharmacy chain with over 2,400 stores now under both the Rite Aid and Bartell name, following the closing of our strategic acquisition of Bartell Drugs in the greater Seattle area. We generate approximately $24 billion in annual revenue and the retail side of the business currently makes up 67% of both total revenues and adjusted EBITDA. But the total size of the PBM addressable market at $400 billion, we view Elixir as our greatest opportunity for future growth. Now on Slide 6. At our Analyst Day last March, right before we shut down for COVID, we introduced our RxEvolution. What was going to be a live meeting in New York turned into a virtual meeting overnight pretty much. And that RxEvolution is how we believe we will deliver on the unique opportunity we have to serve a growing customer base and unlock an iconic brand with a deep legacy, actually 2 iconic brands with a deep legacy, Bartell and Rite Aid. Our commitment is to leverage the power of our organization, including the trusted pharmacists to deliver on the promise of real consumer engagement like never before seen in health care. Our 3 strategic pillars of the RxEvolution are: one, establishing our pharmacy services segment as a clearly differentiated market leader; two, unlocking the value of our pharmacists, and finally, renewing our retail and digital experience. In just 10 months, since we've introduced our strategy, we've delivered meaningfully on these pillars, making substantial changes to position our company for profitable growth. Let's take a look at some of our progress on the next couple of slides. So looking at the next slide, the team has been hard at work revitalizing our retail stores, our website, our mobile app, our merchandise and enhancing our service levels and customer engagement. In November, we successfully introduced our new Rite Aid brand to showcase our focus on delivering the perfect fusion of traditional medicine and alternative remedies. We've refreshed exteriors of our stores, including digital pylons at over 800 stores so far this -- well over the last few months, I should say, into this year. We've reset, and the plan is to do all of the stores by midyear. We've refreshed and reset 75% of our merchandise and introduce new products to reinforce whole health. We've opened 3 stores of the future in Etters, Pennsylvania, Littleton, New Hampshire and Moscow, Pennsylvania, with these stores showing strong early signs in terms of both sales and margin performance. And we have several other stores that are coming near completion, one of which I'll be visiting this week. We've launched and elevated and redesigned our website and mobile app, which reflect our new branding, but also deliver a much-enhanced user experience with more work to do. Finally, through the implementation of lean methodology, we have redefined the role, customer expectations and even the daily workflows of our pharmacists. And we are on target to reduce inventory by approximately $200 million by year-end. These changes are allowing us to help our consumers not just get healthy but get thriving. Now on Slide 8, as I mentioned, we've rebranded our Pharmacy Services Segment, Elixir, to signal the move to crafted Rx Solutions for our target customer. We believe we are well on our way to positioning Elixir as a clearly differentiated and market-leading pharmacy benefits and services company, and in fact, just launched the first phase of our exciting new member portal for Elixir customers. Our rebrand is not just a new name, but a true integration that will offer more options, more capabilities and efficiencies that our clients and members expect, in some cases, don't expect, and I think we will delight. Our fully integrated PBM offering includes technology solutions, mail order delivery, specialty pharmacy, network and rebate administration and claims adjudication as well as prescription discount programs and groups. With stronger, more efficient offerings, we are positioned for growth and improved profits. As noted, we believe Elixir will be a unique PBM offering that represents the largest potential growth for Rite Aid. Now on Slide 9. Our teams are not only executing on our strategic priorities but delivering on our quarterly goals as well. As you know, we released our fiscal third quarter results just before the holidays. Some highlights include a 12% increase in total revenue. Our retail pharmacy revenues increased 5.1% with same-store 30-day equivalent prescription count growing 3.1%. Easy for me to say. I'll say that again, same-store 30-day equivalent prescription count growing 3.1%. Flu immunizations increased by 28%, not surprisingly, with everything going on with COVID. People are very focused on not getting the flu. We also managed to continue to increase front end and pharmacy market share. I think that's really important. And at Elixir, revenues increased a whopping 29%. Even in these unprecedented times, our strategy is working. Finally, on Slide 9, and before we dive into questions, I want to spend a minute on the critical role we're playing to combat COVID-19. We are proud to be an integral part of COVID testing with over 400 testing sites today that we have conducted approximately, and we have conducted approximately 1.5 million tests to date. And we are contracted with the CDC to administer COVID vaccines. You might not know this, but we have administered over 5,000 vaccines. the counties and the states are acting now in earnest, as you probably read, to leverage alternative distributors of the vaccine, which includes now retail pharmacy beyond CVS and Walgreens. While the majority of the vaccines we will be administering is what we believe would be during Phase II as I mentioned earlier, I believe this is going to be ramped up more expeditiously and faster than that. Finally, I just want to say how proud I am of our and associates and the progress we're making in our journey to revolutionize our industry and elevate our role as an indispensable healthcare provider. So we're accelerating the key initiatives that support our strategy, and we'll continue to deliver the operational excellence or hustle, as we call it, needed to achieve strong results as we continue to generate cash flow, the importance continues to be and the focus continues to be for us to reduce our debt. And most importantly, reduce -- improve our leverage ratio. So thank you, again, Lisa, for having us today. And with that, we can open it up for questions.

