Rite Aid Corp (RAD) 2003 Q4 法說會逐字稿

Good morning. My name is Renita, I will be your conference facilitator today. At this time, I would like to welcome everyone to the Rite Aid fourth quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Standley, you may begin your conference, sir.

Thank you and good morning. Welcome to our fourth quarter conference call. On the call today with me are Bob Miller, our Chairman and Chief Executive Officer, Mary Sammons, our Chief Operating Officer and President and Chris Hall our Chief Financial Officer.

Before we begin today, I will would like to read the following regarding forward-looking statements. During today's call, forward-looking statements may be made. Such statements are subject of certain risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements.

Factors that could cause actual results to differ materially from those expressed are implied in such forward-looking statements include our high level of indebtedness, our ability to make interest and principal payments on our debt and to satisfy the other covenants contained in our credit facility and other debt agreements.

Our ability to improve the operating performance of our existing stores. Our ability to hire and retain pharmacists and other store personnel. The outcomes of pending lawsuits and governmental investigations both civil and criminal involving our financial reporting and other matters.

Competitive pricing pressures, continued consolidation of the drugstore industry. The efforts of third party payers to reduce prescription drug costs. Changes in state or federal legislation of regulations.

The success of planned advertising and merchandising strategies. General economic conditions and inflation. Interest rate movements. Access to capital and the company's relationship with its suppliers.

Consequently, all the forward-looking statements made during this call are qualified by these and other factors, risk and uncertainties. Also during today's call, non-GAAP financial measures are mentioned.

The definition of purpose for using these measures are described in the form 8-K we furnished the SEC this morning. The form 8-K can be accessed through our website under the "Our Company" and "Investor" info tabs.

You're also directed to consider other risks and uncertainties discussed in documents we will file with the Securities and Exchange Commission.

Our agenda for today's call will be as follows: Mary Sammons will give an overview of fourth quarter operations, I will review fourth quarter financial results and then we will take some questions. Before we turn the call over to Mary, Bob would like to make a few comments. Bob?

Good morning, there are just a few comments I want to make this morning before I turn it over to Mary for her remarks.

First, I'm very pleased about all the news we reported today. We had a great quarter and a great year. With our operating performance exceeding our expectations each of the last four quarters and adjusted EBITDA for fiscal '03 substantially higher than the year before.

We could not have achieved what we did without the hard work and dedication of all of our associates, but especially of Mary and her team, who kept everyone very focused on our EBITDA initiatives.

Going into fiscal '04 with a solid cash position and a good head of steam, we expect to continue to improve the productivity of our stores and further leverage our costs.

As for our second announcement today, I know you join me in congratulating Mary on her promotion to CEO, which takes effect at our annual stockholder meeting in June. She and I have been partners for nearly 12 years and I can say from firsthand experience that there is no better retail executive in business today.

Nobody works harder than Mary and it is largely because of her leadership that we are able to deliver the results we reported this morning. In fact, she's primarily responsible for the operating results we've delivered since we got here.

She's helped assemble a very talented management team at Rite Aid and I look forward to continuing to work with them in my role as Chairman. Now I'd like to turn the call over to Mary.

Thank you, Bob. And thank you for the gracious comments and I'm really enthusiastic about our future with our business and our associates.

We're extremely pleased with the results we reported this morning. Both fourth quarter and full-year adjusted EBITDA exceeded the high end of our guidance with fourth quarter adjusted EBITDA the highest as a percent of sales since we started our turn around. And full year adjusted EBITDA up more than 38% over last year.

These results show that our focus on increasing sales, improving margins and containing costs is working. They also reflect the hard work of all of our talented and dedicated Rite Aid associates.

Fourth quarter same store sales increased 4.7%. While sales were hurt by bad weather, especially the President's Day blizzard in the eastern and central parts of the country and the continuing weakness in the economy, we significantly improved total gross profit both in dollars and rates.

Pharmacy same-store sales increased 6.8% with gains in all months of the quarter and in all divisions. Pharmacy comps were negatively impacted by short-term challenges to growth. The lack of any significant cold and flu season, reduced sales of estrogen products and the switch of Claritin to over-the-counter.

Growth in generic dispensing due to new generics lowered comps by about 2.3%, but continued to have a substantial positive effect on gross profit. This is the seventh consecutive quarter that we've grown the percentage of our generic scripts.

