Rite Aid Corp (RAD) 2004 Q4 法說會逐字稿

Good morning. My name is Ametrius. And I will be your conference facilitator today. At this time, I would like to welcome everyone to the Rite Aid fourth quarter 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. John Standley, you may begin your conference.

Thank you, operator. Welcome to our fourth quarter conference call. On the call today with me are Mary Sammons, our Chief Executive Officer, and Kevin 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 subjects are subject to certain risks and uncertainties that could cause the 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: A high level of indebtedness, our ability to make interest and principal payments on our debt and satisfy the other covenants contained in our senior credit facility and other debt agreements; our ability to improve our 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 outcome of pending lawsuits and governmental investigations; competitive pricing pressures, continued consolidation of the drugstore industry, the efforts of third party payers to reduce prescription drug reimbursements; changes in state or federal legislation or 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 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 in the form 8K we furnished the SEC this morning. The form 8K can be accessed through our web site through 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 fourth quarter operations, I will review the fourth quarter financial results and comment on our fiscal 2005 guidance, and then we will take questions. Mary?

Thanks, John. Good morning, everyone and thank you for joining us today to discuss our fourth quarter and year-end results.

The fourth quarter was a great finish to a great year. In fiscal '04, Rite Aid became a profitable company again, with four quarters of strong and steady growth. Net income increased to $59.1 million for the quarter, and to $83.3 million for the year.

Adjusted EBITDA grew 21.8% for the recent period and 16% annually, coming in at the high end of our guidance. Credit for these achievements goes to the more than 72,000 Rite Aid associates across the country who believed that with hard work and commitment, we could return this company to health and stability, and we did.

We did it by running better stores, taking better care of our customers and leveraging our fixed costs. We substantially improved the productivity of our existing store base by focusing on four critical priorities: Growing prescription sales, increasing front-end sales, improving customer satisfaction and controlling expenses.

Our results give us tremendous momentum as we move into fiscal 2005 and start opening new stores again. Let me give you the details for the quarter. Same-store sales increased by 6.4%, with higher gross margins resulting in part from increased generic dispensing and strong private brand sales.

Significant events in the quarter were an earlier and stronger flu season than last year and the California grocery strike, which had a positive impact on both pharmacy and front-end sales for all three months.

We've implemented a direct mail retention program targeting those new customers; and based on March sales, it looks like we're keeping many of them.

Pharmacy comps increased 6.7%, with script count growth the highest quarterly script growth count of the year. Our generic prescription dispensing rate reached a new high this quarter, with new generics ramping costs by 87 basis points, but contributing to higher margins.

For the year, the percentage of total generics dispensed increased by 240 basis points, saving money for our customers and our third party agencies.

The Claritin switch to OTC and the sluggish demand for hormone replacement therapy products continue to have a negative impact on pharmacy sales, but less than last quarter. I expect the impact from the Claritin switch to lessen further as we begun to cycle last year's allergy season, where the Claritin switch had the biggest impact.

The hormone replacement therapy may continue to be negative, since the negative publicity continues. We finished the year with a record number of file buys, beating our goal and more than doubling what we accomplished the year before. Our acquisition pipeline remains strong, and we have another aggressive objective of doubling our '04 results for fiscal '05.

During the quarter, pharmacy services continued to be very active in developing programs and relationships to gain new customers for our pharmacies. We partnered with McKesson in making specialty pharmacy services available through all of our pharmacies.

Our partnership with the American Diabetes Association has been extremely successful, and our partnering initiatives with brand and pharmaceutical manufacturers and DVMs gained momentum.

Our pharmacy team held it's first pharmacy supplier advisory board meeting, modeled after our very successful front-end advisory board, which has been operating now for three years. We also participated in the development of the new Pharmacy Care Alliance Senior Prescription discount cards, designed to take advantage of the new Medicare legislation.

As you probably know, the card is a result of the partnership with the National Association of Chain Drugstores and Express Scripts, and it does not promote mail order over retail. It's one of 28 cards that have been Medicare-endorsed. These cards go into effect in June, and Rite Aid will accept most of them.