Okay, great. Great. I'm back. Thank you so much for all the detail. And for the slides. Clearly, one of the key themes of this conference is going to be around the vaccine. We have everything from manufacturers to the labs to entities like yourself that will be so important in the administration of the actual vaccine. And Heyward, you just talked about that you anticipated you would be part of Phase II, but now states and counties really ramping up. So my first question would be, do you anticipate that with the new administration that there'll be a more coordinated effort across the U.S. rather than utilizing states or counties? I think that's what's been -- or at least the assumption has been that, that's where some of the bottlenecking is happening today that I'll use my own city as an example. We've got Cuomo and de Blasio fighting over who should get the vaccine and how it should be rolled out. So that would be my first question. Do you expect something better out of the next administration? And then secondly, since we have Matt with us as well. I'm wondering if you can maybe talk about the potential financial impact of participating in any of the vaccine administration?

Well, actually, ironically, the testing, which is what we've been involved with from the get-go was all centrally coordinated in a way through the federal government. And so it was funded by an orchestrated by and approved by HHS in a very centralized fashion. The vaccines are now -- it's not even just the states, the counties are determining who gets how much and what the conditions are. In other words, is it healthcare providers, which healthcare providers, is it 1A, 1B, 1C, 2. And so it's been, I think, much more confusing because the criteria are different. And the orchestration of it is county by county, which was not the case really with the testing. And so I think we've seen 2 things happen, and we weren't initially, as I said, a part of any of this. So we're just witnessing this to some degree from afar because the healthcare providers were doing, the healthcare providers and the CVS and Walgreens were doing the nursing homes or long-term care facilities. What's become -- 2 dynamics are becoming obvious. One is that it's difficult to figure out how many doses to send to which place and then for them to figure out how to orchestrate getting those doses into people's arms. And so that's been confusing. The second thing that's been very confusing and unfortunate, and I'm sure you read this recently because you live in New York, it was in the New York Times that a lot of doses are going wasted, and in some cases, being thrown away because people aren't -- they can't find people who -- enough people who want the vaccine quickly that day. So it's a real shame to have doses go unused. And we ourselves have seen this in some of the early work that we're doing is that if you open up a bottle and you only get one person that wants a dose that day, you've got to figure out what to do with the rest of the bottle. So I think we would all agree that we don't want doses going unused in this particular dynamic, but it is extremely complicated to figure out how to find the right people, the most vulnerable in that moment in that day without having things go to waste. So I think -- I don't -- I can't predict what's going to happen under the Biden administration. They have clearly reached out to us, and we're in contact with them. And I know that they're discussing the notion of getting all the first doses out regardless -- not regardless of, but without necessarily being 100% sure you can get the second doses out, which is a different strategy than what the other -- with the current administration that's been using. But I think I presume that we'll sort through this in the next few weeks, and you can see some of this shaking out with New York City having a somewhat different policy potentially than the rest of New York. Which is to start to make this as available as possible. We're seeing this in Pennsylvania as well. But I do think one thing is for sure, it's going to be pretty chaotic for the next few weeks as we'll try to maneuver through this.