During the quarter, we also increased our prescription file-buys, after ramping up our acquisition program in November. In the fourth quarter, our file-buys doubled over the third quarter.

Increasing file-buys is critical for us this year, too, since growing our pharmacy script count by stores our number one priority. As a result, we've significantly added to our acquisition staff and increased our file-buy goals for this year.

Thanks to our efforts in the quarter and to date, we are in good shape for complying with the new [HIPPA] privacy regulations which go into effect April 14. All associates are being trained on [HIPPA] rules by that date through our customized computer training program and our required notice of privacy practices will be posted in all stores as well as handed out to our customers.

Our compliance program also includes the addition of electronic signature capture equipment, which is now installed at our pharmacy counters. Our next generation pharmacy system pilot is being extended to additional stores and markets and we are ready to implement Phase II of the pilot that adds additional doctor and customer features. We plan to install this new system in more stores beginning in our second quarter.

During the quarter, we successfully launched e-prescribing in three markets, San Francisco, Louisville and Virginia Beach-Norfolk. With the service provided by Proxy Med positively reviewed by both our pharmacists and the participating doctors. Our plan is to have e-prescribing which results in quicker response time on fills and insures greater accuracy available in about 20 more markets by the end of this year.

On the front end, we again led the major chain drugstores with a 1.5% increase in same-store sales. Consumables, general merchandise and core OTC categories performed well with OTC benefiting from the Claritin switch where our mid-December launch outperformed the channel according to Nielsen data. This helped offset weakness in cough and cold products.

Last month, we introduced Rite Aid Loradidine, our private brand version of Claritin and it's also doing well. Private brand sales overall were strong in the quarter with successful promotions like our January Supervalu bonus event, contributing to the 10.8% private brand penetration we achieved for the year.

Our new programs in optical and in pre-paid phone cards paid off with healthy increases. Vitamins also continue to post solid results as we finish the year with 967 GNC store-within-a-store departments.

Seasonal sales were mixed. With strong sales in Christmas and Valentine candy, Valentine sundries, select Christmas categories and winter seasonal, but weak in toys and early spring summer. Film and photofinishing categories remained difficult because of the consumer switch to digital, which we plan to counter by adding more digital equipment this year.

Our promotional spend for the quarter was equivalent to the prior year with the exception of an incremental December coupon book that replaced a prior year 12-page mid-week circular in the west. We also ran one additional ROP ad.

Even with this minimal increase in spend, our focus on key events such as the Supervalu bonus event, our President's Day sales, continued successes with our first to market strategies and overall excellent product category and value offers got us good results.

Gross margins were healthy for the quarter, even with the mix shift to pharmacy. We were pleased with both pharmacy and funding contributions.

As for SG&A, we did an excellent job of cost containment in the quarter as our stores effectively managed labor, even with lower than expected sales. Total salaries and benefits were also better than prior years, due in part to a reduction in our worker's compensation expense.

We reduced maintenance and supply costs through new programs and contracts and we held the line on other expenses.

Inventory levels were down again from last year and our overall inventory content is excellent. In-stock levels continue to be strong, even with lower inventories.

Going forward into the new fiscal year, we continue our focus on our EBITDA achievement program which has been very effective as you can see from our fiscal 2003 results. This year, we've sharpened our focus, concentrating on four critical priorities with cross-functional teams already developing initiatives, goals and ways to measure these goals broken down into 90-day plans.

These critical priorities are, first, growing pharmacy prescription counts. Which includes initiatives for recruiting, retaining and training pharmacy staff. For example, we are increasing our recruiting staff to better focus on hard-to-staff markets.

Increasing file-buys which I've already talked about. Developing new business and enhancing existing businesses.

Examples include a new program for reacquisition of former Rite Aid customers, specific managed care strategies and a focus on seniors. Strong marketing programs that support our goal to increase pharmacy prescription count will be implemented as well.

Our second critical priority is growing front end sales. Our team is focused on growing our highest impact categories, maximizing the effectiveness of promotions and growing and retaining existing customers. Examples of initiatives are the new teen glam camp program we introduced in the stores this month and featured in this week's circular and an increased emphasis on ethnic marketing.

Our third critical priority is to contain expenses. We made excellent progress here this past year, but we believe we continue to have areas for improvement.

Our team has targeted very specific expense areas and begun the development of 90-day plans for improvement. We will of course, continue to execute our labor management program, utilizing our staff work flavor scheduling tool.

