Rite Aid Corp (RAD) 2005 Q3 法說會逐字稿

At this time I'd like to look of everyone to the Rite Aid third-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. (OPERATOR INSTRUCTIONS) Mr. Standley, you may begin your conference.

Welcome to our third-quarter conference call. On the call with me today are Mary Sammons, our President and CEO, and Kevin Twomey, our Chief Accounting Officer.

Before we begin today I would like to remind you that today's conference call includes forward-looking statements; actual results could differ materially from these projected statements. The factors that could cause actual results to differ are described in our fiscal 2004 annual report on Form 10-K and our periodic reports on forms 10-Q and 8-K if any. 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 8-K we furnished the SEC this morning. The Form 8-K can be accessed through our website under our company and investor info tabs. You're also directed to consider other risks and uncertainties discussed in documents we filed with the Securities and Exchange Commission.

Our agenda for today's call will be as follows -- Mary Sammons will give an overview of third-quarter operations, I'll review third-quarter financial results and comment on our fiscal 2005 guidance and then we will take questions.

Thank you, everyone, for joining us today as we discuss our third quarter. As our press release indicates, the third quarter was a difficult one and we are disappointed with the results. Adjusted EBITDA declined 7.8 percent year-over-year due to slowing sales growth in both the pharmacy and the front-end.

As we said when we reported November sales, our business continues to be negatively impacted by the United Auto Workers mandatory mail prescription program and tougher year-over-year comparisons because of the substantial sales increase we saw last year with the Southern California grocery strike. We expect to see this negative impact on sales lessen over the next 3 to 6 months as we cycle both the start of the UAW program and the end of the grocery strike. And we are pleased that even with the decreases in strike affected regions we have retained customers who shopped with us during that time period.

Like others in the drugstore business we are also feeling the negative effect of a very slow start to the cough, cold and flu season which, you'll remember, started out strongly in mid-November last year. So far this year's flu season is predicted to be not only weaker than last year, but could also be weaker than an average flu year.

Same-store sales increased 0.2 percent during the quarter. Pharmacy same-store sales were basically flat, but pharmacy gross margin was up due to more sales of generics and continued purchasing improvement. New generic prescriptions dampened pharmacy comps by 179 basis points as we continue to emphasize generics as a better value for our patients. The UAW mandatory mail program continued to have a significant negative impact on approximately 1,100 stores, primarily in the central division.

The slowdown in HRT continues; the Vioxx recall depressed sales in its therapeutic category and lower third party reimbursements also depressed comps. We believe that patients cutting back on their number of prescriptions because of higher co pays is also affecting sales. On the positive side, our prescription file buys were up 20 percent compared to last year's third quarter as we continued our aggressive acquisition program.

As we have said before, we are looking at both single and store file buys. To give you an example, earlier this month we completed a deal to purchase prescription files from five community pharmacy stores in Maine worth almost a quarter of a million scrips annually. We also completed the rollout of our next gen pharmacy dispensing system to all stores this quarter. As with any new system, the rollout caused temporary disruption in customer service in some of our stores and we continue to provide those stores with additional training support. Overall the response from our pharmacists has been very positive as they get comfortable with this new technology which is designed to make it easier to fill a scrip, provide more time for counseling patients and enhanced quality assurance.

In November we launched the unique medication management therapy program with the University of Pittsburgh where our pharmacists partner with physicians to deliver medication management services to their patients not only in our stores but also in the doctors' offices. The goal of that pilot is to develop a fee for service medication management therapy model that can be duplicated in other parts of the country.

During the quarter we continued our evaluation of the potential benefits of developing a PBM or PBA for Rite Aid which we've discussed previously. We believe this capability is strategically important for us giving us the ability to compete for managed care plans and protect market share. We are evaluating several alternatives and our final decision will be based on both strategic potential as well as expected return on investment.

On the front end same-store sales increased 0.3 percent with the weaker cough, cold and flu season contributing to declines in core OTC categories. Comparisons to sales during last year's grocery strike also negatively affected numerous categories, although we continue to retain a substantial portion of the business we gained last year. And according to AC Nielsen data, we outperformed other West Coast drug retailers in retaining business gained last year.

Private brand penetration was 11.2 percent for the quarter, about even with last year even with overall softer sales. We have now launched almost 200 new SKUs this year with a total of about 240 planned for the full fiscal year. Even though the total photo and film businesses remain soft, combined 1-hour photo and Kodak picture maker sales turned positive as quarter end as we completed the addition of Digital Equipment to all of our 1-hour photo centers. Now that the new equipment rollout is complete we have an aggressive promotional plan in place to market the digital services.