Pharmacy initiatives we put into place during the quarter, along with those we implemented all last year, will allow us to take advantage of the significant growth forecast for prescription sales.

Included in those initiatives are the investments we made in pharmacy technology, especially our new Next-Gen [PHONETIC] pharmacy [INAUDIBLE] and workload systems, and e-prescribing capabilities, which are now in more than 1200 stores.

Our industry-leading front-end sales continued to climb in the quarter, with strong promotions like our Super Value Days in January and President's Sale in February. Strong assortments, new items, new [INAUDIBLE],off-shelf promotions and excellent store execution of corporate and local programs also contributed to the growth.

Private brand sales increased 17.5% in the fourth quarter, with our full year penetration reaching an all-time high of 11.4% penetration compared to 10.8% the year before. We added 217 new SKUs last year, and many more are currently in development.

Core drugstore categories were excellent, led by gains in upper respiratory and a solid increase in vitamin sales, led by our partnership with GNC. In key categories such as oral care, hair care and baby care, we outpaced the market per AT Neilsen. Consumables continue to be strong, and general merchandise performed well.

According to AC Neilsen data for Rite Aid markets, we held or gained market share in all major segments of our front-end business, with house-related and consumables leading the gain, followed by increased share in general merchandise and seasonal. March trends have shown even greater gains for all major segments.

Photo, film and photofinishing remain difficult in the fourth quarter, as well as throughout the year. We finished the year with digital capability in about 60% of our one-hour locations.

Digitally-enabled stores experienced about half the decrease of one-hour stores. We will continue to add new digital labs and upgrade existing equipment, and expect to have all stores digitally-enabled by the start of the third quarter.

We expect this business to remain difficult, but show consistent positive improvement as the customer comes to recognize the value of developing at retail, both price-wise and quality-wise.

As for SG&A, our team did a good job of controlling expenses, both in the fourth quarter and for the full year, even as we invested more labor dollars in expanding store hours and increasing the number of 24-hour stores.

During the quarter, inventory turns improved for both front-end and pharmacy over prior year, and further improvements in inventory management continues to be part of our plan.

As we move forward into the new fiscal year, we will continue focusing on increasing sales, leveraging costs and delivering improved customer satisfaction. Our new store development is progressing well, with about 65% of our goal for this year now in the pipeline.

We finalized our new store design in March, and are excited about its unique combination of customer appeal and operational efficiencies. It also clearly shows our commitment to our core equity business, the pharmacy.

We have already scheduled a pilot to test it with customers, and we will soon begin taking the principals and learnings from our new store prototype into our future remodel plan. Our remodeling program will continue, with 175 planned this year.

We launched our new fiscal year with increased emphasis on our [INAUDIBLE] personal promise to our customers. I, and other key members of our executive team, traveled to and met with each of our 19 regions over the last three weeks to speak personally to all of our field leadership about renewing our commitment to deliver superior customer satisfaction to every customer who walks through our doors, especially in the pharmacy.

Our field leadership will take this message to each and every store associate within the next 30 days, emphasizing the store's ability to control the experience. We've already started to support this promise with a national advertising and marketing campaign, with circular advertising, in-store signage and special front-end cap displays.

TV will be added to 33 markets that represent 74% of our pharmacy sales by mid-year. And outdoor will support selective store messages, such as 24-hour locations.

With us it's personal; we'll guide many of our initiatives throughout the year, especially on the pharmacy side of our business, with initiatives that include a stepped up commitment to training, a new customer service video for the pharmacist and our recently-launched customer service interactive voice survey, which will give us continuous firsthand customer feedback on all of our store locations.

All of our efforts are geared towards making customer service our number one priority for the stores. We will also tie our [INAUDIBLE] personal message to our direct adoptive program, supplier and third party partnership planning and recruitment.

In closing, let me say that I'm optimistic about the coming year, as you can see from our guidance. While our industry faces certain challenges, the drugstore sector remains one of the most attractive in retail.

