Rite Aid Corp (RAD) 2004 Q2 法說會逐字稿

Good morning, my name is Mandy and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the Rite Aid second 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 and then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key.

Thank you, I will now turn the call over to Mr. John Standley, Chief Administrative Officer. Sir, you may begin.

Thank you, operator. Welcome to our second quarter conference call. On the call today with me are Mary Sammons, our Chief Executive Officer, Christopher Hall, our Chief Financial Officer and Ken Twomey, our Chief Accounting 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, our ability to make interest and principal payments on our debt and to satisfy the other covenants contained in our 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 retain pharmacists and other store personnel, the outcomes of pending lawsuits and governmental investigations, competitive pricing pressures, continued consolidation of the drug store industry, the efforts of third party payors to reduce prescription drug costs, changes in state or federal legislation 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 of the forward-looking statements made during this call are qualified by these and other factors, risks and uncertainties. Also during today's call, non-GAAP financial measures are mentioned. The definition and purpose for using these measures are described on the form 8-K we furnished the FCC this morning. Form 8-K can accessed through our website under the "our company" and "investor info" tabs. You are also directed to consider other risks and uncertainties discussed in documents we file with the Securities and Exchange Commission.

Our agenda for today's call will be as follows. Mary Sammons will give an overview of second quarter operations, I will review the second quarter financial results and comment on our fiscal 2004 guidance and then we will take questions.

Mary?

Thanks, John, good morning. We are very pleased with our second quarter performance. Our adjusted EBITDA rose 22% over the same period last year as we completed another quarter with substantial improvements in operating results and we dramatically reduced our net loss.

Contributing to our success was the excellent job our team did in leveraging a healthy 5.9% increase in same-store sales by growing margins and containing costs, demonstrating we are now working with the store base and strategies that give us significant potential for future productivity and earnings growth.

We had 744 stores affected by the East Coast blackout, but we had healthy front-end sales for that week that more than offset any pharmacy script loss thanks to the store, field and corporate associates who kept the stores open and stocked with necessities, often without electricity. Many customers thanked us for staying open when many other retailers closed.

Pharmacy comp sales for the quarter rose 6.8% with stronger script count growth and continued improvement in pharmacy contribution. Our growing mix of generic brand prescription positively impacted pharmacy margins and helped offset the continued negative effect of lower HRT sales and the Claritin switch to over-the-counter.

New generic dispensing rose stamp and comp sales by approximately 1.3%, but contributed to higher gross profits. During the quarter, we continued our aggressive prescription file-by programs and are ahead of last year's numbers. We piloted our senior pharmacy loyalty card in test markets with very positive initial reception and we will evaluate expanding it to additional markets in the coming months.

On the technology side, we added E-prescribing to 44 more stores making this service now available in 346 stores in 14 states. We are also on track to start the roll-out next month of our next generation pharmacy dispensing system which will substantially improve efficiency and work-flow in the pharmacy. These technology improvements are part of our commitment to enable our pharmacists to deliver on their commitment to "ready when promised" and "with us, it is personal."

Front-end margins were particularly strong as we led the change in the industry as front end same-store sales gains. Same-store sales increased 4.3% thanks to strong promotion, improved planograms and category selections and excellent execution by the stores of our merchandising programs, especially in seasonal and private brands. Our private brand penetration reached an all time high as we introduced 54 new sku's in our own Kids Fun toy brand.

Core drug store categories were strong led by gains in upper respiratory, home healthcare and diagnostic diabetic. Consumables remained strong and general merchandise performed well. We had excellent sell-through for back-to-school.

Photo categories remain difficult, although we expect performance to improve as we continue the expansion of our digital photo capabilities started in August. During the quarter, we completed our second wave of extending store hours and increased the number of 24-hour stores to make Rite Aid even more convenient for our customers.

We selected a design firm to help us with our new store prototype and completed research giving us insight into what the customers expect from a drug store and, specifically, from Rite Aid. Developing a new prototype is part of the new stores development program we announced in June and our real estate organization is already actively involved in price selection for the new store roll-out programs.