Our final critical priority is improving customer satisfaction, which we believe will give us sustainable, long-term benefits. Initiative center on instilling a customer satisfaction culture in our company, enhancing our customer service programs, including quicker resolution of complaints. Improving the customer shopping experience with the focus on convenience and consistency and improving our associates' work experience

Our capital commitment of $170 million includes plans to remodel 180 stores and reset fully 150 additional stores as well as complete 13 relocations and build 1 new store. The remodels and resets improve both our customer shopping experience and our associate work experience.

We have already finished the first month of our new fiscal year and reported sales on Tuesday. March, of course, will need to be viewed along with April due to the Easter shift.

While we still find ourselves operating in a challenging environment, we feel very positive about the programs we have in place and the plans we are setting in motion as part of our EBITDA achievement program for this fiscal year. We made tremendous progress this past year and fully intend to build on this progress.

And now, John Standley will fill you in on a few more details for the quarter. John?

Thank you, Mary. Overall, we are very pleased with our fourth quarter results.

Total sales for the 13-week fourth quarter were $4.14 billion versus sales of $4.04 billion for the prior year fourth quarter. Sales increased $102 million or 2.5% this year versus last year.

We operated 3,404 retail stores at quarter end, versus 3497 stores at the end of last year's quarter, a net reduction of 93 stores or 2.7%. Same store sales for the quarter were up 4.7%, with pharmacy comparable store sales up 6.8% and front end comparable store sales up 1.5%.

Pharmacy comparable store sales for the quarter were negatively impacted 2.3% by an increase in generic sales mix. Although increases in generic sales negatively impacted comp store sales, they increase gross margins.

Prescription sales accounted for 61.8% of total sales and third party prescriptions represented 92.7% of total pharmacy sales.

Gross margins, which include occupancy costs, were $991.7 million or 24% of sales for the fourth quarter this year versus $903.8 million or 22.4% of sales last year.

Excluding a noncash LIPO credit of $19.5 million this year and a charge of $24.8 million last year, gross profits were $972.2 million or 23.5% of sales this year versus $928.6 million or 23% of sales last year, an increase of 50 basis points.

Gross margins were positively impacted by a larger percentage of generic drug sales versus branded drugs, improved third party reimbursement rates, better leveraging of occupancy and depreciation and amortization expenses included in gross margin, and lower store inventory liquidation expenses.

These improvements were partially offset by a lower mix of front end sales due to a higher rate of pharmacy sales growth and higher vendor returns and payback expenses on front end merchandise due to unusually low expense in the prior year fourth quarter.

Selling, general and administrative expenses for the quarter decreased as a percent of sales by 169 basis points compared to the prior year.

Significant items impacting SG&A in the fourth quarter this year include a $27.7 million credit resulting from the reversal of severance liabilities for former executives, a net credit of $4.5 million from favorable legal settlements and $7.5 million of legal expenses incurred to defend prior management and to defend against litigation related to the business practices of prior management.

Significant items impacting SG&A in last year's fourth quarter included charges of $8.8 million to exit an unprofitable vender exclusivity arrangement. $3.3 million of costs associated with investigations and litigation related to our benefit plans that has subsequently been resolved. And $3.9 million of legal expenses incurred to defend prior management and to defend against litigation related to the business practices of prior management.

SG&A in the fourth quarter improved 70 basis points from the prior year, after adjusting both years for the significant items. This improvement is the result of lower payroll expense in the stores due to the leveraging of the fixed component of labor, lower occupancy and depreciation amortization expense resulting from a lower number of stores and good cost control in our stores, distribution centers and the corporate office.

Noncash [INAUDIBLE] compensation was a charge of $800,000 this year versus income of $18.7 million in the prior year. The noncash compensation relates to variable plan accounting on certain management stock options and divesting of restricted stock grants.

The large amount of income in the prior year is the result of the change in our stock price at the end of last year's fourth quarter compared to the price at the beginning of that quarter. Interest expense was $79.5 million for the quarter versus $82.5 million in last year's fourth quarter.

Interest is lower than in the prior year because we've reduced debt by $194 million since the end of last year and due to lower interest rates this year versus last on floating rate debt. Cash interest expense was $70.6 million this year versus $74.1 million last year, and noncash interest was $8.9 million this year versus $8.4 million last year.

