Rite Aid Corp (RAD) 2004 Q1 法說會逐字稿

Good morning. My name is Angie, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Rite Aid first 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. Standly, you may begin your conference.

Thank you. Welcome to our first quarter conference call.

On the call today with me are Bob Miller, our chairman and Chief Executive Officer; Mary Sammons, our President and Chief Operating Officer; and Chris Hall our Chief Financial Officer. Before we begin today I would like to read the following regarding forward-looking statements: During today's call forward-looking statements may be made. Such statements are subject to 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 or implied in such forward-looking statements include: Our high level of indebtedness; ability to make interest and principal payments on debt and satisfy other covenants contained in credit facilities and other debt agreements; our ability to improve the operating performance of our existing stores in accordance with management's long-term strategy; our ability to hire and maintain pharmacists and other store personnel; the outcomes of pending lawsuits and governmental investigations; competitive pricing pressures; continued consolidation of the drugstore industry; the efforts of third-party pairs to reduce prescription drug costs; changes in state or federal legislation over regulations; the success of planned advertising and merchandising strategies; general economic conditions and inflation; interest rate movements; access to capital; and our relationship with our suppliers. Consequently, all the fashions made during this call are qualified by these and other factors, risks, and uncertainties. Also during the call non-GAAP financial measures are mentioned. The definition and purpose for using them or described in the form 8K we furnished to the SEC this morning. The form 8K can be accessed on our website under the "Our Company" and "Investor" tabs. You are also directed to consider risks and uncertainties in our documents filed with the Securities and Exchange Commission. Our agenda for today's call will be as follows: Mary Sammons will give an overview of first quarter operations; Chris Hall will review the first quarter financial results; I will comment on our recent refinancing in fiscal 2004 guidance; and then we will take questions.

Mary?

Thanks, John. Good morning.

We are very pleased with the results we reported this morning as we continue to improve operating performance in a retail environment still suffering from a weak economy, high unemployment, and a cautious consumer. We achieved adjusted EBITDA of 175.1 million, an increase over the prior year first quarter and continued the positive momentum we saw at the end of last year with EBITDA again equaling 4.3% of sales. We delivered these results by increasing sales, improving margins and containing costs. Also noteworthy in the quarter was the completion of a major refinancing that includes a new senior secured credit facility, a three-year extension on the maturity of a substantial portion of our debt, and additional capital to invest in our business. Thanks to the significant improvement we made in our operating results, we were able to accomplish this nearly two years ahead of schedule. John will give you more details on the refinancing when he makes his remarks.

First quarter same-store sales increased 4.3%, with gross profit again improving over the prior year for both pharmacy and front end in both dollars and rates. Pharmacy same-store sales increased 5.7%. Like other drugstore chains we've seen slowing in overall pharmacy growth which became more pronounced in the first quarter. Some of the reasons are very likely short-term: a non-existent flu season, missed expectations for cough and cold, a late start to the allergy season, reduced sales of estrogen products, the Clairitin switch, the slowdown in FDA approval of new drugs, and rising unemployment which affects the ability of some of our customers to buy prescriptions. While higher and multi-tier (INAUDIBLE) the growth of mail order and continued rate pressure from both private and government third-party pairs could have longer term impact, we still see significant natural growth in the sector. Growth in generic dispensing dampened costs by approximately 2.1%, but continue to favorably impact gross profit. Our rate of generic dispensing increased more than 300 basis points compared to the same period last year, which makes this the 8th consecutive quarter for this positive trend. We also made inroads with our aggressive program to acquire prescription files. We doubled our acquisition budget and tripled the size of our file by team. And have already increased the number of acquisitions this first quarter by 77% compared to last year's first quarter.

Other pharmacy initiatives included the start of a major project designed to further improve work flow, productivity, and costs in the pharmacy to coincide with the installation of our new pharmacy dispensing system planned for chain-wide rollout beginning this fall. We held another successful health and beauty expo in Baltimore in May with 90,000 people attending. We've now held six expos around the country which not only raised the image of Rite Aid but results in increased sales. We also launched e-prescribing in one additional market. New Orleans, and still have plans to offer the service that allows doctors to send prescriptions electronically in more than 20 markets by fiscal year-end. And we successfully met the HIPPA compliance date of April 14.