On the expense side, SG&A was down for the quarter due to effective labor scheduling in the stores and good cost controls at all levels. Online auctions for non-retail supplies have already started to deliver dramatic savings. Inventory content is excellent and stores are already set for both harvest and Halloween. Early holiday is shipped to the stores and the majority of our holiday product will arrive soon due to earlier scheduled deliveries.

Service level on basics is also excellent in both front-end and pharmacy as we continue to enhance our in stock position to be a reliable provider and, we continue to aggressively support new item introductions as well as promotions. Going forward, we expect the positive momentum to continue as we remain focused on our four critical priorities. Growing prescription count, achieving front-end sales growth goals, improving customer satisfaction and containing expenses.

Upcoming initiatives for growing our prescription business include the launch of a comprehensive diabetes program, in partnership with the American Diabetes Association, this fully integrated program, including a website, magazine, point of sale, and circular advertising and events capitalizes on the fact that most of our pharmacists have been trained as diabetes specialists.

Since more than 17 million people have diabetes and, on average, customers with diabetes spend three times more in a drug store than those without, you can see why this is an important market for us.

Our pharmacy initiatives also include a new specialty pharmacy program in partnership with McKesson and specific strategic initiatives with key managed care partners to improve the value proposition for their customers and improve our positioning in their networks. We also have new customer reactivation programs starting up, as well as individual store market programs. Our number one initiative, however, continues to be our commitment to deliver the best customer service in our pharmacy.

We're bullish on front-end sales as we enter our busiest selling season with great new items and programs, in addition to the positive momentum in our core categories. Thanks to a tie-in with Universal Studios upcoming "Cat In The Hat" movie starring Mike Meyers, "Cat In The Hat" will be our winter holiday theme, with exclusive products and end caps offering theme toys, books, puzzles and posters, music and special signage throughout the store.

We will expand our new private brand, Kids Fun offerings for the holidays. Also in the works for the third quarter are marketing programs targeted to Hispanics and African-Americans. We expect the strong results we're getting from our new off shelf programs introduced in the second quarter to get even better next quarter.

By the end of November, digital photo capabilities will be in over 1,300 stores. As for our customer satisfaction initiatives, we just completed our third year bench marking customer survey and we continue to improve our stores by focusing on areas that customers tell us are important to them. We are focused on the entire store experience, the environment and especially the people. Our containing expenses team continues to identify new areas of savings to reduce unnecessary costs and has made great progress in areas like utility and maintenance expenses, bad checks and store supplies.

New initiatives include optimizing inventory investment and reducing debit and credit card fees. We also have numerous additional online auctions scheduled for the remainder of the year. Continuing to contain cost is important to us as it frees up dollars to spend on growth initiatives as well as improved results.

We are confident that the combination of exciting merchandising plans, a multi dimensioned approach to building script count, a commitment to customer service and a disciplined focus on cost will continue to get us the results for another successful year.

Now, John will fill you in on a few more details for the quarter.

Thanks, Mary. We are very pleased with our second quarter results. Total revenues for the 13 week second quarter were $4.05 billion this year versus $3.86 billion last year. Revenues increased $195.6 million or 5.1% this year versus last.

We operated 3,386 retail stores at quarter end versus 3,444 stores 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 5.9% with pharmacy comparable store sales up 6.8% and front-end comparable store sales up 4.3%.

Pharmacy comparable store sales for the quarter were negatively impacted 1.3% by an increase in generic sales mix, although increases in generic sales negatively impact comp store sales, they increase gross margins. Prescription sales accounted for 63.8% of total sales and third party prescriptions represented 93.2% of total pharmacy sales. Gross margins, which include occupancy costs, were $964.2 million or 23.8% of revenues for the second quarter this year versus $897.8 million or 23.3% of revenues last year.