Store closing and impairment costs totaled $80.6 million this year, which includes $78.3 million expense on the face of the operating statement and $2.3 million of expense in costs of goods sold, representing inventory liquidation costs. Impairment charges for the quarter totaled $60.6 million and closed store charges totaled $17.7 million.

The impairment charges are the result of our fourth quarter impairment test. The closed store charges primarily consists of a $10.7 million charge due to a reduction in the risk-free interest rate used to discount the closed store reserve and $5.3 million of charges related to changes and assumptions for stores closed in previous periods.

Gains on sale of assets were $2.5 million for the fourth quarter this year versus losses of $8.3 million last year.

Net income, including a $12 million extraordinary gain resulting from the early extinguishment of debt was $7 million or a loss of 2 cents per common share for the quarter, compared to a loss of $257.9 million or a loss of 51 cents per common share for last year's quarter. Loss per common share amounts include the effect of the accretion of preferred stock dividends that are not included in net income or loss.

Accretion in the fourth quarter this year was $15.3 million versus $7.3 million last year. The higher accretion is due to the timing of the declaration of quarterly dividends. Dividends for two quarters were declared in the fourth quarter this year.

On an adjusted basis, the FIFO net income this year was $29.9 million or 3 cents per common share, compared to a loss of $20.7 million or a loss of 5 cents per share last year. We have included a schedule with our press release that computes adjusted FIFO net income and I'll briefly walk through that table now for the 13 weeks ended March 1, 2003.

Our net income, as I mentioned earlier, was $7 million for the quarter, compared to a loss of $257.9 million. We had a LIFO credit this year of $19.5 million versus a charge last year of $24.8 million.

Store closing and impairment charges this year were $80.6 million versus $227.2 million last year. Stock-based compensation was expensed this year of $800,000 versus income last year of $18.7 million.

As I mentioned, we had an extraordinary gain this year from the early extinguishment of debt of $12 million with nothing last year. Litigation settlements this year were income of $4.5 million versus a charge last year of $3.3 million with the elimination of severance liabilities for former executives of $27.7 million credit.

We had a gain on asset sales this year of $2.5 million versus a loss last year of $8.2 million. The legal and accounting expenses to defend prior management and their business practices is $7.5 million this year versus $3.9 million last year.

And last year we had the nonrecurring income tax benefit of $13.1 million. So after adjusting all those items out of our results, our adjusted FIFO net income loss was income this year of $29.9 million and a loss last year of $20.7 million.

Adjusted EBITDA for the fourth quarter was $178.1 million or 4.3% of sales exceeding the high end of our guidance range by $8.1 million and an increase of $34.5 million over the prior year computed a consistent basis. The schedule attached to our press release reconciles our net income to our adjusted EBITDA total.

Adjusted EBITDA for the year was $622.9 million or 3.9% of sales versus $451.3 million or 3% of sales last year. That is an increase of $171.7 million or 38% from last year and those numbers are also reconciled from net income in our press release.

During the quarter, we sold $300 million of 9.5% senior secured notes due 2008. We used the proceeds to refinance the $149.5 million shareholder notes and general corporate purposes.

We also repurchased $118.6 million of 6% notes due December 15, 2005 and $15 million in 7 1/8th notes due January 15, 2007. These notes were repurchased at discounts that resulted in the $12 million extraordinary gain in the quarter.

Shortly after the quarter ended, we repurchased $17.6 million of the 7 1/8th notes due January 15, 2007. That is not reflected in the year-end financial statements.

Liquidity remained strong during the fourth quarter. Cash on the balance sheet increased $128 million from the end of the third quarter to $365 million at the end of the fourth quarter. The increase in cash during the quarter is due to $145 million of cash generated from operations, $13.2 million of proceeds from asset sales and $5.5 million of net proceeds from financing activities partially offset by $35.3 million of capital expenditures.

Our $500 million revolving credit facility was undrawn at year-end except for $89.1 million of outstanding letters of credit. We did not use our revolving credit facilities at all during the year, other than for letters of credit.

During the quarter, we remodeled eight stores, relocated one store, opened one new store, added 69 GNC departments within our stores and closed 8 stores. For the year, we opened three stores, relocated 12 stores, remodeled 138 stores and closed 97 stores.

In regards to our outlook for fiscal 2004, on December 19, 2002, we gave guidance for fiscal 2004, which ends February 28, 2004 and we are very comfortable with that guidance.