Percentage growth in prescription sales is estimated to be in the double digits again this year. A significant number of new, branded drugs are expected to come to market, with many more believed to have blockbuster potential than last year.

New generics are coming to market at an even faster rate than anticipated, and demographics are certainly in our favor as the population continues to age.

Rite Aid had a terrific fiscal '04, with returning to profitability a major step for our company. We look forward to building on that strong performance in this fiscal year, and continuing to deliver value to our shareholders. Now I will turn it over to John to fill you in on more details for the quarter.

Thanks, Mary. Overall, we're very pleased with our fourth quarter results. Total revenues for the 13-week 4th quarter were $4.40 this year, versus $4.14 billion last year. Revenues increased $256.5 million or 6.2% this year versus last year.

We operated 3,382 retail stores at quarter-end, versus 3,404 stores at the end of last year's quarter, a net reduction of 22 stores or about 65 basis points. Same-store sales for the quarter were up 6.4%, with pharmacy comparable store sales up 6.7% and front-end comparable store sales up 6%.

Total comparable store sales for the quarter were positively impacted by approximately 125 to 150 basis points for the grocery worker strike in Southern California. Based on March sales results, it appears we have succeeded in retaining a great deal of that business so far.

Pharmacy comparable store sales were negatively impacted 87 basis points by an increase in generic sales. Although increases in generic sales negatively impact comp store sales, they increase gross margin.

Prescription sales accounted for 62% of total sales, and third party prescriptions represented 93.4% of total pharmacy sales.

Gross margins, which are net of occupancy costs, were $1.1 billion, or 24.8% of revenues for the fourth quarter this year, versus $1.0 billion or 24.4% of revenues last year. Current quarter included a noncash LIFO-related credit of $5.5 million, and the prior year's fourth quarter included a LIFO-related credit of $19.5 million.

Excluding these LIFO components, 4th quarter gross margins were 24.6% of revenues, compared to 23.9% of revenues last year, an increase of about 70 basis points. Both pharmacy and front-end FIFO [PHONETIC] gross margins improved in the quarter versus the prior year.

Pharmacy margins were positively impacted by reduced inventory costs, resulting from purchasing improvements and more generic scripts as a percent of total scripts, partially offset by lower reimbursement rates.

Front-end margin improved because of more efficient promotional markdowns as a percent of sales, lower inventory costs due to improvements in purchasing, and better product mix.

Shrink expense increased slightly in the quarter, but was more than offset by revenue of occupancy and depreciation and amortization expenses that are classified in gross margin.

Selling, general and administrative expenses for the quarter increased as a percent of revenues by 34 basis points compared to the prior year before adjusting for significant items. The significant item impacting SG&A in the fourth quarter this year was a $12.5 million favorable legal settlement.

Last year, significant items impacting SG&A were $4.5 million in favorable legal settlements and a $27.7 million credit resulting from the reversal of severance liabilities for former executives.

After adjusting both years for the significant items, SG&A in the fourth quarter improved 15 basis points compared to last year.

This improvement is the result of lower occupancy costs, such as CAM and real estate taxes that are classified in SG&A, and lower depreciation and amortization expense resulting from certain intangible assets becoming fully amortized, and good cost control in our stores, distribution centers and corporate office, partially offset by higher employee benefit costs.

Noncash stock-based compensation expense was $3.9 million this year versus about $800,000 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.

Prior year charge is the result of variable plan accounting on certain management stock options and investing for [INAUDIBLE] stock grants in the prior year.

Store closing impairment costs were $23.5 million this year, which includes $22 million in the face of the operating statement and $1.5 million in expense and cost of goods sold, representing inventory liquidation costs.

Prior year store closing and impairment costs totaled $80.6 million, including $2.3 million of inventory liquidation cost included to cost of goods sold, and $78.3 million of expense on the face of the operating statement. Interest expense was $77.4 million for the fourth quarter versus $79.5 million in last year's fourth quarter.

Cash interest expense was $72.5 million this year versus $70.6 million last year, and noncash interest was $4.9 million this year versus $8.9 million last year.