Other category sales were mixed with consumables strong even with the cycling of the West Coast strike. Our GNC departments are experiencing good gains and we opened 21 new GNC's this quarter bringing our total GNC stores to 1,015. We plan to add 300 new units over the next 2.5 years.

General merchandise and seasonal lagged last year. While we experienced year-over-year declines in some key categories, according to AC Nielsen data on Rite Aid markets we gained share in combined beauty, consumables, health and seasonal during the quarter. Like other retailers, we had a strong Friday after Thanksgiving but sales slowed on the weekend.

To encourage sales we've increased our promotional efforts by adding midweek and weekend ads until Christmas especially on the West Coast. We also continued our focus on improving customer satisfaction during the quarter, expanding our voice response customer satisfaction survey in the pharmacy to the rest of the store. With this tool we can now measure satisfaction in the front-end as well as the pharmacy and we'll be able to include customer satisfaction in the annual bonus formula for all field management next year.

While our team continues to focus on managing expenses to help offset the impact of lower sales, SG&A was up over last year as a percent of sales primarily because of higher labor and advertising costs. We increased labor to support our new pharmacy system rollout and, as we've mentioned before, we made a decision to begin pharmacy image advertising on television which started up in the beginning of the third quarter. Inventory levels were negatively impacted because of lower sales and aggressive support of basics and promotion.

As for our new store development plan, the third quarter marked the debut of our new Rite Aid store design with two pilot stores -- one opening in Akron, Ohio in October and one in Sellersburg, Indiana near Louisville, Kentucky at the end of last month. The new 14,500 square foot prototype store in Sellersburg is about 30 percent larger than our current prototype and the relocated store in Akron showcases how the new design can be used to remodel a smaller Rite Aid store.

Both stores turned out great; they demonstrate our commitment to pharmacy, to health and wellness and to a well-organized but thoroughly pleasant shopping experience for our customers. Aisles are wide and clutter free and the sightlines make it easy to find what you're shopping for and the store environment shows that we also care about our associates' ability to efficiently get their work done. Our entire design and merchandising team are to be congratulated on an outstanding job.

Currently we are in the process of getting feedback from customers in both of the stores to make sure we've delivered the best drugstore experience possible. As we plan for new and relocated stores we are being very selective about sites to meet our strategic objective and deliver the best return on investment. As a result it has taken longer than we originally anticipated in the first year of our development program to get new stores opened. As a result we expect to open 28 new and relocated stores in fiscal 2005 and 80 to 85 new and relocated stores in fiscal 2006. We will also continue our aggressive remodel program with 180 remodels in fiscal '05 and over 200 remodels planned for fiscal '06. Our store development program remains a top priority for Rite Aid to strengthen our market share and competitive positioning.

As you can see from our release, we have lowered guidance for fiscal 2005 due to current sales trends and industry challenges which I have already discussed. And as I said at the start of my comments, we're disappointed in our results for this quarter, but we have confidence that, even with the challenges currently facing our industry and our business, we are in a retail sector with tremendous opportunity for success. Our team is focusing on the right priorities and initiatives to position us to share in that success. We're committed to being an active player in health care and committed to our strategic growth plans to increase our market share and deliver long-term shareholder value. Now I'll turn it over to John.

Thanks, Mary. Total revenues for the 13 week third quarter were $4.1 billion this year flat compared to last year. We operated 3,363 retail stores at quarter end versus 3,386 doors at the end of last year's quarter, a net reduction of 23 stores. Same-store sales for the quarter were up 20 basis points with pharmacy comparable store sales up 10 basis points and front end comparable store sales up 30 basis points.

Gross margins which are net of occupancy costs were 1.10 billion or 24.6 percent of revenues for the third quarter this year versus $1 billion or 24.4 percent of revenues last year. The current quarter included a non-cash LIFO charge of $5.8 million versus a credit of $1.4 million in last year's third quarter. Excluding LIFO the third-quarter gross margin was 24.7 percent of revenue this year compared to 24.3 percent of revenues last year, an increase of 38 basis points.

FIFO gross margin was positively impacted by increased pharmacy margins partially offset by softer front end margins and a slight increase in occupancy costs. Pharmacy margins were positively impacted by reduced inventory costs resulting from purchasing improvements and more generic scrips as a percent of total scrips partially offset by lower reimbursement rates. Front end margins were negatively impacted by higher markdowns partially offset by improving shrink trends.

Selling, general and administrative expenses for the quarter increased as a percent of revenues by 38 basis points compared to the prior year. The increase is the result of higher wages, advertising and bad debt expenses partially offset by lower workers compensation and general liability expenses, lower incentive compensation expenses and an increase in litigation settlement proceeds.