Before Matt answers the financial question, I just -- I want to also understand the reporting aspect. So one of my concerns is that we make sure that we get to that herd immunity that we get 75% or 80% of the American population vaccinated, that can be vaccinated. And so what is the government asking around documentation? So -- And then from there, how do you view future documentation. So will it be -- if I come to Rite Aid and I get my vaccine, will you give me a card that says I've had my vaccine so that I can prove it to others. Will it go into an electronic health record, will it go into some centralized database across the U.S., what's your expectation?

I'll let Jim take a crack at that.

Lisa, thank you. Great to be here. I would say, I can't really talk much about what the government is going to require simply because those have not yet been fully flushed out. And they, like other aspects of this, are subject to change. But we are absolutely prepared to provide a record of immunization, proof of immunization that we'll be putting out from our own pharmacy system. We also are exploring opportunities to participate in a more digital-based solution, which actually goes beyond Rite Aid and into the form of partners who are also digitizing in a way that can help protect people like you and me next year when we go to the JPMorgan conference in person.

Which I'm hopeful for.

As we all are.

Rite Aid [ healthcare ] vaccine databases that we participate with. So like if you go to a Rite Aid, we can print out for you every vaccine you've ever gotten regardless of where you are. My husband just had that done, himself. So I'm not sure if that's state-by-state or whether all states do that. But there's already sort of a precursor for this because vaccines if you think about it, you can't go to school without proving that you've been vaccinated for certain things. So I think we'll be building on whatever -- what already is a fairly robust architecture of proof of vaccine. So I don't think this will be all that different than measles, mumps, rubella, Smallpox, whatever, but I think the key for us is to figure out a way that you can put it in your digital wallet, so you could show it when you go on an airline, something that's really slick and convenient and less paper-heavy. Because I do anticipate for the next couple of years, you will need to prove your immunity or vaccine status to do certain things. So that's what we're working on.

And Matt have you talked about the financial impact? I know ourselves and probably other analysts have written about the potential. And the way we looked at it is we've got about the profitability being roughly equal to doing a flu vaccination, which I think I've heard you and other retailers talk about in the past that it's about the same as filling a script. So do we think about this as being similar? Or are there different characteristics that this would be different than what we see with a flu vaccination from a profitability standpoint?

Yes. Lisa, I think on a gross margin standpoint, it all depends on how insurers adhere to the CDs -- it really -- past 2 kind of factors. One, how to ensures it adhere to the CDC kind of recommendations for reimbursement. And the second is whether you're doing both of the doses or just one of the doses that someone gets, which, obviously, we are going to set up tracking systems and work with our customers to make sure they're getting both of the doses. But I think the profitability of flu shots is probably as good a proxy as any right now, especially when you think about there's still cost -- incremental costs that were potentially going to incur around additional pharmacists, things to stand up, kind of a digital intake system and other types of costs that are going to be in there that are very, very early in trying to figure out. So I think that's as good a proxy as any for right now with probably more to figure out here really even over the next few weeks or a couple of months.

Just so everyone that's watching today, I understand you don't have anything in your current guidance around the potential vaccine, correct?

Yes. So our fiscal '21 ends at the end of February. So there's nothing in our fourth quarter guidance related to the vaccine now.

And you haven't given us '22, yet. So...

We have not so. So that's I would anticipate we will have some estimate for the vaccine impact. When we come out with '22 guidance, how tight it is, probably depends on how these moving pieces work their way out. But we'll have something in when we come out with '22 guidance, but nothing in '21.

Yes. Donigan, one of the things that's really stood out over the last several quarters has been the same-store sales trend. Can you just talked about what you saw in same-store sales at 3.1%. If we look at IMS data, you're actually benchmarking the IMS data, you look at the fact that nearly 25% of new prescription volumes or new prescription volumes are down 25%. And yet, you still do well. Can you maybe talk about -- is that the revitalization of your stores that you're getting new customers in? Are you doing programs around keeping people on their prescriptions. What are some of the key things that you've done to be able to drive those trends?