Excluding non cash LIFO charges of $11.8 million this year and $17.3 million last year, gross profits were $976 million or 24.1% of revenues this year versus $915.1 million or 23.7% of revenues last year, an increase of 36 basis points. Gross margins were positively impacted by a larger percentage of generic drug sales versus branded drugs, strong margins on front-end products and better leveraging of occupancy in depreciation and amortization expenses included in gross margins.

Selling, general and administrative expenses for the quarter decreased as a percent of revenues by 40 basis points compared to the prior year. Impacting SG&A in the second quarter this year and last year, include 2.6 million this year and 3.5 million last year of legal expenses incurred for prior management and to defend against litigation related to the business practices of prior management.

SG&A in the second quarter improved 38 basis points from the prior year after adjusting both years for the litigation expense related to prior management. This improvement is the result of lower payroll expense as a percent of sales in the stores due to the leveraging of the fixed component of labor, lower occupancy resulting from a lower number of stores and good cost control in our stores, distribution centers and the corporate office.

Noncash stock compensation was a charge of $8.8 million this year versus a credit of $6.7 million in the prior year. We adopted FAS-123 at the beginning of the first quarter on a modified perspective basis to recognize the noncash cost of stock options granted to management. The prior year income is the result of variable plan accounting of certain management stock options and divesting certain stock grants in the prior year.

Store closing and impairment costs were a credit of $6.7 million this year which includes a $9 million credit on the face of the operating statement primarily related to an increase in the risk free rate used to discount the closed store reserve and $2.2 million of expense and cost of goods sold, representing inventory liquidation costs. The prior year store closing and impairment costs totaled $58.8 million including $0.5 million in inventory liquidation costs, included in costs of goods sold and $58.2 million of expense on the face of the operating statement.

Interest expense was $79.4 million for the quarter versus $85 million in last year's second quarter. Cash interest expense was $74.9 million this year versus $75.1 million last year and non-cash interest was $4.6 million this year versus $9.9 million last year. Non cash interest is lower than the prior year due to the classification of interest on closed door reserves as closed door expense this year versus interest expense last year and lower debt issue cost amortization this year.

Adjusted EBITDA for the second quarter was $152.9 million or 3.8% of sales, an increase of $27.5 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 folder. Net loss for the quarter was $10.6 million or a loss of four cents per common share compared to a net loss of $105.3 million or a loss of 21 cents per common share last year. The loss per common share amount includes $7.9 million in the current year and $2.3 million in the prior year of accretion of declared preferred stock dividends that are not included in net income or loss.

Liquidity remains strong during the second quarter. Cash on the balance sheet at the end of the quarter was $260 million. Operations used $111 million cash during the quarter primarily due to an early seasonal build in inventory, slightly higher receivables and reduction in the closed door reserve.

Expenditures for property plan and equipment were $29.7 million and we acquired $2.7 million of script files for a total of $32.4 million of capital expenditures. During the quarter, we remodeled 49 stores, relocated one store and closed 11 stores.

Now, a couple of comments about guidance for fiscal 2004. We're updating our adjusted EBITDA guidance to $700 million to $725 million for fiscal 2004 compared to the prior range of $675 million to $725 million. Attached to our press release is a table that reconciles our adjusted EBITDA guidance to our guidance for GAAP earnings. We are also updating our GAAP earnings guidance ranges from $4 million net income to a $27 million net loss compared to the prior range of break even to a net loss of $63 million for fiscal 2004.

Sales are expected to be in the range of $16.5 billion to $16.7 billion based primarily on assumed same-store sales growth as between 5.5% and 6.5%.

Cap ex is expected to be in the range of $170 million to $190 million for fiscal 2004. This does not include the $107 million buy out of the synthetic lease completed with refinancing that will be classified as cap ex on our cash flow statement.

Operator, we are now ready to take questions.

Your first question comes from John Heinbockel with Goldman Sachs.

John, how many file-buys have you guys done year to date and what do you think you do for the full year?