Non-cash stock-based compensation expense, which is now included in SG&A, was 5.4 million this year versus 7.3 million in the prior year. We expensed the fair value stock options granted, the decrease in expense from last year's third quarter is due to options granted in earlier years becoming fully amortized. (indiscernible) and impairment costs were 2.6 million this year versus 3.1 million in last year's third quarter. Interest expense was 70.6 million for the third quarter this year versus $77.7 million in last year's third quarter. Cash interest expense was 65.8 million this year versus $72.5 million last year and non-cash interest was 4.9 million this year versus 5.2 million last year.

Adjusted EBITDA for the third quarter was $163.8 million or 4 percent of revenues, a decrease of 13.7 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. Income before taxes was 6.3 million this year versus 26.1 million last year, but this year's pre-tax income includes a $20.2 million charge related to the refinancing of our bank facility that we concluded in September.

Income tax expense for the quarter was 5.3 million this year versus a $47.5 million benefit last year. Net income for the quarter was $1 million or a net loss of 1 cent per diluted share compared to net income of $73.6 million or net income per diluted share of 12 cents last year. The net loss per share for the current third quarter includes $8.7 million of declared preferred stock dividends that are not included in net income versus 8 million last year.

During the quarter we reduced our debt by $605 million using cash from our balance sheet and the proceeds of our new accounts receivable securitization agreements. We also replaced our old $1.15 billion term loan and $700 million revolving credit facility with a new $450 million term loan and a new $950 million revolving credit facility, both of which mature in September 2009. We expect that the debt reduction and refinancing will reduce interest expense $27 million per year when compared to the cost of the old facility.

Operations used 43 million of cash in the quarter excluding the proceeds from the sale of accounts receivable primarily to purchase inventory for the holiday selling season. For the quarter we spent $44.6 million for property, plant and equipment and $8.4 million for (indiscernible) purchases for a total of $53 million of CapEx in the third quarter. During the quarter we also completed the sale and leaseback of 21 stores for net proceeds of $53 million. During the quarter we opened two new stores, relocated four stores, remodeled 46 stores and closed 9 stores.

Based on third-quarter results and current sales trends we are lowering our adjusted EBITDA guidance range for fiscal 2005 to $750 million and our net income guidance to between $49 million and $99 million. We are also lowering our range of sales estimates to 16.7 billion to 16.8 billion and same-store sales growth estimates to a range of 1.2 percent to 2.1 percent. Attached to our press release is a table that reconciles our adjusted EBITDA guidance to our guidance for GAAP earnings. Operator, we are now ready to take questions.

(OPERATOR INSTRUCTIONS) Reed Kim (ph), Banc of America.

Could you tell us -- would you mind sharing with us where the store closures were? I assume they were scattered throughout, but I was just wondering if you could share that.

I don't know the exact store locations, but they are scattered. It's not a --.

And it would be primarily related to maybe a lease expiration where we determined that it really didn't make sense to renew it and we could find a better site elsewhere.

And regarding your plans for store additions and just the general real estate market, could you comment on what you're seeing in terms of rate increases or that sort of thing?

I think the real estate market is competitive and I think it has been competitive. Our competitors are also aggressively developing real estate, but I don't think we've seen anything in recent trends that tell us that real estate costs are skyrocketing or anything like that.

In addition, we have a fair number of stores that are build to suit that are financed by developers and we also just successfully completed a sale leaseback transaction at attractive rates. So it seems like we're doing fine.

Okay. And then another question just on the AR facility. The total amount you sold I think was 335 and is -- if I'm (indiscernible) working capital through the end of the year, kind of excluding that amount, is there any number you can provide for me in the final quarter here?

Yes, inventory is at peak levels today. And I think we said previously, from trough to peak we usually between 150 and 200 million of inventory. So we would expect to sell down inventory to some degree between now and the end of the year and then further in the first quarter. So we'll have some inventory improvement between now and year end. So there should be some improvement in working capital or reduction from now until year-end. I'm not providing specific working capital guidance.

You've asked me to just use last year's movement from third quarter to fourth quarter as a guide?

You do have one factor that will affect the fourth quarter and that's an earlier Easter this year. So you will have some additional Easter product that will hit the stores probably in the month of February for March sales.

Okay, thanks. And then one last question. If I could just ask Mary, any updates on the competitive environment on the East Coast that's been a few more months just mostly thinking in terms of the Eckerd transaction, how that's affecting the marketplace? Thank you.

I really haven't noticed any significant change there. I think we have been aggressive in our strategies to get customers in those marketplaces but I'd say other competitors have been aggressive too. I think everyone is looking to get as many customers as they can, but I've really heard nothing unusual going on.