During the quarter we joined with others in our business to lobby members of Congress on the importance of thoroughly including retail pharmacy in any Medicare prescription drug plan. As you know, the political pressure on Congress to pass a drug plan for seniors has intensified in recent weeks as have our lobbying efforts. While influential members of Congress has been receptive to our message, it's too early to tell what effect the long-term prescription plan that would begin in 2006 or the proposed short-term discount card will have on large chain drugstores. We continue to work both independently and in cooperation with NACDS our trade association, to make pharmacy's position clear.

On the front end, same-store sales increased 1.8% even when the weather against us most of the quarter and across the country. Strong promotion, new item support, improved plan-o-grams, and better execution of store-direct programs contributed to the increase. Consumables remained strong while core drugstore products were mixed. Vitamins and personal care sales increased. And OTC gained strongly because of the Clairitin switch. Strength in pain care and adult nutritional helped offset decreases in diet products resulting from the increased negative publicity around ephedra and the elimination of most ephedra-based products from our assortment. Private brand sales rose significantly as a percent of sales with penetration up 30 basis points compared to last year. 75 new SKUs were introduced in the quarter. Seasonal sales increased because of outstanding Easter sell-through, while summer seasonal was throw because of weather issues. Optical and prepaid phone cards stayed strong thanks to new programs. Photo, film, and photo finishing remained a challenge due to the consumer switch to digital, but we moved closer to finalizing our plan that will accelerate the rollout of digital capability to the majority of our one-hour photo labs throughout this year. Cigarettes and tobacco continued to decline.

In April, we launched "Glam Camp," our new program targeted to teens, as part of our initiative to attract new customers from secondary customer markets. Elements of the program include a dedicated end cap, gift with purchase and quarterly sweep stakes. Co-marketing the program via website and magazines popular with teen girls we're starting to see some pay back. Our overall advertising spend as well as focus was paramedic comparable for the quarter. We eliminated four nonproductive pages compared to last year freeing up those dollars for a later coupon event. Once again, our associates did an excellent job of cost control during the quarter as all divisions continued to manage payroll while delivering improved customer satisfaction. We also kept corporate and administrative expenses in line. The DC's continued cost -- contained costs with good labor control and a reduction in freight expenses. Our shrink management tools continued to deliver improved results. As for inventory, we're in good shape even with the slower sales of summer products.

As you may remember from our last conference call, we started the fiscal year focussed on four critical priorities: Growing pharmacy prescription counts, growing front-end sales, improving customer satisfaction, and containing expenses. As we move into the second quarter, those critical priorities are gaining momentum. On the pharmacy side, we are getting even more prescription (INAUDIBLE) in our pipeline. Allergy season is picking up, and we will cycle the first quarter of reduced Estrogen usage due to the negative publicity last June. Other major pharmacy initiatives planned for the second quarter include the piloting in several test markets of a new loyalty program for seniors designed to increase both pharmacy and front end sales. We will finalize all remaining phases of our new pharmacy system to improve pharmacist satisfaction and customer satisfaction and allow to us deliver on both our, "With us it's personal" and "Ready when promised" commitment and an improved program to handle the workers' comp. Managed care relationships are getting increased focus through the efforts of our new Senior VP of pharmacy services Mark DeBruijn.