Noncash interest is lower than in the prior year because of lower debt issue cost amortization and the classification of interest expense related to the closed store reserve, as closed store expenses this year versus interest expense last year.

Adjusted EBITDA for the fourth quarter was $216.8 million or 4.9% of sales, an increase of $38.8 million over the prior year, computed on a consistent basis. The schedule attached to our press release reconciles our net income to our adjusted EBITDA total.

Net income for the quarter was $59.1 million, or net income of 9 cents per diluted share, compared to net income of $7 million, or a net loss per share of 2 cents last year.

The earnings and loss per common share amounts include $8.8 million in the current year and $15.3 million in the prior year of declared preferred stock dividends that are not included in net income or loss.

Liquidity remained strong during the quarter. Cash on the balance sheet at the end of the quarter was $335 million. Operations generated $127 million of cash during the quarter, primarily due to a strong adjusted EBITDA and a reduction in inventory, partially offset by an increase in accounts receivable and a decrease in accounts payable.

Expenditures for property, plant and equipment were 52.5 million, and we acquired 4.9 million of script files, for a total of $57.4 million of capital expenditures.

During the during the quarter, we opened two new stores, acquired 1 store, remodeled 17 stores, relocated 3 stores and closed 7 stores.

Looking to our fiscal 2005 guidance, we're confirming our adjusted EBITDA guidance for fiscal 2005 of 800 to 850 million. Attached to our press release is a table that reconciles our adjusted EBITDA guidance to our guidance for GAAP earnings.

Sales are expected to be in the range of 17.4 to 17.6 billion for the year, based primarily on assumed same-store sales growth of between 5.5 and 6.5%. Cap Ex is expected to be in the range of $300 million to $350 million for fiscal 2005. 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, 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 John Heinbockel with Goldman Sachs.

Can you kind of just give us the -- how many script files were bought in the fourth quarter and for the year? And what your target is, how many you think you will buy in '05?

That we bought for the year, we bought 69. For the quarter, I don't know the number off the top of my head, John.

And we would expect to double that amount this next year.

What -- what was the target for '04? You know, it was more than that, correct?

Yeah, it was probably closer to 80 or something, just, you know, I think we spent a little over $16 million and we wanted to spend closer to 20, so.

So 69 is the number of files?

That's correct.

Okay. And the goal for this coming year is something like 140 or --

Yeah, 120 to 140, something like that.

Right. The -- in your 5.5 to 6.5% comp number, do you think -- will pharmacy and front-end be very similar as they have been, or do you think pharmacy picks up and the front-end comes back a little bit?

We don't generally break it out. But I think we've been realistic in both our front-end and our pharmacy sales projections that are in the plans.

Okay, and I'm just trying to get a sense, you know, how quickly do you think your pharmacy initiatives, you know, generate an improvement in the pharmacy comp trend? Do you think it's this year or --

Yes. We -- we definitely believe that we will gain traction with our pharmacy initiatives this year.

Okay. And what -- how much opportunity do you see in the Eckerd changing of hands, you know, either pharmacy or front-end, and what do you do, if anything, to try to pick up some that of business that's in flux?

I think it's just important know that we're going to continue to focus on what we've been doing in our existing stores and to improve position with customers and, you know, anytime there's a change, there's opportunity, and you know, we're going to be running good stores and taking care of any customers that come to our stores.

So, do you change your -- in those markets where you think there may be an opportunity, do you -- [INAUDIBLE] whether it may be a brand change or even not do anything different with the circular with investing labor hours, or basically do what you've been doing?

Yeah, I don't think we know what's going to happen in each of those markets yet, but we're going to continue to do the things that we think are working really well for us, and we're very competitive on store hours today, and our staffing initiatives are well in place, and if anything, we're just getting better and better about taking care of customers, and think it will pay off for us in the future.

And one final thing, the Medicare cards that are out -- are going to be out there June 1st, there is a lot of them, and there's obviously going be a lot of confusion among seniors and -- and it's probably not going to fit, you know, a lot of people are not going to have their drugs covered. Do you think that's going to have any discernible impact for you or the industry on -- on top line, or not really, it's going to be fairly modest?