Karen Holland (ph), Lehman Brothers.

This is actually Meredith Adler. A couple quick questions. The first is you've talked about 28 new stores for this year and 80 to 85 new stores for next year, but it wasn't clear how many of those were actually new and how many were relocated. What do you expect at this point in time that the store count will be at by the end of next year?

Probably reasonably flat. I say that because there's probably 40 to 50 of those stores that are relos with the balance being new and we'll probably get lease terminations and whatever and have another 10 to 20 closures or something. So I think store count on a year-to-year basis will be reasonably flat for this year.

(multiple speakers) Next year too?

Yes.

And the average size of the stores that you're building?

The average size is 14,500 square feet -- that's here the East Coast. On the West Coast they're going to be about 3,000 square feet larger. (multiple speakers) to give a larger back room in terms of receiving and handling products. So the majority is on the floor but also the ability to better work product was taken into consideration and customers space.

The key thing I'd tell you about the store development program is that we really started from nowhere, we had no -- we really eliminated the whole process when we first got here out of necessity. So in the last 18 months we've really started from nowhere, built a pipeline -- a pretty substantial pipeline today. Put the processes in place and the people to really move this thing along. And even though store count could be flattish next year, we do expect store growth over the next 3 years as we ramp this thing up.

Okay.

And Meredith, I'd add one thing. A good percentage of it being relocations I think is very important strategically for us because it allows us to really replace older, smaller tired stores with our new thinking and we've already seen significant sales increases out of the one relocated store that opened a up early enough for us to have a sales indication. So, I think it's very positive for going forward.

Okay. And then just to talk a little bit about your thoughts about growing a PBA or PBM. Do you see that it would be important to grow through acquisition? Do you need to get some kind of critical mass in a hurry? Or is this something that you could do organically and gradually?

I think the advantage of an acquisition is probably some amount of lives that you would get right away and some infrastructure (indiscernible) our store network. It would take some time even through acquisitions to have lives that are represented in our stores. I think what's important is to have a vehicle that allows us to be competitive in certain situations that are important to us in terms of competing with the mail-order option. That's what we're thinking about. I'm not sure it's necessary that we have an acquisition, but it could be helpful.

I would agree with that. And I think even though we would not have the critical mass of lives that large PBM would have, if we target our efforts really towards markets that are strategically important for us, I think there are a lot of opportunities with employers and plans to be able to do something.

Okay. And then my final question is is there anything you need to do in the areas that are being very impacted by the UAW mandatory mail plan? Do you need to do some consolidation of your store base or can you cut labor or is there anything you can do to control the fixed costs because if they continue with mandatory mail that business might never come back?

I don't think that business is going to come back anytime soon, that's for sure. But what should happen is we cycle this thing and then we have resuming more normal organic growth process which should replace that business over -- we hope -- a reasonably short period of time. I mean, it could be a couple years. So that's the answer I think. If we were to meet, if we cut labor to make expenses or do something like that, that could further detriment those customers that we had kept as well as the (indiscernible) business that goes with that mail-order business that we (indiscernible).

And we already use scheduling software to really make adjustments in labor needs by store based on scrip volumes predicted in a pharmacy area as well as front-end volumes in the rest of the store. Certainly there are going to be levels that you can't take it any lower than a certain level, but we also have to be very responsible, like John said, to the customers that are in our store shopping to make sure they have a really good quality experience. And we are going other things from a marketing and competitive standpoint to gain more market share in those areas that are most affected.

Thank you very much.

John Heinbockel, Goldman Sachs.

A couple things, Mary. Can you walk us through the different dynamics that will impact pharmacy comps over the next 6, 9, 12 months in terms of drug pipeline, patent expiration, maybe other macro factors, UAW? Kind of give us a sense -- should we expect a notable improvement in pharmacy comps over the next 6 to 12 months or is this going to be really very much a drawn out process that will take quite a while? What do you think internally -- of all the initiatives you guys are working on which is the one that's most likely to move the pharmacy comp dial this year?

Okay. I think, John, it's not going to just get over overnight. I think when you think about the UAW impact that's going to, like I said, we'll cycle that in like 3 to 6 months. And John is actually right there that we will cycle through it and then we'll begin to get new business off the customers that we have and new customers that we're gaining. But I'd say that's a 3 to 6 month time period to cycle it.

As far as cough, cold and flu will be behind us over this first quarter and that actually could be a positive that we don't know yet depending on what happens with the flu season, even (indiscernible) forecast changes its mind every couple of weeks as to what's going to happen width flu season. So that could be a plus or a minus.