On the front end we are continuing to find more ways to offer great values and newness to our customers. We will shortly roll out several exciting offshelf programs, and the move to digital capability will be well underway by quarter end. Our suppliers are teaming up with us to upgrade our ethnic offerings as part of our initiative to gain share with secondary customer targets, and we feel good about both our back-to-school assortment and the promotions planned to support them. Private trend development will also continue to be strong and of course our pharmacy initiatives around the senior loyalty program will also benefit the front end. Clearance activity will also be dominant during the quarter as we move out of the spring and summer and into fall. Our advertising and promotion spend will continue to focus on smart sales. A unique combination of consumable value offers, core drugstore categories, new items and strong seasonal offerings. We will be adding one new event for new event or back-to-school. The plans we have described for both pharmacy and front end are key components of our critical priority to increase customer satisfaction. These specific initiatives, coupled with our emphasis on operational discipline, execution, and customer service, will help us increase our market basket and gain new customers. And our efforts to contain costs is continuous with a focus 5 always being updated.

During the quarter, we will also continue to work on our new store development program. During the last several years, we have focussed on increasing the productivity of our existing stores because our financial situation didn't allow for building many new stores. That strategy has worked well for us and we will continue that focus. But with our substantially improved operating results and the refinancing we just completed, we are now in a position to also start working on new store development again. As our release said this morning, our goal is to open 75 new stores by the end of fiscal 2005, and 100 new stores in fiscal 2006. These new stores will be located in our strongest existing markets, and in many cases will replace existing stores which we believe will deliver a much bigger and quicker payback than entering new markets. We've already geared up our real estate group and have put a team together to start working on a new Rite Aid prototype. We will have more details for you as the program progresses. We are excited about our results to date and even more enthusiastic about the future ahead of us.

Now I'd like to turn it over to Chris to give you more details on the quarter, and then to John to review the refinancing and guidance for fiscal 2004 that we gave in our news release this morning. Chris?

Thanks, Mary.

Overall we are very pleased with our first quarter results. Total tales for the 13-week first quarter were 4.05 billion this year, versus 3.92 billion last year. Sales increased 122 million, or 3.1% this year, versus last year. We operated 3,396 retail stores at quarter end, versus 3,454 at the end of last year's quarter, a net reduction of 58 stores or 1.7%. Same-store sales for the quarter were up 4.3%, with pharmacy comparable store sales up 5.7 and front end comparable store sales up 1.8%. Pharmacy comp sales for the quarter were negatively impacted 2.1% by an increase in generic sales mix although increase in generic sales negatively impact comp store sales they increase gross margins. Prescription sales accounted for 64.5% of total sales, and third-party prescriptions represented 93.1% of total pharmacy sales. Gross margins which include occupancy costs were 978 million or 24.2% of sales for the first quarter this year, versus 930 million or 23.7% of sales last year. Excluding noncash LIFO charges 15 million this year and 17.3 million last year, gross profits were 993 million or 24.5% of sales this year, versus 947.2 million, or 24.1% of sales last year, an increase of 40 basis points. Gross margins were positively impacted by a larger percentage of generic drug sales versus branded drugs, improved third party reimbursement rates, strong margins on front end products, better leveraging of occupancy and depreciation 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.

Selling, general and administrative expenses for the quarter decreased as a percent of sales by 90 basis points compared to the sales prior year. Significant items impacting SG&A in the first quarter this year and last year include 6 million this year and 6.7 million last year of legal expenses incurred to defend prior management and to defend against litigation related to the business practices of prior management. SG&A for the prior year first quarter was also impacted by $20 million charge to record an estimate of the cost of settle the U.S. Attorney's investigation of the business practices of prior management. SG&A in the first quarter improved 44 basis points from the prior year after adjusting both years for these significant items. This improvement is a result of lower payroll expense in the stores due to leveraging fixed component the labor. Lower occupancy and depreciation and amortization expense resulting from a lower number of stores and good cost control in stores, distribution centers and corporate office. Noncash stock compensation was a charge of 9.8 million this year versus a charge's 8.1 million in the prior year. We adopted FAS123 in the beginning of the first quarter on a modified prospective basis to recognize the noncash cost of stock options granted to management. The FAS123 expense is calculated by amortizing the fair market value of the option at the date of the grant over the option vesting period. The prior year charge is a result of variable planned accounting on certainly management stock options and investing in restricted stock grants in the prior year. Store closing and impairment costs totaled 7.3 million this year, which includes 6.4 million of expense on the face of the operating statement, and 900,000 of expense in cost of goods representing inventory liquidation costs. The prior year store closing and impairment cost totalled 3.6 million including costs including 7.7 million in inventory liquidation costs included in cost of goods and a credit of 4.1 million resulting from a favorable adjustment to the closed store reserve.