Operator, we're now ready to take questions.

Yes, sir, at this time, I'd like to remind everyone, in order to ask questions, please press star then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from Elizabeth Lynn of Smith Barney.

Hi, I'm calling for Lisa Cartwright. Congratulations, everyone. Just a couple of quick questions. First, Mary, I think you mentioned that CAPEX is going to be at 170 this year, that's up about $20 million from the number you had reported before. I think that you had said you were going to do $20 million in file-buys. Is the increase the greater number of file-buys you're planning?

Yes, we doubled our plans for file-buys which we feel that's an important strategy for us to grow script count.

And then I'm wondering if you can just talk a little bit about the across-the-board trends that you were talking about, the depressed pharmacy comps this quarter, generics, Claritin and then the hormone replacement therapy and what your expectations are for the next several quarters?

I think the kinds of things that I talked about are really the kinds of things affecting most of the drugstores and anyone who sells prescriptions. Now, some of those things, like the issues with estrogen, we will cycle those in the middle of this next year. And there may be even some improvement with the low dosage hormone product that Wyeth is putting out there. So that may help even as we, before we cycle. And we won't cycle the effect of the Claritin OTC switch until December.

But the cold and flu season, we're passed now, so we have allergy to go up against and it really depends what happens with allergy throughout the country. And on generics, even though they depress comps, they're good for our overall business, they're good for our customer, they help our gross profit and I think we continue to work our strategies, we're going to continue to make progress in growing our script count growth per store.

So, for generics, are you expecting them trend in the same, you know, range, around 200 basis point impact going forward?

We really don't have that number to give out. We do expect generics to continue to improve for us because it's a high focus for us, but we already have significant generic penetration in our company. So, either you cycle a lot of the new ones that came out last year and so as others develop, we'll continue to grow them.

Okay, great, thank you very much and congratulations again.

Thank you.

Your next question comes from Monica Aggarwal of Merrill Lynch.

Good morning. Just the continuing the question on generics. Do you expect to cycle through the Glucophage and Prozac because of the exclusivity periods had ended, you know, about 12 months ago on Prozac, now it's been 18 months since, you know that, drug went generic.

Yes, we've already cycled through any of those that are over a year. And when we talk about generics' effect on our comp, we're really only are talking about the effective new generics that really would have not gone through a year's cycle.

I would add to that, even after you cycle the one-year anniversary, those generics ramped up over time.

Yes.

So they will continue to have some trailing impact for a period of time after this cycle date.

Because we have a high-level focus on just increasing use of generics and there is actually more public pressure toward getting customers to use more generics.

Okay, so we wouldn't -- I guess for Rite Aid you know, if you look at the CVS numbers and then this morning, the Eckerd's numbers in terms of the impact of generics, I think the CVS impact went from 300 to 150. And then, I think Eckerd went down to about 140 versus over 200 basis point impact. So, would we expect to see something similar for Rite Aid? Because your numbers are very similar for March versus February.

Our generics situation is, you know, other than like differences in penetration is not a lot different than theirs. But we're not going to give you specific guidance on the sales.

Okay. And then, can you give us an update on your shrink management, you know, whether that's improving in the fourth quarter, you know, what is it sort of running at versus where you'd like to see it? And did you also benefit from any improvements in cash reimbursement rates versus last year or was that really a third quarter phenomena?

Well, on the shrink question, we've had a good shrink management program in place for the last couple of years. We really got started, I think, earlier than other companies on getting shrink management tools out there and this goes back at least a year and a half, maybe even two years now. And then we installed those shrink management tools in our pharmacy area, too. And we do a good job of managing it. We don't consider fluctuations in that to be a significant impact on any change on our profitability at this point, so...

Okay.

And on the cash reimbursement, John, you want to take that?

I think what we've been saying all year it's been consistent in the fourth quarter, that just in general, reimbursement rates have held strongly. That's, I think, across-the-board.

Okay, thank you.

Your next question comes from Mark Wiltamuth of Morgan Stanley.

Hi. Mark Waltamuth of Morgan Stanley Just wanted to follow up a little bit on your comments on the proceeds you used for the senior notes offering. Looks to me like you might have now wiped off most, if not all of the 2005 debt maturities. Just want to confirm that and just to confirm that the next big refinancing hurdle is around 2006 or 2007.