As far as new drugs, there's not really a lot going on in terms of what I'd call real blockbuster entries for next year. I think we've got a couple of new entries projected, but they're in category, they already have a lot of choice. So I think they'll be good for the category but I don't see anything real explosive there. And I'd say the same thing with generics, they're going to be pretty stable based on what we've been seeing this past year.

But we also do an excellent job of growing generics in our company and we continue to grow them. We just talk about the new generics and their impact, but we actually have grown generics much more than the addition of the new ones that have come out there and we're going to continue to push on those because they offer so much more value.

On internal initiatives, in addition to file buys which we still feel are a key component of us really getting scrips into stores that really can handle that additional volume and make the whole store more successful, we're going to still keep pushing really hard on these other initiatives that really play upon the relationship of the pharmacist to the patient. All of these initiatives around consultation, chronic care management, disease state management.

I mentioned in my comments the program we've got going with the University of Pittsburgh, but we're also working on a number of other initiatives we're evaluating including perhaps getting started with the center for health transformation that Newt Gingrich has founded. We've got some things we're looking at with nurse practitioners. Just more efforts around that area because long-term that's going to be I think a key to success for the pharmacies.

We also -- I mentioned our rollout of our new system was completed this last quarter. We believe that that is also going to help us not just in terms of a better experience for the customer, but a better experience for the pharmacist and helps attract even higher quality people who want to come to our team too because we have a great work environment.

If I adjust for UAW and the onetime things that are impacting you right now -- UAW, Southern California and flu -- it still looks like comp scrip count is probably pretty close to flat. Is that roughly correct? And can you get expense leverage on a flat comp scrip number or do you really need to grow that line to get some leverage?

We believe that growing pharmacy sales is an important key to our future success. We're in the drug store business and that -- success in that area is critical for us and that's why we really focus our team on that as the number one priority.

And I guess what I'm getting at -- it looks to me like you still have a ways to go to get to a pharmacy sales number that would create some expense leverage even if I take some of these onetime items out. Am I right or wrong about where you need to get to?

I think you would need to grow your pharmacy.

Well, you need to grow -- sales or scrip count?

Both. I think just having sales growth without scrip count is going to make leverage difficult. I think you need really some script count growth.

Okay. And then finally, what's the -- if you think about the CapEx philosophy going forward, is that basically going to be a run cash flow neutral? I assume you don't necessarily want a lot of free cash.

That's right. We're now planning to lever up to build a lot of stores, that's not our intention. But we -- I think it would be our intention over the longer-term. Obviously we need to continue to deal with our capital structure, but we need to continue to make good investments in our business, that's going to be critical.

One final thing. What's the update on new plans going mandatory mail say CalPERS and other plans that might be doing that, what's out there?

Well, CalPERS -- I know we've read different things that talk about them going mandatory mail, but we've had conversation with them several different times and they are planning no change at this point in their plan as it exists. They already have a mail component to the plan and are not projecting a change at this point in time.

Okay, thanks.

Leah Hartman, CRT Capital.

I did want to check to see what the outstanding balance was under the Accounts Receivable securitization facility?

335 million.

It is 335. And that's rolling as you choose to sell off receivables into that?

Yes.

And do you retain any of that or remain eligible or are you selling off all eligible into that facility?

It's a frequently adjusted and measured kind of analysis and there are times where we don't sell absolutely everything, but we utilize the facility as much as practical.

But the definition of eligible, I mean if you think (indiscernible) $600 million (indiscernible) selling 330 or something.

Correct. But by design the agreements in the structure keep a lot of cushion for the purchasers (indiscernible) kick out things that essentially are not eligible.

I remember when you were negotiating it. Thank you for the color on that. Good luck with the rest of the season.

Mark Wiltamuth, Morgan Stanley.

Mary, is there any way you can give us some health indicator on the comps outside of Southern California and outside of the UAW markets?

I don't think -- we really have not been giving that specific of indications.

But we would still be soft. (indiscernible) those a very impactful to our comps. I think we've said before the UAW -- if you took all the UAW impact at the stores out it would improve our comps by about 2 percent and I think it's pumped (ph) into that 150 to 2 percent range for the third quarter. The grocery strike is a lot harder to measure so --.

Okay. And also on the debt reduction front, obviously you made some big progress there. How much more could you do here in the year ahead and what are the maturities the next few years?

Well, for next year we really have two bond maturities that come up -- 2005 maturities; one's in April and one's in September (ph). The big one is in April, the 178 million or so. And then 38 in the fourth quarter basically. So for next year about 220 roughly if bond maturities.

Yes, fiscal '06 would have a 215 required maturity, fiscal '07 would be 575 and that includes the converts.