Well, I think we're definitely prepared to deal with the fact that seniors are going to be needing a lot of information, and we've the put together a very comprehensive plan to educate our pharmacists to be able to talk with seniors about the new programs, including how to select and enroll in a card that's right for that specific senior.

And I think you're going to find that pretty much throughout the industry. I think everyone wants to make it as easy as possible on the customer.

Okay, thanks.

Your next question comes from Jack Murphy with CSFB.

Thanks, good morning.

Hi, Jack.

Good morning.

First, I wonder if you could talk a little bit more about the gross margin. It seemed like a pretty strong year-over-year improvement.

And I'm wondering, you know, when you set out this quarter, did you, you know, in the guidance, did you really expect to be up as much as you were? And if you could just maybe just drill down a little bit on the big components of the improvement, that would be great.

I think I gave you some of the -- some of the -- some of the big factors. Quarters, you know, it's always -- are not always exactly what you expect when you get into them, but we did expect our margins, you know, to continue to be strong when we gave our guidance.

Certainly we've done some things on the pharmacy purchasing side that have been very beneficial to us. The generic situation has helped us a lot. Reimbursement rate issues are always out there, we're fighting those and we saw some pressure in the quarter we were able to offset.

On the front-end side, you know, our promotional effectiveness was very good, but we spent our markdowns wisely, and our cost for markdowns was less on a percent of sales basis versus the prior year fourth quarter. We saw good product mix, Mary mentioned the private brands, that kind of stuff was very beneficial to us.

And I think those are some of the big factors that are helping us right now. And included in our gross margins is some portion of our occupancy and depreciation amortization, and as we move up our sales, we continue to leverage those costs very effectively. Those, of course, will be the big factors.

I'd add one other point, Jack, on the front-end.. In December, when you have like a strong cough/cold season, which we did, you also sell a higher percentage of what I call just good, strong, basic product, and that, I think, adds to your margins, too. And that was a real strong month.

Okay. When you look at the gross margin for this time next year's guidance, is there, you know, meaningful -- are you guys expecting a meaningful improvement from generics or meaningful contribution from generics, more so than you got in '03?

I think generics will continue to be a -- a strong factor in the margins, and that there will be a significant number that come out there.

A little bit stronger percentage of them than last year, but they may not be maybe as strong as some of the individual generics.

Okay. And then just last question, Mary. You mentioned about March -- when you were talking about March sales that, you know, you sort of indicated that you were holding on to some of those sales coming out of the California grocery strike.

Could you just give us a sense of what you're doing to keep some of those sales? Is there anything, you know, in particular? And do you think -- you know, how sustainable you think that might be?

Well, I think one thing that happened during that strike is that we -- we had people that maybe came into our stores for the first time that hadn't been in to to see the things we had done to improve store conditions and store service.

And I think that is a real positive, as well as, you know, they took advantage of good promotions that we ran. They also experienced good service in our pharmacies.

We have put into place a -- we did put into place a direct mail piece to customers, relative to retaining them as future customers. And -- and we'll continue to give them really good service.

So, I think a portion of that definitely is we're going to keep. You know, I'd like to keep every bit of it, you know. That's probably not a realistic response, but we will keep a good chunk of it.

Okay. Thanks.

Your next question comes from Mark Hudson with Merrill Lynch.

Yeah, just curious when you say you've done some better things on [INAUDIBLE] purchasing, with the -- with the old and experienced procurement departments at Rite Aid and the fairly set prices out there in the industry. I'm surprised there's enough flux in buying terms out there to make a significant difference.

What is it you did?

Well, one thing we did is we just extended our contract with McKesson, who is our large supplier of branded pharmaceuticals. And that helped us.

And what percentage of your pharmaceuticals comes -- do you source direct? And what percentage from McKesson, if it hasn't changed?

We primarily buy our branded drugs through McKesson, and we generally buy our generics directly.

That translates to dollar-wise, 90% of the purchases in dollars.