Actually, I -- I -- I picked a traunch of the '05s a little bit, not honestly for price reasons, but there's still a traunch of '05s left that remains outstanding. It's $198 million or something I think. I also bought some '07s.

But the biggest bunch is coming in '06 or '07?

What's left right now is a little bit of '05s of one traunch, the other traunch remains mostly outstanding I think. In '06, here, I will get the table in front of me, we can go down it here. But in '06, the converts are out there. There's $250 million in the converts are out. In '06. And 12.5 notes, the senior secured notes are also in '06. There is $152 million of those.

Okay.

Okay?

But it's safe to say, you know, with your cash flows coming in better-than-expected, you're going to be devoting more and more of the free cash flow to debt reduction. Is that fair?

Yeah, I mean we are focused on deleveraging to some degree, but we're trying to walk that fine line in balance. We also are focused in investing in our stores. What we're focusing our investment right now is on existing stores. I mean we're very focused on remodels and relocations versus trying to necessarily build new stores or enter new markets. So we're balancing that with the deleveraging effort.

Do you have a general target for debt reduction in the year ahead?

I don't think we're giving out, you know, specific balance sheet numbers, honestly, but we want to continue to, you know, I think just, you know, our -- our guidance, if you look at our guidance and if you look at our EBITDA this year and you look at how much we delevered this year, you can get a sense of what could be possible.

We're fortunate, we're excited about our cash position, our cash flow and where we're at today and to be truthful, we continue to analyze what we think will be the best return for investors. That could mean some increased capital spending if the opportunity presents itself and we continue to perform like we are. So, we really don't have a target, but we're in a very good position considering where we were a couple of years ago. Okay. Well, congratulations on the improved EBITDA performance.

Thank you.

Your next question comes from Eric Bossard of Midwest Research.

Eric Bossard, CFA: Good morning, Eric.

Go ahead with your question, sir.

Eric Bossard, CFA: I'm sorry, in terms of overall pharmacy momentum, you talked about Mary trying to do some things to get pharmacy volume growing faster. We've seen a bit of slowing across the industry. I know some of it is explained in terms of generic mix. Can you talk about your outlook in terms of pharmacy volume, pharmacy momentum and what you actually think you can do to improve your pharmacy growth rate?

Eric, there certainly are short-term challenges on pharmacy and I think we've seen that in everybody's results, but we've got a really good plan already in place and being worked on for this upcoming year and it really includes those focuses I mentioned that we've really got a strong plan in place on recruitment, retention, training of pharmacists because we feel that experience at the pharmacy is so important to us, retaining and getting new customers. So, that's a key priority. The file-buys, which I mentioned, we doubled our target in terms of what we want to do in file-buys.

We are also looking at some very specific managed care strategies to be able to add more lives to that weekend coverage throughout our stores and have very specific plans in place there that I really don't want to discuss any specifics on that at this point in time, though I will share them as we get things finalized there in the future. And then we're doing things really with our existing pharmacy business to strengthen it and better target specific problem markets or problem stores and with combination of direct mails and special marking programs for those areas and also doing some things that I'll talk about, probably in the next conference call, relative to seniors.

All right, you might mention our new systems, we're excited about them, the second phase of our pharmacy systems.

We've talked, I think the last few calls, about our next generation pharmacy system, which has been in pilot stage and we're going to be adding additional stores to that over the next four weeks and really will get under way with the rollout about the middle of the year for a lot more stores and markets. And that improves the whole work flow process. It's very pharmacist friendly. It's going to allow a lot of flexibility in what we do, in fact creating a better environment behind the bench we believe is important for satisfaction.

The comment I'd make too, is that some of the factors, the estrogen, the Claritin, what not, are really near-term things. We still believe in the broader, longer term trends, which is very positive demographics and the strong pipeline developing out there in drugs and what not. So we believe in the longer term trends will be positive.

Eric Bossard, CFA: Second question, in terms of the front end, you talked about in the fourth quarter, you were slightly more promotional. It sounds like just very slightly. What type of position do you plan on taking in terms of promotions in 2003 in order to grow the front end faster?

We believe the things we've been doing in the front end have been working well for us and we're -- we don't see any significant change in what we're doing. We use our pages well and our promotion well. We give good value. We're going to concentrate probably even more on what we do with suppliers on first to market strategies and what we do with offering better value and more excitement in what we do.