We have got in the budget cap ex of $20 million for file-buys for the full year. John, I tell you, if we could spend a little bit more than that, we probably would, on file-buys, the year-to-date is...

Twenty-four.

Twenty-four file buy's Yes, twenty-four year-to-date and the year to date cap ex is...

We're ahead of last year, John, in file-bys year to date. We have substantial numbers that are active in the system right now and in some process of being closed and even more additional leads on top of that. So, we would expect to extend that amount in that plan.

Do you think you are getting ramped up here do you think second half, you could double that, you could do 50, or is that?

We would expect to do substantially more than that based on what we have already active in the process.

Yeah, we built a nice pipeline, John. We ramped it up, we added additional staff and, as you would expect, it takes a little time to build the pipeline that we have built now and we think the second half will be much stronger on script file purchases.

If I think about, just, trying to think of the benefits you get from this, the average script if, I use the average script per file of, say 600 and retention rate of, you know, 70%, you know, are those kind of fair, averages or are they off?

I don't know if I have an average on the actual scripts per file purchase. They're just very different depending on what you're doing there. But, if you annualize a $20 million spend, we figure it's worth roughly a percentage point of comp store sales.

To pharmacy comps?

Pharmacy comps, yes.

All right, and then secondly, on the customer reactivation in the pharmacy, what exactly are you going to do there? I know CVS did this a couple of years ago by sending out mailers and reminders and so forth. What are you guys going to do? Are there a lot of dormant customers you think you lost that you think you need to reactivate?

John, our system allows us to track customers that we would consider to be a lost customer and so we are doing a series of reactivation mailings to get encourage them to come back into the store.

Have you done that before or is this the first time?

Well, the number that we're doing today is substantially greater than anything we've done in the past.

Right, and what have you generally found, I think they probably found that it was modestly successful in terms of kind of a redemption rate or something like that.

What have you guys found? Is it kind of a small hit rate or no?

Yes, I would say it's something that is a modest increase, too. That's just one of the things and that's why with pharmacy there's no one single thing that gets you what you need to get and that's why we identified, we think, a handful of key initiatives to grow our script count.

And one final thing, what do you think, what to you think the pharmacy environment will look like, say, the next 12, 15, 18 months and a case because of patent expiration law and the new drug pipeline that you actually get an acceleration in, you know, pharmacy comps for some period, 12, 15, 18 months before, before the next wave of patent expirations hit? How is that going to play out?

I don't we've put a number around that. We think that there will be continued to be challenges in pharmacy as well as opportunities for more growth and that's why we worked hard together to get initiatives going because there's always things that you're working against, I mean, at least we're recycling some of the things like Claritin and the HRF issues. Prilosec will be some impact, not as severe as say a Claritin was to the pharmacy, but we feel pretty good about the things we've got in place to grow our script count.

And you don't think there's a period here where, for all of you, where the pharmacy numbers pick up because the generic penetration slows down?

I think we'll continue to grow our mix of generics to brands; it just won't be at the same rate as it had been. But, it will continue to grow.

I think, now, we continue to believe that the pharmacy is a great business and, yeah, there's some inherent script count growth here and great things going on overall in the pharmacy business.

Okay. Thanks.

Your next question is from Eric Bosshard with Midwest Research.

Hi, Eric.

Good morning. A couple of things, first of all, could you review where the store base goes from here in terms of store count, second half of this year and what the thoughts are for next year; gross and net opens?

In terms of where we are we're going to do a total of 12 reloads for this year and possibly one new store. Not a big change in store count this year. There could be a few, kind of cats and dogs closures but nothing substantial there. For next year, we're targeting 75 additional stores and probably half of those we're thinking are reloads and about half of those are news and, again, there could be a few small closures, not substantial.

And of the 75 new next year targeted at any particular market or any particular type of store?