In dollars.

So, you're slightly unusual insofar as you have a much more of an outsourcing attitude toward procurement than most of the other chains.

You've also got a GNC relationship, and I guess there's still a drugstore.com relationship in some sort of sort, in terms of outsourcing.

Sure.

So, the McKesson relationship now includes specialty? Was that a meaningful part of the improvement?

No, specialty is a small piece of it, but it just allows us to satisfy more customers. But, you know, extending the agreement with McKesson was really important, they're a great supplier for us, and I think we're both really pleased with the outcome of our arrangement in the new agreement.

So, and -- I -- I think that's all part of, you know, our purchasing improvements, and it sort of worked in our favor, so.

Just in terms of going forward, as the drug cards come in now, we're close enough to the launch date that you have some idea about how the pricing mechanism works, and who's responsible for supplying the discount of the face of the care? How does that work now and how will it affect Rite Aid?

Well, I'm going to have Mark [INAUDIBLE], who is my Head of Pharmacy Services, answer that question.

Thank you, Mary. The contribution under the Medicare discount cards will be provided twofold. First, by Pharma in the form of rebates back to the consumer.

And secondly, through a discount mechanism through retail pharmacy. The discounts appear to be fairly consistent across all 28 cards that are being offered that we've seen in the marketplace.

So, you're funding the portion through the retail pharmacy? And is that more or less than a 10% discount you would have given to an uncovered Medicare-age patient, anyway?

It would approximate that discount.

Okay, so there's nothing much more coming out of your hide. You say a rebate back to the customer, is that customer --

What you are going to have coming out of your hide is the fact you will be moving cash sales to discount sales. So that is going to hurt margins.

You know, and there certainly can be some increase in customers or in scripts purchased, but what the combination of that increase, along with the hit to margins is going to be, we don't know yet.

I'm sorry, just -- were you not offering a 10% discount to customers who are retired anyway?

Yes, yes, we were.

Yes.

But you said you're going to lose cash, but the cash was at a reduced margin because of that discount. Are you saying that not everybody claimed that discount?

No, they did. They did. But in terms of just the overall discount that is -- the overall price of the customer is going to be paying.

Okay. So -- there is a little bit more than the 10%? As far as --

Yes.

As far as your contribution?

There is a discount rate available in the marketplace. Some will be lower than 10%, some will be higher. It's really going to be dependant upon the uptake of the card in the marketplace

And which cards the customer uses and how much the pharmaceutical manufacturer is covering and, et cetera. So, there's still some moving pieces in a lot of this, even though you're close to implementation day.

This is a very small piece of our business.

Yes, it is, it's very small.

Okay.

Like right now, cash is about 7 or so percent of our business, and only a small percentage of that is seniors.

Thanks very much.

Our next question comes from Carla Castella with JP Morgan.

My question has already been asked, thank you.

Your next question comes from Leah Hartman with CRT Capital.

Good morning. I was wondering if we could focus a little bit on the balance sheet. The term loan outstanding still, 1.15?

Yes.

And there was nothing under the revolver?

Nothing under the revolver.

We have -- did you have any debt repurchases during the quarter?

No.

None?

Nope.

Do you still have a split rating, I believe, on most of the unsecured debt between the two principal rating agencies?

That's correct.

Have you been in discussions with them? Is that --

Moody's just -- we were two notches below, and Moody's just moved us up one notch.

Right.

And so now there's a one-notch separation, and I'm sure Moody's will continue to look at the situation as we continue to improve our results.

Okay. All right. Good luck with the rest of the quarter.

Thank you very much.

Your last question comes from Jim Lane with Argos Partners.

Hi, good morning. I hope this isn't too ignorant of a question, but I was just hoping you could fill us in. What is the reason for the $14 million reduction in the LIFO credit in these fourth quarter results?

It's a difference in inflation between the two years.

So, this is an indication that there was less inflation.

Actually it would be more inflation.

