Rite Aid Corporation
Q4 2023 Earnings Call Transcript

Published: 20 Apr 2023

[Operator Good morning. My name is Rob, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Rite Aid Corporation Fourth Quarter Fiscal Year 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.Byron Purcell, Vice President, Investor Relations and Treasurer, you may begin your conference.Byron Purcell Thank you, Rob, and good morning, everyone. We welcome you to our fiscal 2023 fourth quarter earnings call.Elizabeth "Busy" Burr, Interim Chief Executive Officer; and Matt Schroeder, Executive Vice President and Chief Financial Officer, will begin the call with prepared remarks. Chris DuPaul, Chief Operating Officer of Elixir, will also join the call during the question-and-answer session.As we mentioned in our release, we're providing slides related to the materials we'll be discussing today. These slides are provided on our website, investors.riteaid.com. While management will not be speaking directly to these slides, these slides are meant to facilitate your review of the company's financial results and to be used as a reference document following the call.Before we start, I'd like to remind you that today's conference call includes certain forward-looking statements. These forward-looking statements are presented in the context of certain risks and uncertainties that can cause actual results to differ. These risks and uncertainties are described in our press release in Item 1A of our most recent annual report on Form 10-K and in other documents we will file or furnish to the SEC.Also, we'll be using certain non-GAAP measures in our release and in the accompanying slides. The definition of the non-GAAP measures, along with the reconciliation to the related GAAP measures, are described in our press release and the slides.And with that, let me turn it over to Busy.Elizabeth "Busy" Burr Welcome, everyone, and thank you for joining our Q4 earnings call.I realized that this is the first time that many of you are hearing from me as the Rite Aid Interim CEO appointed by the Board on January 9. I'm thankful to the Board for choosing me to manage the business during a critical time when urgency and focus is needed and happy to serve until such time as a permanent CEO is hired. As a Board member for the last three years, this assignment is especially important to me. I'm singularly focused on making progress and ensuring we do not lose any time while conducting our search for a permanent CEO.Rite Aid, as you know, with the longstanding trusted U.S. brand in the retail pharmacy space, [as is] (ph) Elixir in the PBM space, we've been a highly leveraged company for many years, which has limited our ability to invest in the business and keep up with our competitors. Before I share more on what we are doing to return our business to growth, I'll briefly cover Q4.Q4 adjusted EBITDA of $129 million was above the midpoint of our guidance and better than analyst expectations of $101 million and prior year Q4 of $106 million. The main drivers were:]

front-end sales comps, excluding cigarettes and tobacco products, of 2.8%; SG&A improvements from cost reductions initiatives and store closures; and script comp of 5.2% or 9.7% excluding COVID, demonstrating share gains over the last five quarters for a total of 50 basis points to 11.2%, according to IQVIA.As pleased as we are about Q4, our focus is on the future and what lies ahead. We anticipate many headwinds for fiscal year '24, none of which are a surprise, but we need to plan for them. As in the past several years, we expect reimbursement rates to be under pressure, cycling COVID benefits to add to the challenge, and wage inflation and shrink to eat into earnings. We've also lost ground in the PBM market from a loss of a large health plan account, and the plan shrinking of our Med D business.I know that litigation faced by us and many others in the industry is on your minds. We are actively managing those matters and defending ourselves. We've engaged excellent legal counsel and the anticipated cost to defend ourselves is factored into our guidance. But as you all know, litigation is a process that takes time.That being said, there are great opportunities for us to be very successful. There is a fundamental consumer need for pharmacy services, for both individuals and companies. At Rite Aid, we serve these needs through both our retail and PBM businesses, respectively. We have a trusted and iconic brand and attractive retail footprint and a long history of serving millions of customers built over the years largely through our pharmacists.Specifically, the role of the pharmacist has become an increasingly important, trusted, ubiquitous, and efficient option for the delivery of healthcare services to consumers. And this is part of our core value proposition. We augment this with digital and remote capabilities to support customers in their preferred channels.We have a lot of work to do to seize the opportunity given the pressures I mentioned. There's a sense of urgency that the Board and I have brought to Rite Aid. Simply put, we need to grow the core, prescriptions and retail, and grow the PBM, all while continuing to make the company more efficient. We will not be chasing long shots, but rather we are immediately focusing on the core areas of our business with initiatives that have high- and nearer-term ROIs. We also need to do this while carefully managing our capital structure.On a macro level, last fall, Rite Aid started the implementation as an established turnaround model that has been used at numerous companies to successfully turnaround their business. While you've heard the term turnaround used before, this is different. We are partnering with a leading consulting firm that has worked with several Fortune 150 companies to execute a highly prescriptive and programmatic model, that has a rapid cadence and analytical rigor, and currently engages associates from across the Rite Aid enterprise. We believe that this model, that is geared to drive performance and acceleration across the enterprise, will enable us to organize effectively and efficiently to capture value and drive growth.I am also well aware we need to prove it. It begins with leadership. And as you have seen, we are not afraid to make changes and significant ones as needed. To execute our turnaround, we have both eliminated some position at up level talent and capabilities by adding new positions and bringing in new perspectives. In addition to a new CEO, we've added a new Head of marketing, a new Head of Merchandising, a new Head of Procurement, a new Head of Transformation and a new Head of FP&A to bring in new discipline and expertise to our operations and business.The turnaround model has given us visibility to the profitability opportunities we believe we'll drive; we can drive over the next three years by focusing on improvements and growth in our core businesses. Many of the opportunities are simply catching up to things our peers do better than us today. We believe this effort will position the core business for growth longer term. Here are a few examples of turnaround initiatives in the three core areas of the business.In our pharmacy business, we're continuing to invest in med adherence. For example, we've seen a nearly 150 basis point increase in adherence from our Courtesy Refill Program. From industry benchmarking, we believe continued investment in this program has the potential to bring significant upside. We are scaling a successful Q4 pilot initiative that produced a 60 basis point reduction in abandoned scripts to enhance message timing and content. At scale, just 1% improvement could drive a material impact on adjusted EBITDA.In the front-end, we're optimizing inventory to improve our in-store experience and increase working capital. Initiatives include space productivity efforts and replacing categories that are over-spaced with faster growing categories. We are able to reduce inventory by $40 million in fiscal year '23 and we will be deploying further inventory controls this year. We're implementing a store clustering initiative to enable regional assortments and improve our product relevancy based on the success of the regionally focused product assortment [indiscernible]. We're improving our pricing analytics and capabilities by increasing the number of price zones and creating a variable price zone structure. We began to realize gross margin benefits from the initial pricing tests.In Elixir, we're continuing to focus on client retention through things like improved reporting and pricing competitiveness. We have already secured three of our top five renewals. We're continuing our efforts to improve procurement economics, specifically through contributions from plan design administration, formulary and rebate management services and network performance. We're taking steps to optimize our specialty and mail pharmacies with expanded access to networks and new limited distribution drugs. We've already gained access to two of the four largest Medicare networks.Last year -- lastly, we're working on efficiency, productivity and, of course, cost reductions across the business. Examples include