And then the bulk of it moved to 2008 and beyond.

That's right. So in terms of where we sit today, we obviously would generate some amount of cash flow. We are trying to invest some of that cash flow back into our business. We have established -- what we basically did is took a lot of our excess cash -- we had $335 million roughly of excess cash at the end of the second quarter -- and use that to pay down the old term loan facility and restructured that to give us a larger revolver facility to be available for next year's maturities.

So we went from a $700 million revolver to a $950 million revolver. So we have a couple of different angles really to get at near-term maturities. We have a fairly gigantic (indiscernible) facility which gives us I would say a safety stop to deal with those maturities as they come do. And obviously there's whatever cash from operations after CapEx that would be available and then whatever access we want to take the capital markets that make sense to do that kind of thing at the time we deal with those maturities.

We have a lot of different avenues to go, but we have created a revolving facility that's given us the flexibility to deal with those maturities as they come due today.

Okay, thank you.

Monica Aggarwal, Merrill Lynch.

Just to follow up on John Heinbockel's question, what type of progression are you seeing in the underlying volumes ex UAW and what potential could you see over the next 12 to 18 months with some of your new initiatives?

I think what we were trying to say -- I don't know if it was John or who asked the question -- but if you focused on the different parts of the country I guess say went to the East Coast our cost would be much stronger there versus the West which has the strike and the Central which has the UAW. So there are a lot of our stores that have very healthy pharmacy comps today. So it's a mixed bag as we deal with different issues that are impacting our comps today.

So what we think is going to happen is that the first half the next year will continue to be impacted by UAW and the end of this year will continue to be impacted by the Southern California grocery strike. But we should work our way out of those issues over time. We're focused on various initiatives, as Mary just mentioned, customer service, the next gen system which may have had some negative impact in our most recent results just because of the rollout, but really should help us in the long run provide better customer service. We think comps are going to come around probably late second quarter through third quarter. On the pharmacy that's where we think we'll cycle through some of this stuff.

And I mentioned, even with cycling that West Coast grocery strike, both in the front-end and pharmacy, we have, in fact, retained new customers that we picked up during that strike. So even though we're showing decreases against the great gains that we had there last year, we definitely won more customers and so we would expect that business to continue to grow for us too.

And I think before we actually saw that cycling time coming up and did some analysis on what we call the UAW affected stores, when we pulled those out of the equation the numbers were significantly better.

So would it be reasonable to assume that scrip volume for Rite Aid could be in that 1.5 percent range for the industry in '06 or is that still a longer-term target?

We are right now in the process of doing our budget for the upcoming year and taking into account the different factors. We'll have a clearer picture on that in the -- probably the next 30 days.

Okay. And just two small questions. First of all, the 50 million EBITDA gap or guidance swing, what would be the main factors given that the UAW impact is pretty much known? And then secondly, in terms of doing file buys, is that something that you can continue to also internally do by sort of combining more of the Rite Aid stores and closing some stores down and shifting (indiscernible) transferring file buys -- transferring files over?

We look at that all the time. We review underperforming stores pretty carefully on a pretty consistent basis. So we're always looking for that opportunity. And could there be a few more? There might be a couple, but I don't think that's going to be -- consolidation of the store base I don't think is in our minds at this point a material factor over the next year or so. But we do look at those issues all the time. So I'll just give you that (indiscernible) we're always kind of staring at it and seeing what are the right things to do for the whole company, not individual stores. So we do look at that all the time.

And the $50 million EBITDA?

We're going focused on the top line. That's really what this discussion is all about. The UAW situation has really developed over a period of time and everyone is asking about the non-UAW stores and obviously that's had some impact. Flu is a major factor that we've stared at and now we have some insight on going into December here and so I think that has given us some concern. So we've really looked very carefully at our sales forecast for the fourth quarter and that's really what is driving our change in guidance at this time.

Thank you very much, John.

David George, Deutsche Bank.

Just a follow-up on the last question actually. So just to be clear as to the fourth quarter, the change in the lowering of guidance is the effect of the flu season and the performance of your other stores and the change really doesn't affect what you had previously estimated for UAW and retention in California, is that correct?

Well, I think retention in California is a developing situation.

So when you gave your previous guidance, your attention to date has been less than you previously expected, is that fair?

I'd say that's a factor, yes.

And then on the previous call when you said that the negative effect of UAW had been seen in August and that's really when you felt the brunt of it and felt that it had kind of plateau’d at that point -- it continued to deteriorate through today. Is that fair?

It's still running at about that same level.

The UAW has flattened out?

The UAW has flattened out.