Interest expense was 79 million for the first quarter versus 84.6 million in last year's first quarter. Interest is lower than the prior year because we had a lower average debt balance outstanding during the quarter this year versus last year. Lower rates on floating rate debt and the classification of interest expense related to the closed store reserve as closed store expense this year versus interest expense last year. Cash interest was 72.1 million this year versus 75 million last year and noncash interest was 6.8 million this year versus 9.6 million last year. Losses on debt modifications were 33.4 million in the first quarter compared to 300,000 last year. The charges in the current year are from the write-off of unamortized debt issue to say cost for debt refinanced in the quarter, partially offset by gains resulting from the early retirement of bonds.

Gains on asset sales were 1.5 million for the first quarter this year, verses gains of 16.9 million last year. Adjusted EBITDA for the first quarter was 175 million or 4.3% of sales, an increase of 16.8 million over the prior year computed on a consistent basis. The schedule attached to our press release reconciles our net loss to our adjusted EBITDA total. Net loss for the quarter was 38.8 million or a loss of 8 cents per common share compared to net income of 2.6 million or a loss of 1 cent per common share last year. The loss per common share amount for the prior year includes 7.2 million of accretion of declared preferred stock dividends not included in that income or loss. No preferred stock dividends were declared in the first quarter this year.

John will now comment on the refinancing and our guidance.

Thanks, Chris.

During the quarter, we completed our comprehensive refinancing which extended the maturity of a substantial amount of our debt for an additional three years. A new 1.15 billion term loan and $700 million revolving credit facility with a maturity date of April 2008 provides us the flexibility to increase our capital spending or retire shorter debt maturity as we choose. In addition to the new bank facility we issued $360 million of 8.18 senior secured notes due 2010, and $150 million of 9.25% notes due 2013. The proceeds from the new term loan and bonds were used to repay the old senior credit facility, repurchase $193 million in bonds, repay the $107 million synthetic lease facility, and for general corporate purposes. Debt is $86 million higher than at year-end because the $107 million synthetic lease which was previously treated as an operating lease for accounting purposes has been refinanced with debt. Liquidity remains strong during the first quarter. Cash on the balance sheet at the end of the quarter was 343 million; cash from operations was $49.8 million on the cash flow statement; expenditures for property, plant, and equipment were 29.9 million; and we acquired $4.9 million in script files for a total of $26.8 million in capital expenditures. The 26.8 million of capital expenditures did not include the $107 million synthetic lease buyout that would be reflected as capex in the cash flow statement. During the quarter, we remodeled 41 stores, relocated one store and closed eight stores.

Looking at our guidance for fiscal 2004, we are confirming our adjusted EBITDA guidance from 675 million to 725 million for fiscal 2004, attached to our press release is a table that reconciles our adjusted EBITDA guidance to our guidance for GAAP earnings. Our GAAP earnings guidance ranges from a break even to a net loss of 63 million for fiscal 2004. Sales are expected to be in the range of 16.6 billion to 16.8 billion based on primarily assumed same-store sales between 5 1/2 to 6 1/2%. Capex is expected to be in the range of 170 million to 190 million for fiscal 2004, and this does not include the 170 million buyout of the synthetic lease completed with the refinancing that will be classified as capex on our cash flow statement.

Operator, we are now ready to take questions.

At this time, I would like to remind everyone in order to ask a question, please press "star 1" on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Eric Bosshard from Midwest Research.

Good morning. A couple of questions. First of all on comp guidance of 5 1/2, 6 1/2, which is a little better than you've done the last couple quarters, can you just give us a sense for why you have a level of confidence in improving comps and what you see in your business or the macro environment contributing into that?