They are going to be in existing markets, in existing key markets, we have no plans to enter any new markets so we are going to continue, we have lots of good opportunities to continue to grow in some of our very key markets. The reloads are really designed to get out maybe some smaller stores that are good productivity stores that can maybe move to a better corner or something like that and have a little bit larger store and get more of our product our offering in. That's kind of the gist of it.

Secondly, the front end momentum you've established has been pretty impressive, can you talk about a front end marketing promotion year-over-year in the first half and the second half and if you're getting more or less aggressive or the components of it, what you're doing different?

Eric, as far as quantity of advertising, we've really not changed it that much from prior years. We added one coupon book in the second quarter and that ran in August. For the back half of the year, our page count is pretty consistent with prior year, also. We are experimenting a little bit during some key weeks with standard format as opposed to the tab circular we usually run and we continue to work our same marketing strategies and I think we have a good mix of promoting and featuring key consumables, new items, seasonal offerings and doing event advertising and we would continue that same strategy.

And, then, lastly, within the gross profit performance, any color on how front-end margins behaved in the quarter and what the expectation might be there?

We had strong front-end growth margins for the quarter and good sales to start with and even though mark downs were a little bit higher and we also had a lot of promotional support from ads that we ran and that was a plus. And, we had just overall good results out of front-end margin.

Great, thank you.

Thanks, Eric.

Your next question comes from Mark Husson with Merrill Lynch.

Yeah, good morning, I just want to get back onto the prescription side again. If there's a weakness to the story, it's getting prescription count up. Recently we've seen some improvements in industry scripts sales in total, can you talk about your script count and whether that's up in positive territory, if you exclude the file-by's or is it the file-by's that is taking it there?

I don't mean to interrupt. The file buy's, I don't think are very material yet. It's really a building process. We have not bought a ton of files yet. So, they will be more impactful in the fourth quarter of next year and really has to do with script count at this point. In terms of disposing script count we don't do that.

That script count improved in second quarter over first quarter is positive.

Also, I know you don't spend a lot of time talking about East Coast versus West Coast but it is obvious to everybody that Walgreen's is piling in some capacity on the West Coast where other drug store retailers are having a really torrid time in the marketplace. Can you just talk about how well your brand is holding up there and whether you had anymore success in penetrating consumers' confidence in the Rite Aid as opposed to the predecessor brands?

Mark, we still really don't give out any info about how the different regions are doing. I think we are pleased with the continued performance, overall, in terms of overall geography and there's always going to be some weak parts of it but that is typical throughout the country.

Okay and, then, struggling to find something you can answer. Going forward, I guess, historically, on calls like this you've been able to talk about where the opportunity may still lay for you, means you got lower operating margins than a number of other retailers, where the operating margin opportunity lies, is it on the gross profit or on the SG&A, do you think you're hitting a glass ceiling at some stage in the near term or do you still see blue skies?

We still see, Mark, continued opportunities and it's a top line growth story to start. Because you hit on the issue with our prescription growth and we need to continue to find a way to grow that and that will help us leverage the different fixed expenses. We can fill a lot for scripts in out stores without adding a lot more cost.

I guess the top line growth question, which is still the issue, you're not adding an awful lot of space, can't afford to at this stage. Return of capital on this level of EBIT margin is still not very exciting, or is it? I mean, is the recent return on invested capital better, excluding script count?

Sure they are. They're getting much better because we are growing our EBITDA and we are not spending substantial amounts of capital to do it, so the return on debt to capital is moving up very rapidly. I think that's a positive that we have, is that our situation is actually we have a great opportunity, just like Mary said, to continue to leverage the cost structure that we have without deploying a ton of capital to do it.

Over the next couple of years, what can you see, space growth, actually turning into positive space growth and what sort of rate of growth?

I think it's still go be very moderate. Next year, we'll be up in store count slightly, maybe, or just even. Not going to be a huge amount of space growth. Truly it's just growing the sales in existing stores.