Okay, great. And then the next question is in terms of the CapEx guidance that you're going forward with, what specifically is the hold up in terms of developing new stores? Is it finding sites or you just wanted to slow down a little bit or what exactly is causing --?

There is actually not -- I think the constraint is the ramp up. As I said earlier, where we really came from is nowhere. We had completely stopped our store development program; we were developing no pipeline at all. And I think probably in terms of our original expectation what's different was just the time to get (indiscernible) preferred developer program across the country, identify the key markets, employ resources into the deal, find the sites, get construction started. Just that timing took us longer than we thought.

Where we are today is -- we are identifying and bringing in and building a pipeline at a fairly good clip today. So I would call us kind of largely ramped up at this point.

So you characterize it as a shift beyond fiscal '06 into fiscal '07, that would be a larger opening than you would have expected previously, is that fair?

I think what it is is that our ability to get sight into the pipeline during this year just took us longer than we thought and we got fewer strikes into the pipeline.

We would have the ability at this point, I think, if we wanted. '06 is firming up because you have a 12 to 18 month lead time, you have about 2 months left in this year. So in terms of '06, it's going to be probably in that range. We would have some flexibility at this time if we decided to ramp up '07 further if we choose to do that.

And for instance at our real estate meeting we just had this week, we approved almost a dozen new sites. So it's the timing on making sure it's the right site because we are being absolutely adamant about where we're putting these new stores and making sure the relocation makes sense in what we're going too. And if it meant we had to have a little fewer than we would have originally wanted, it's better to do that and make sure it's the right location. But we've really got our organization geared up and our pipeline geared up and we should be into our program in full force by the time we are through this next year.

And then in terms of your front end comps, the most recent weakness seen there, is that related also to the UAW in the sense that you're having less foot traffic through the store that you're seeing a decline in volume or is that mix factor? How would you characterize it?

I would say there is definitely some effect but not a huge effect. More of it has to do with the -- what's going on with cough, cold and flu -- just the seasonal startup itself being a little bit softer than I think any of us would have anticipated. But those would probably be your largest factors versus UAW.

Okay, great. And has the flu season changed at all since what you saw in November looking through December now currently?

No, it's still -- in fact, about a week and a half ago (indiscernible) put out a new report really projecting the business to be softer than they had originally anticipated. And if anything I think we're probably being affected about as much as our other major competitors, maybe even a little slightly worse but about the same. I think everybody's probably experiencing some big issues there and a problem with POPs, cold and flu is it extends beyond prescriptions because it hits you in your pain care OTC and your upper respiratory and your gastrointestinal, any of those kinds of categories too. And it just decreases traffic over where people would have come for those kinds of products.

Thank you.

Carla Casella, JP Morgan.

I have a couple questions related to pharmacy. I'm wondering if you have any detail in terms of what percentage of your pharmacy customers are under healthcare plans for large companies which I think would be more at risk of moving to the mandatory mail-in prescriptions?

I don't think I could actually give you a percent on that. I think everyone would have that sort of situation I think going on because all of us have a high percentage of what you call third parties sales. In fact about 92, 93 percent of the business is in third party plans. But it's really -- it's up to pharmacy to be doing more to demonstrate the value of pharmacy and that's a real focus for us because customers definitely would prefer to get their prescription in the store.

Can you just refresh what percentage is Medicare or Medicaid and what percentage is chronic versus the routine monthly prescription?

Medicaid is about 16 percent of our pharmacy business and I think everybody's Medicaid business has grown somewhat over the last I'd say 6 months looking at IMS data. And in terms of chronic versus acute, did you ask that question?

Yes.

I don't know if we know exactly. It's going to vary depending on the area, but I think anywhere from 40 to 50 percent of it could be chronic medication.

Okay. And then is there a way to track what percentage of your front end sales is coming from pharmacy traffic?

You've got a separate front end customer too. In fact, your customer traffic count on the front is much larger than your customer traffic count for the pharmacy. And any numbers that we look at show that there is some cross shopping, but it's not as large as people would think. So you definitely have opportunity to continue to grow the front end of your store even as pharmacy has its issues its dealing with.

Okay. And my second question -- or line of questioning comes from maintenance CapEx, do you have an estimate of how much that would be on either a per store basis or a total company?

It depends on how you define maintenance, Carla, but you could basically just think in terms of the repairs and maintenance kinds of things that are capitalized and then just things break and you'd replace them. And you're probably looking at something around $50 to $75 million. Some folks talk about maintenance CapEx also including remodel, and if you do that then you might want to add another 50 or so million.

We're trying to get an idea for now frequent you need to remodel a store and what number of stores would have been remodeled in say the last 3 to 5 years.