This is Mary answering that question. We really think that when when you look at what some of the things that occurred in the first quarter, would not necessarily be repeated in the second quarter, when you look at weather factors that were a big problem, and you also are out of -- going to start cycling some of the things on the pharmacy side that negatively impacted sales, allergy season has also picked up. And we feel good about our prescription followed by a program that we ramped up early towards the end of last year and are continuing to ramp it up. We feel comfortable with the guidance we've given on comp sales.

Secondly, in terms of promotions and that effort, can you talk about what you're doing in the market now and what you expect to do through the balance of the year, especially with the sales expectations that you have?

We have had a very focussed promotion program over the last several years and we really aren't making any significant changes in that. We have a weekly circular program, our page count is fairly consistent from year to year. I think I mentioned that we added one new coupon event for the second quarter which we think will also be real positive for back-to-school sales. But overall we're going to continue to work our program which has helped produce the kind of sales that we've had on the front end of the store.

And last question on the store opens, is this a 75 gross number, is that a net number? Can you give us a sense of what this would net out as in terms of incremental stores?

Yeah, that's a gross number and we think it will probably be maybe kind of 50/50ish in terms of news and relocations.

And are there other further closings that would leave you in a net growing the store base 30 to 50 stores a year or by the time you got other sort of normal course of business closings that you net out at flat? What do you think the math looks like?

I think we'll have net growth in fiscal 2005 and there will be some, a few business closures but we're not at this time predicting any large group of store closures.

Great. Thank you.

Your next question comes from the line of Karen Miller of Bear Stearns.

Hi, good morning. Great quarter. Just a couple questions. First in terms of housekeeping could you please tell us what your bank debt was at the end of the quarter?

Chris, do you want to take that?

We just entered the new facility to the bank deal was the billion 150.

You didn't have anything on the revolver?

No, except LCs.

And how much was that?

123 million. Again, that's not reflected as debt.

Right, right. Secondly in terms of the new store schedule, is that going to be more heavily weighted towards the beginning of fiscal '05, the end? If you could give us some sense of maybe what cap ex will look like in fiscal '05 and '06.

I don't think we're guiding to cap ex in fiscal '05 and '06 at this point. The store schedule will be more weighted to the back of the year, fiscal 2005 and it will probably be a little bit more evenly spread in fiscal 2006.

Okay great. And then just one final question. The FDA just approved the sale of Prilosec for over the counter. Do you see this favorably impacting you? What's going to be the impact on your pharmacy versus these front end sales.

We're in the process of quantifying that, and it doesn't happen until September so it's a third quarter event. We'll have more information on that going forward.

Great, thanks a lot.

Your next question comes from the line of Mark Husson of Merrill Lynch.

Hi, this is Monica for Mark. First of all you talked about clearing some seasonal items for the summer and spring. So would that put some gross margin pressure for the second quarter?

No, don't really expect anything significant. It's just normal clearance activity that you always experience in the second quarter.

Okay. And I think for the year, you were expecting gross margins to be flat and you know you've had positive gross margins in the first quarter because of the generics. When do you think you sort of start cycling some of that?

Well, there continue to be new generic entries and some of them might be smaller but you add them up, you'll see that continuing, I think, I don't see any significant change from what we're experiencing today.

Okay. And then finally, as you sort of ramp up the new store program, what type of pressure could you expect on the SG&A, you know, given the new stores take some time to become profitable?

I'll touch on that. I think there does create some pressure on SG&A clearly as you incur costs to start up the stores. And obviously takes time for the sales to ramp up. Relative to our overall cash flow, the impact of the number of stores we're talking about is not significant. We don't think it's going to get us off our longer term plans to do this.

So you could still, you know, in the next couple of years expect EBITDA growth of about 10 to 13% even with the new capex?

I don't think we're guiding quite that far out. We just gave you good guidance, I think on this year, so we'll see how the plans kind of develop but we feel strongly about the prospect. This is clearly the right long-term decision to make.

Right.