And then I mentioned that we've got some specific initiatives under way relative to ethnic marking. That we're going to be focused on as well as things like doing more with the teen customers. So, I think we've got a good blend of marketing and merchandising going on out there besides the ad itself. I don't think more pages are the answer to the problem with sales.

Eric Bossard, CFA: And then last question, the store countdown 2.7%. What are we likely to see a year from now? You commented about your real estate plans, but is there another chunk of closings or are we likely to see comparable store count from this point forward?

We think we're -- have done a lot of work here, Eric, to get through the underperforming stores. You know, we still have a group of underperforming stores that we are working with very carefully and we measure, but we don't expect to have closings anywhere near the level that we had in the last few of years. There could be, you know, some stores that get closed, but nothing like the last couple of years.

Eric Bossard, CFA: Great, thank you.

Your next question comes from Leah Hartman of CRT Capital.

Good morning and congratulations once again on a wonderful quarter. I did want to just check again on the debt schedule. You made another term loan scheduled payment. Is that correct?

In the fourth quarter --

Right. And so, the balance now is...I think I have $1,372 billion.

That's correct.

Okay. And could you just give me -- double check for me the 6% of '03, the balance outstanding there.

$58 million.

58. All right. Thanks again.

Your next question comes from Rachel Golder of Goldman Sachs Assets.

Thanks. Very few left, but wondering whether you've spoken with the rating agencies, in particularly, Moody's lately.

We talk to the ratings agencies frequently! And we've reviewed year-end results with them.

Okay, any -- any indication from that that they may be revising --

I hate to speculate what the ratings agencies will do. I mean, obviously, since we were last, since most of our debt was last rated by either Moody's and S&P, we've made substantial improvements so we remain hopeful that, you know, the rating agencies will continue to review the situation, but I could -- you know, I can't predict what the rating agencies will do.

Okay. Great. As far as your networking capital management goes, is that pretty much been accomplished or do you think there will be further improvements in total levels of inventory over the course of the year?

We -- we still believe that we have good opportunities in working capital. You know, we've worked hard on it and our folks here have done a fabulous job with it, Mary --

Yes, we continue to have days on hand improvement goals for our pharmacy and we'll continue to get turnover improvement out of the front end and as we've gotten rid of all the old inventory that clogged up the back room, we have been able to focus more effort on productivity of the inventory on the sales floor.

Okay. Great. And my last is maybe a dumb question. Could you remind me what the source of the noncash interest is?

It's primarily the write-off of debt issue costs.

Okay. Great, thank you very much.

Okay.

Your next question comes from John Sykes of Nemora.

Yes, good morning. My question is, what percentage of your total front end sales come from private, branded products? And what's been the trend there, in terms of comps?

Our private brand penetration came in for the year at 10.8% and we are -- our goal for the year was 11. So, we're very close to our goal. We believe there is probably over the next few years, a couple of percentage points improvement there. But we do it in, I think ways that work well for our business because it's important for to us continue to promote the brands that customers want, too. But private brand is an important component of our strategy.

What was the growth last year, Mary?

The growth? Well, the growth was higher than our overall comps for front end. Want to give out the percentage? Does that answer your question?

Yeah, I guess what you're saying is that I guess the merchandise there has on a comp basis grown better than sort of your stock-branded products that you have.

Yes, because we had aggressive goals there because it helped us differentiate, it gives us margin improvement opportunity. So we added about 250 to 260 new items this year to our private brand assortment and will continue to add about that many over each of the next few years, too.

Just on just two kind of follow-ups to that, one, the contribution margin on the private label products. I'm assuming that that's higher than sort of the just base front end products. Is that...

Yes, it saves the customer significantly and we make more money on it.

Okay. And then just in terms of goals going forward, you know, just say over the next kind of three to four years, what would you like to bring that up to?

I'd say we're talking about getting it in that 12 to 13% penetration level.

Okay. Thank you very much.

Thank you.

Your next question comes from Mary Austin of Pax World Fund.

Actually, Diane Keefe from Pax World Fund. I was wondering if the product or if the message that you referred to where you were doing increased substitution of generics were associated with NDC health software. Are you currently using that software? And if so, what stage of implementation are you in? Or is this something that you've developed internally?

We use some NDC software products, but not for that.

We have our own internal-developed software that prompts where it needs to prompt at store levels, but we do have a relationship with NDC and use it in our third party area.