It's more inflation. Okay, all right. Thanks. I will look at my accounting books. Thanks! [ Laughter ]

Jim, the LIFO charge is always an estimate for the entire year, and as the year progresses, you're required to update your estimates to your best estimate, and sometimes you have, you know, a -- a credit, so to speak because your original estimate was higher than what you finally ended up with.

The difference in inflation.

Okay. Okay, thank you.

You're welcome.

Bye-bye.

Ladies and gentlemen, we do have time for a few more questions. And your next question comes from Mark Hudson with Merrill Lynch.

Yes, I didn't realize we were going to run out so soon! The -- just on the pharmacy sales, the pharmacy sales have always been a bit of a weak part of your hand, and when you think about the whole market growing at 10% or thereabouts and -- and you're doing quite a lot less than that, and yet I think you said that you were protecting market share.

Can you just walk us through that? And perhaps, you know, you must have got some benefit from file buys in the last year or you wouldn't be doing so many. So, the underlying business ex-file buys is still kind of weak. Can you just explain how you grow that again?

I'm not sure I'm following your question. [OVERLAPPING SPEAKERS] I think we intend to continue to get our script business, our pharmacy business healthier, and I think the initiatives we have will do that, because pharmacy business is a neighborhood business, and we have a lot to do to repair our images with customers.

And I think we've identified the right things that we needed to do to get our store staffed right and to improve our positioning there. But, you know, as you are working your initiatives, you're working against negatives that are out there, too.

And I think -- you know, I think if you look at our numbers and you're comparing to us CVS and Walgreens, I think we believe very strongly in the sector. Frankly, we've deployed a little less capital. CVS, you know, buys a lot of files -- substantially more than we do. We spent 16 million, they spent 90 million. Walgreens has a very high percentage of newer stores comping at very high rates.

Those all factors. But even having said that, we think there's still a great opportunity for us to do the things that Mary said, and grow our script counts. And we continue to make improvements our stores. That's what we're doing.

So is script counts actually positive right now in Rite Aid?

Yes.

Okay. Thank you very much.

You're welcome.

Thank you.

Your next question comes from Karen Miller with Bear Stearns.

Hi, good morning. I wondered if you could just give us a little more detail on capital expenditures? First, could you go over what your Cap Ex was for the fourth quarter and full year? And then could you please discuss your plans for 2004 regarding the number of new stores versus relocations?

Sure, Cap Ex for the fourth quarter was 52 -- let me get the exact numbers here, make sure I get it out right. 52.4, I think it was. Where did I put it here?

And then we bought script files of about 4 and change, for I think it's $56 million of total Cap Ex for the quarter. For the year -- Kevin, you got that handy? [INAUDIBLE] It was $250 million, including the $109 million synthetic lease purchase for this year.

In terms of where we're going for next year, we've given the guidance of 300 to 350. We've talked about opening 75 new or relocated stores, we're working on the program right now. Our Cap Ex also includes some, you know, land banking for future years in our number.

In terms of the split between news and relo, there's probably about a 50/50 mix for next year, in terms of how they spit off between news and relos. You know, in terms of the 75 stores, I think we've done a great job of ramping up the real estate program. We've really gone from very little to very a robust pipeline today.

I think our challenge will be to get all of the stores we have in the pipeline built by year-end. So, you know, we may not hit the 75 dead-on, it could be 50 or maybe 75, somewhere in that range. But I think our program is progressing really well.

Is there any particular region that you're focusing on, in terms of the new stores and relos?

Yeah, I mean, we're very focused on our existing markets. We have a lot of infrastructure in place in terms of supervision and distribution and advertising costs and all those kinds of things.

So we think that our new and relo stores could be profitable very quickly, particularly the relos, in our existing markets, and we think we have lots of opportunities to protect and grow share in those markets, so that's really the right place for us to focus our Cap Ex at this time.

Okay, great. And then just in terms of your competitive landscape now that Eckerd is finally sold, and we know the players and the location.

Do you see any significant change or -- or -- in your competitive landscape? And is there a possibility that there may be some shuffling of stores? I remember CVS swapped with --

With us!