What you'll see when we start up the new store program, we still have probably two or three years of great earnings growth opportunity just by continuing to mature the existing store base and so we'll gradually increase the store development program so that as we, our stores do reach a maturation level, we're prepared to continue to grow earnings through some square footage growth if we need to do that.

Thank you.

You're welcome.

Next question is from Lisa Cartwright with CitiGroup.

Good morning.

Hi, Lisa.

Hi. Can you talk a little bit on where you stand on the whole issue of mail order and filling 90 day prescriptions at the store and how you feel about being able to provide that to Medicare patients if, perhaps, that benefit allows for picking up prescriptions at retail? Some of the other chains have commented on that and then I will have a follow-up question.

Well, I think it still remains to be seen what comes out of the Medicare issue that debate that's going on now in the conference committee but I think we've been advocates along with the rest of the major chains in having that equal opportunity there relative to filling 90 day scripts at retail. So, that is something that we believe needs to be part of the program.

Do you think you're, I don't know how you would put it, but, the level of robotics that you have in your stores, which at one point might in the past has not been seen as a huge positive, early on, but, going forward, might actually be a big positive for you, if there is some sort of transition to filling 90 day at retail?

It absolutely is going to be a plus in the future because as we grow script count we got the robotics there, whether filling 0 day scripts or additional new scripts and, again, without adding a lot of extra help.

Okay and, just switching gears, you mentioned that some cost saving opportunities in the future lie with optimizing inventory or inventory optimization, are you looking at new software and can you just elaborate on that and is that something you think will help you deliver the same type of gross margin increases or help you lower your inventory?

It would help lower the inventory.

Again, making sure you got it in the right stores and the right categories. We started the supply chain initiative three years ago and I think we continue to improve our processes of getting product to the store and committed to in-stock on basics as well as promotion and new items and we want to improve the inventory turns and free up as much working capital to fund either growth or pay down debt or just improve results.

I think in terms of systems, we have a very professional inventory management system and what we're basically do is modifying it and making improvements to it.

So, just heading into next year, if you look out at all of the projects that you're talking about doing and look at your, you know, the possibility for continuing this same type of EBITDA growth, where do you think the majority of the benefit is going to come from? Is it going to be the same as it was?

It's going to be primarily driven by sales growth.

Okay. Thank you very much.

You're welcome.

Your next question comes from Mark [Wiltimuse] with Morgan Stanley.

Good morning.

Good morning.

Good morning.

I just wanted to follow up a little bit more on the front end sales improvements. Could you give us a sense of how much of that is really self driven through your planograms and new merchandising and how much of that you think might be the economy getting a little better?

Well, I think it's hard to put a number on it. I think there has been a little bit of an up tick in customer confidence in terms of purchasing, but I think the majority of if is we have been gaining traction with our strategies and consistently offering value out there. So, we have got really good planograms and we've updated all of them, I think, over the last year time period and we'll continue to introduce new items and get better at merchandising and our field people are getting stronger at executing the programs and plans. So, I think it's a combination.

And have you seen any abatement of discounting or promotional activity from any of your competitors over the past couple of quarters?

No, not really.

Okay and just to shift over on to the pharmacy side briefly. If you look earlier this year, January through March there was a market slowdown for most of the players in the industry, in terms of pharmacy sales and I guess there's some speculation that some of this could have come from the new company plans coming into effect with three-tier co pays, do you think that's a fair assessment of what might have happened there and is there a chance that may reoccur this year?

I think the multi tiered co-pays was a definite factor that everyone had to deal with. I don't know to what level it will repeat itself. I mean, I think the employers have to be careful of how much additional cost they keep passing back to their associates. But, I think we can keep expecting there will be pressures in a lot of parts of pharmacy and that's why we got to work on things like disease management and find ways to keep getting customers in the store.

Okay. Thank you.

Your next question is from Robert Urquhart with Oppenheimer.

I'm looking at the website financial statements you have provided and I'm wondering if I'm missing something. There doesn't seem to be a cash flow statement there, is there somewhere I could go to get the cash flow statement?