Have to get back into the store growth. It will have a little bit of short-term impact but why think we can work through that.

Thank you very much.

Your next question comes from the line of Carla Casella with JP Morgan.

I'm wondering if you can give us color in terms of store openings, if there's a certain size parameter or cost or each store?

I'm sorry, I missed the last part of your question.

How much does it cost to open each new store for the size prototype that you're planning?

I believe I mentioned our comments that we are in the process of looking at our prototypes and we haven't finalized that. We're note expecting a significant difference in costs from what we would have been experiencing in opening new stores.

Okay. What would that be on a per store basis?

It kind of ranges depending on what part of country, but the overall average is around total cap ex including land and building and everything is $4 million. We may not pay all of that if it's a developer built site. We would be paying just the fixtures and equipment. It's going to depend on how the deals are structured.

Okay. Thank you.

Your next question is from Leah Heartman of CRT Capital.

Good morning.

Just some housekeeping as well with respect to the bond repurchases. Do you have the balances outstanding under the '05 and '07, the three bond issues?

Sure, we do.

John?

Which one -- you're asking about --

the seven and 5/8 of '05.

We have -- what we have left is 198 million.

Okay. That's the same from last quarter then.

Yes.

The sixes of '05.

There's $38 million left.

Okay. And then the balance came out of the 7 and 1/8.

210 of those left.

Okay. All right. Thank you. And, Mary, I missed the beginning. Did you make any comments about your private label program? Any changes to that?

No. Other than that we are continuing to see good growth there. We have actually our highest penetration in the first quarter that we've had. It improved 30 basis points over last year's penetration, and we're going to continue to keep developing that.

And what's the goal for the end of the year, then, do you think?

Our goal is over 11% penetration and so it will depend on how fast we get out the rest of the new items we have targeted.

Okay. Best wishes for the rest of the year.

Thank you.

I want to tell you we did buy some longer dated maturities.

Yeah. I didn't total total up to the difference in debt. And that would be?

I think we bought of the 13 -- the 6 7/8 13, we bought 15 million.

You're down to 135?

Of the six and 7/8 at 28, we bought 10.

Okay.

And I think we bought 5 million of the 27 bonds.

Okay. You've been around the block. All right, thank you very much.

Your next question comes from the line of Christina Bonnie of Credit Suisse First Boston.

I'm re-addressing free cash flow for the year, if you could reiterate what your target is on that front. And secondly, if you could address what you see from working capital perspective in fiscal 2004?

Chris?

We're not guiding on either one of those.

Okay. Could you clarify if on payments for closed stores, is $50 million I think is what you said in the past.

It's a little less than that right now, it's 48 million or something at the end of the quarter.

Okay.

While we didn't give specific guidance, there's good opportunities for us in working capital, we're not expecting a big investment of any kind or anything like that.

Okay. And you did have a gain in the quarter in asset sales, are there any asset sales -- what were the asset sale proceeds?

The asset sale proceeds -- Hang on one second. 8 1/2 million.

Do you anticipate any further asset sales just given your --

It will be little cats and dogs deals. We have some small surplus pieces of real estate we're working there so that's what it is.

Okay. Great, also one clarification on the 2003's, is there still 58.1 million outstanding?

Yes.

Yes.

Okay. Great. Thank you very much.

Thank you. Your next question comes from the line of Matthew Peck of Asidey Group.

Most of my questions have been answered but I was wondering if you could comment on your expectations for taxes this year and whether you might expect any tax reimbursements for the year?

Yes, we do expect some refunds this year. Probably in late third quarter, early fourth quarter.

Which is reflected in our guidance. That's correct.

That's my only question. Thanks.

Your next question comes from the line of Robert Goch of Miller and Associates.

Hi, good morning.

Good morning.

Could you comment on (INAUDIBLE) what your expectations are over the next for both this year and fiscal '05 on on litigation and accounting cash numbers?