Yeah it was with us. I think that it's probably a little early to say what will happen in each of the given markets, but we will continue to do what we can to run good stores and take care of any customers that come to us.

Okay. Thanks.

Our next question comes from Steve Chick with JP Morgan.

Hi, thanks. Your March sales trends were very good on the front end, and we've seen some pretty good trends from everyone.

Is there any benefit for a slightly earlier Easter in those trends or is it -- would that be pretty small?

That would be pretty small in March. Most of that really shows up in April.

Okay. And one other thing separate to that. John, it looks like you're planning to incur tax expense for next year.

When -- looking out beyond that, what -- what should we start to think about in terms of forecasting, you know, income tax expense? And when will you have an effective tax rate that might look more like a more normalized level?

Hopefully not nor a long time. We have a substantial NOL, I'll say probably close to $3 million in pretax dollars out there.

So really what you're looking at are state NOLs that are expiring in our provision today for the most part. So our effective tax rate for a while is probably kind of in that 10 to 11% range, realistically.

Okay, so the --

For the foreseeable future.

Okay, all that $3 billion is probably -- you will be able to use that?

We think we will be able to use the majority of it.

We won't be paying federal tax and have a federal tax provision for a long time, Steve, but the state tax expense that John alluded to is -- is at that rate now and will continue to go on forward.

Okay, great, thanks.

You're welcome.

Your next question comes from Jeff Cobalar with Solomon Brothers.

Your front-end has been doing very, very well. And can you explain why you think the front-end is doing so well relative to the pharmacy side?

Well, we're -- yeah, we're -- we're -- we're pleased with the progress in both of our businesses.

Obviously, our front-end has had industry-leading numbers and, you know, over the last several years, we've continued to improve assortments, run strong promotions, good store execution of programs, both corporate and local, and I just feel our [INAUDIBLE] management group, who does a great job on what they buy.

And pharmacies, it just takes a little bit longer to get everything moving the way that it needs to to get more customers to try your pharmacy for the first time, but we're making headway and we believe we'll make considerable more headway into next year.

Can you comment at all about customer counts, or at least trends in customer counts and market basket -- the size of the market basket the customer buys?

I mean, I think what I would say, it's some of both. We're seeing good activity on both sides of the equation.

Right. Okay. And then you mentioned, Mary, about the customer satisfaction indices as you follow are up. And can you quantify that or just talk subjectively about how much they're up?

We do an annual, what we call a benchmark survey of customer satisfaction and measure it by market areas, as well as corporately, and we improved -- had some strong improvements this past year in almost all of our markets, and we know which markets may need additional improvement, and have a goal at being the best at customer satisfaction.

And we've delivered that message in person to every single one of our regions, and it's going to be top priority for this year, and we expect to see significantly -- additional gains on customer satisfaction.

And when there's variation between your market and customer satisfaction, what's the reason for that?

It can be different. It could be the strength of another competitor, it could just be that we need to do more with maybe remodel programs in those stores, maybe it's a staffing issue.

It could be different. It depends on the region. So we really get in and look at what the cause might be and fix the cause for that area.

Thank you.

Operator?

Yes, sir.

We will take one more question.

Your next question comes from Leah Hartman with CRT.

A follow-up on that annual Cap Ex number. Did that include the file buys that were made?

It did not. That's another $16.7 million.

Okay, $16.7 million?

So again, the Cap Ex number for the year was 250.7. That included the purchase of the sale lease back to 107 or 109, whatever it was -- 107.

Right.

And then you had $16.7 million for the file buys. So, it's like 267 total.

Great.

Okay?

And then just a catch-up on where you are on the private label penetration as part of the front-end?

Well, in my comments, we had a terrific year in private brand, got up to 11.4% on penetration. Private brand sales of the last quarter were up 17.5%.

And we expect to see those continue to grow over the next few years.

Great. Thanks very much.

Uh-huh.

I think that's it. Thanks, everyone, for joining us. We appreciate your interest in our company.

Thank you.

Thank you, ladies and gentlemen. And thank everyone for participating in today's teleconference. You may now all disconnect.