We'll be filing our 10-Q shortly and it will be there. After tax cash used from operations is $111 million. That's the key number I think you're looking for.

Say that, again, I'm sorry?

Taxed operations used cash of $111 million. We built some inventory in the quarter if you look at the balance sheet and that is most of it there.

Okay, thank you.

Your next question is from John Sykes with Zumora.

What is the pre cash flow guidance for the year?

We haven't we're not providing free cash flow guidance but we give you a nice table that reconciles the adjusted EBITDA to net income it has all of the components that you would need there to derive the cash flow number.

Should I -- so.

If you go to the press release and go back to the schedules there.

Right.

You'll see there's a reconciliation that goes from our adjusted EBITDA to our GAAP guidance so you can see there all of the components that you need that we highlight that impact our cash flow and then you would need to look at our cap ex guidance of $170 to $190 million.

What about working capital changes?

Working capital changes, I don't think we give specific guidance on.

Okay. Just one other question, I guess, or something that maybe you care to comment on. Consumer Reports had done sort of a rating in their October issue of "Drug Store Chains" and, Rite Aid didn't exactly rate too well in that study. So, I'm just curious what you're customer satisfaction surveys are saying and, really, just trying to get, I guess, some comment as to the study that they did?

Okay, I'll address that. None of the drug stores fared too well. It's also old data and the survey was completed in April 2002 and it was also one of the areas that we have focused on extraordinarily hard with our people and, if anything, we've been getting very positive customer feedback and several other, much more positive articles, too.

I think if we look at our bench marking survey and we look at what our customer comments are telling us, our satisfaction has gone up and we're going to continue to focus on it because we think it's a key priority. So, you know, we read that article, too, and take it with a grain of salt and, you know, you keep working and making it better.

Okay. All right. Thanks.

You're welcome.

Your next question comes from Carla Cassella with JP Morgan.

Hi, a question on the operating cash flow, does that include the $107 million from the repurchase of the synthetic lease?

The cap ex does not include that, so you would add that on.

The $111 million used that you just mentioned, does that include that?

No.

Okay. Thank you.

You're welcome.

Your next question from Lewis Kahn with Cann & Company.

Two quickies, cash interest, would you repeat that number, again?

$74.9, I believe.

Versus?

$75.1.

Availability in total availability of what?

What's that?

Availability on the revolver?

Yeah. The availability on the revolver is undrawn.

Okay.

There are 105 of letters of credit.

Okay. A question about the focus of your promotions. I assume you look at what you think or what you know what your major competitors are doing. Do you look much at some of the larger local chains?

For example, I have noticed in visiting stores in my area that the local chains consistently beat you on the prices of certain promotional products. Do you guys look at that?

We always take a look at what our competition is doing.

I'm talking about the local chains now.

Well, we look at what we would consider the key regional players, yeah.

Right.

And, but, we do work our own ad strategy, I mean, you have to have an ad strategy that you believe gives the customer value and really represents what your store has to offer and I believe we have strong promotional offerings overall, as well as a strong assortment of what our store is all about.

All right. Thank you.

Your next question comes from Daryl Casolino, Private Investor.

Hi guys. I shop at 5 or 6 of the Rite Aid stores on the west side of Los Angeles and I noticed something about one of the stores that was a carry-over from when you purchased it from Thrifty and it makes it more of a community store and that is, Rite Aid Beverly Hills. I was wondering for not a lot of money if you considered putting signage underneath the name of Rite Aid in each of the local communities to make it more of an owned community store, more individual? It is a nice touch; that's what I thought about that.

It's an interesting comment. It's probably quite frankly a significant amount of capital expenditure to do that.

Really?

It's also, all of our signage has to conform to what's allowed on the various places that we operate but, in general, we're also trying also brand our company with the signage, also.

At this time, there are no further questions.

Perfect. Okay, thank you very much everyone for dialing in today. We appreciate it.

Thank you.

This concludes today's conference call and you may now disconnect.