Well, I think we've guided on that. If you're talking about the -- if you look at the schedule attached to the press release, we have a line that says what the legal costs are associated with defense of prior management, I think that's what you're asking me about, we've given you a number, I think it's 15 million dollar in the table.

Okay. Mary, you mentioned that you know you do expect comps to be helped on the front end because you're going to be cycling the estrogen and flu and late allergy, I guess in terms of the generic, the negative impact to comps on the RX side from generics, you're not expecting that to be a wash, you are still expecting net, you know, year-over-year improvement in comps on the RX side despite the generic switching?

Yeah, in fact, all those factors you mentioned are all pharmacy factors versus front end. And we've continued to accelerate what we can on generics and I think there will be more drugs that move to generics more quickly with what the government is really sort of mandating there.

Okay. Lastly if you could characteristic comment on the impact to date or what you see going forward with respect to the importation or either through the Internet or mail order, et cetera, from Canada on the RX side of the business?

I think that the issue of reimportation is actually at this point still illegal drugs coming into the country. And the NECDS, National Association of Chain Drugstores, has very active lobbying on this area and so does the FDA has spent time on it, too. I don't have any other information on that at this point.

Okay. And did you say that you previously guided for '04 the flat gross margin?

No we're guiding you on the GAAP earnings and adjusted EBITDA.

Thank you very much. Good quarter.

Your next question comes from the line of Jeff Cobolard of Salomon Brothers.

I notice that your store closing charge, you're expecting it to be 40 million or so this year. Can you -- verses 153 million the year before. Can you comment about how many stores are in that -- those baskets?

Generally we're not anticipating -- that does not anticipate a large November cash flows. What it basically includes is the interest carried on the liability, which is classified as store closing expense, and the P&L, there's a small estimate in it for any potential year-end impairment charges, that's based on the information we have today but those are estimates. That are subject to impacts from changes in interest rates which, you know, affect the way that reserve is discounted discounted. And year-end impairments difficult to statement based on store-by-store results but that is our best estimate at this time.

All right. And Mary, you mentioned that your generic dispensing rate was up 300 basis points this past quarter. Can you just tell us briefly what the recent history's been about the increase in just dispensing rate?

Well, over the last, I'd say, year or so or last certainly six months it's averaged 200 basis points to 300 if you took all of the generics into account, the 200 basis points is really new generics and you've got the effect of just increase from your penetration of existing generics.

So this most recent quarter was just slightly at the higher end of net range?

Yes.

Okay. Is it reasonable to expect that that's going to continue at that rate, 200 to 300 basis points?

Well, come up against where we were getting those kinds of improvements, so we could expect some of that comp effect to go down but we're still planning generics to continue to increase as a% of total.

And there will be new additional generics introduced this year. You'll cycle the ones that came in last year, that will reduce the rate of increase because of that, and then there will be new districts introduced this year. I think the ones this year are not quite as impacable as the one last year.

Thank you.

Your next question comes from the line of lan Street of McMahon Securities.

A couple of quick questions. The new bank line, it allows you to repay any debt as it matures?

Any debt that matures prior to the maturation of the credit facility. So April 2008.

So all debt prior to that can be repaid, great.

Yes.

Also, I know you don't want to give free cash flow guidance, but can you give what your cash interest guidance is so we can maybe back into it our own way?

It will be right around 290 to 295 million for next year.

Thanks a lot.

Your next question comes from the line of Bibec of Argus.

A question in terms of your drug price, inflation, can you comment on what you're seeing out there for both branded and generics?

The inflation has been less over the last number of months and but we don't really release that number in our comments.

Do you release any LIFO charge other you don't release any --

That's in our guidance.

That's in our guidance.

Would be in the appreciation.

The charge for the quarter was $15 million. And we're expecting 60 for the year. That's a combined number.

That's a combined number?

Yes.

Thank you very much.

At this time there are no further questions. Do you have any closing remarks?

Yes. We appreciate everybody joining us today. We're very excited about our quarter results and again thank you for joining us.

Thank you.

This concludes today's Rite Aid first quarter results conference call. You may now disconnect.