Can you give us any granularity on how much improvement you're going to be expecting in terms of the substitution of generic for branded and improved inventory turns as a result of those efforts?

I don't have any specifics there, other than to tell you that we do plan our generic -- generics to increase this year in prescription count over the prior year.

Thank you.

Your next question comes from Bill of Hartman and Sons.

Good morning. And congratulations on a great quarter.

Thank you.

I think every one of us hears and receives a lot of e-mails on cheap pharmacy products from Canada. Can you just comment on that trend? And is that a threat? And then finally, what worries the management team the most? What one item worries you the most these days? Thank you.

Well, the question on drugs from Canada, that is illegal importation of drugs and it really has safety ramifications and there is a large effort under way through NACDS, which is the National Association of Chain Drug Stores, as well as, I think, of renewed interest by the FDA and what's happening there because there are really safety issues. So --

There is an action against certain of these importers. So we're going to see a good flurry of activity there I think.

That's not healthy for the overall safety of the country. So... And on the second question, what worries management?

We're all focused on sales, we focus on sales a lot, so...

Yeah, just, you know, continue to grow the business even with a tough retail climate out there.

Thank you.

We have a follow-up question from Leah Hartman of CRT Capital.

A couple of unrelated questions. I didn't hear the cash interest expense for the year, please.

For the year... Hold on one second.

And the second question is, Mary, as you outlined your, you know, the key focal points for the year, one of the mentions was specifically on pharmacy and pharmacist recruiting. Are you trying to give us the impression that is to drive the traffic and to have high quality pharmacists in place or that we actually are experiencing a shortage of pharmacists?

Well, the pharmacist shortage has continued for everybody, I think, over the last number of years. We just don't have enough graduating students. So you always have to be active with recruiting and since we plan on increasing our script count growth, we want to make sure if we have needs that we've got qualified pharmacists.

But our biggest focus is probably on the recruiting for what you'd call hard to fill areas and I think everybody has some of those, whether you're talking about part of Maine or you're talking about outlying areas in Northern California, and you don't want to rely on agency payroll, you really want your own pharmacists.

We're not in a position that's worse than it has been in the past. In fact, it's probably a little better.

Right.

We have to get aggressive give recruiting new pharmacists.

And on just training programs and all retention strategies because they're in hot demand.

That's why I was going for clarification. Thank you.

The cash interest expense for the year is $292.7 million.

Thank you very much.

Your next question comes from Dan Kurt of DK Equity.

Good morning, I have two quick questions. Could you possibly tell us what the free cash flow was for last fiscal year? And separately, concerning the EBITDA guidance for fiscal year '04, you mentioned you're standing by earlier guidance, could you just affirm, is that earlier guidance a range of 675 to $725 million?

Yes, that's the guidance we gave on December 19. And what was the -- what was the first part of the question?

Could you tell us what free cash flow was for the last fiscal year, please?

Cash flow statement. Yes, cash flow statement, cash flow from operations was $305.4 million.

Okay. And you've got the CAPEX you've given us that.

That's right.

Thank you very much.

You're welcome.

Your next question --

This will be our last question.

Your next question comes from Michael of GMO.

Hi, I think that's me! The name is Michael Ellman from GMO.

Hi, Michael.

You know, my congratulations on the results and on your promotion, Mary.

Thank you very much.

Could you -- you indicated, I guess, when you issued your guidance for '04, that you were looking for same-store sales growth of 6 to 7%. I think in the past two months, you've notched 3.2 in February and 2.4 in March. Could you just go over, in broad terms, the dynamics that are going to cause the same-store sales to lift?

I think March has to be looked at in light of Easter, the Easter switch to April.

So, if we made that adjustment, what do you think the number would have been?

We're not going to...

When we give out April sales, we will talk about the combined effect of those two months and what the Easter result was.

Okay.

I think February was impacted by weather, slow flu season, some other things. We think the last couple of months, you know, were impacted by near-term trends and again, we still believe in some of the longer term trends that will impact our sales.

Yes.

Could you clarify, you know, sort of the relative contribution of front end and pharmacy in that 6 to 7% projection?

We could not. We're not providing that guidance.

Okay. Thanks.

Thank you. Thank you very much. We appreciate you participating on our call this morning.

Thank you.

Thank you for participating in today's conference call. Your may now all disconnect.