I think Kevin can work up some statistics for you on that if you want to get them. I think our goal is to make sure every short cut (ph) is going to be 10 years. And we're really starting to look at that more by volume and we're going do focus on making sure that our higher volume stores are remodels -- probably more frequently than that could be maybe 7 years or something like that. That's kind of what we think traffic is through the stores and we assess by market using -- focusing (inaudible) remodel every 5 years we remodel. We're not too sensitive as to how (inaudible).

Okay.

And I think I mentioned that we've planned about 200 -- a little over 200 remodels for next year, we'll have done about 180 this year. And in addition to that we do what we also call resets where we go in and redo the merchandising in a store and we may also go in and do some expansion or change on pharmacy if we had done a file buy and that pharmacy needs to be able to handle more scrip volume. And when we do that we will do some updating on the rest of the store as needed.

Okay. And then (indiscernible) the receivable facility, is that on balance sheet? Is that in the total debt number or is that separate.

It is not.

Okay.

(inaudible) the receivables.

Okay. Thank you.

Mark Wiltamuth, Morgan Stanley.

John, I wanted to ask about the store closing and impairments. You only did about 2.5 million this quarter and in the EBITDA reconciliation table in the back it looks like 50 million for the year. Does that mean we're looking at $38 to $40 million for the fourth quarter? Is that just a normal year-end activity for you?

We do an annual store closing and impairment calculation -- it's a non-cash charge. And so what the majority of the balance that remains to be incurred represents is an estimate at this time based on the guidance that we just put out and our projections for the year of what that charge would be.

Okay. But that is a sizable number and it will affect the fourth-quarter numbers.

That's correct.

Okay. And how does that 50 million annual number progress over the next several years?

It should theoretically go down. Our cash -- our actual cash payment -- there's two components, so there's the charges which really is going to be dictated by how many stores we close and what the annual impairment test comes out like. That's the expense in the P&L, then we have the actual what goes on with the liability from a cash perspective. Today the cash carry is $38, $40 million, in that range and we would expect that number to go down unless we were to close a substantial number of stores.

At this time it is not our plan to close a substantial number of stores, but, as we said, we do look at that from time to time including at year end and that claim can change. But based on what we know today we don't expect a significant store closing charge for next year related to actual store closures. So for next year we've been looking (indiscernible) impairment test (ph) and if we improve earnings and we have upward trends then that charge goes down (multiple speakers).

(indiscernible) continues to go down.

Right. Okay?

Okay, thank you.

Robin Russell (ph), Cameron (ph).

Just a couple of questions. First with regard to the 2005 CapEx, I know you -- sorry if I missed this -- I know you've broken it out previously between remodels, new store growth, acquisitions, technology and I guess what you call pack stage. Could you give me a sense, where did the 50 million come out of?

Primarily new store development.

Primarily out of that 115 new store development?

Yes.

Okay. And then did you actually give 2006 CapEx guidance yet?

We have not.

Will you?

We're going to come back to guidance probably early next calendar year.

Okay. And your revolver, I guess you have 90 -- drawn and so how much is availability?

(inaudible) $950 million facility and there's --.

112 letters of credit.

There you have it.

Okay. And then you did a sale leaseback and I'm just wondering are you going to continue to do sale leasebacks -- for one? And then secondly, what would you say is kind of your run rate rent expense at this point?

Sale leasebacks -- we'll do some odds and ends from time to time. I wouldn't expect large amounts of cash from those except to the extent we develop new stores ourselves and then we probably will do sale leasebacks on those. And we have another transaction that is going to close or closed in the fourth quarter for about another $37 million. So those represent this transaction, the one that we did during the third quarter represents owned stores that we have on the books that made sense to turn at this time. And so we had a few more of those that we could do from time to time.

So given that you're going to do another 37 million in the fourth quarter, what would you say your run rate rent expense is?

We don't have that. We've not given quarterly rent expense and we don't have a run rate right now.

I guess in my mind --.

It's not materially different though. If you looked at last year's 10-K --.

Right, which is 554 net.

Right. The cap rates are in the 8 range. It's not a huge factor.

And then secondly, I know you touched upon this a little bit, but I just wanted to clarify this. Obviously you've got some calendar year 2005, 2006 maturities coming up. And I'm just wondering, are your plans to opportunistically come to the capital markets to refinance some of that or what are your plans with regards to do?

What happened was we were sitting on a large amount of cash, we were making a half a percent or 1 percent of whatever on it as required by our investment policies here. And so what made sense was to delever and save interest expense. That's what we did. But correspondingly we upsized the revolver. So we do have this revolver available, that's what it was designed for to absorb maturities over the next couple of years if we choose to do that. Having said that, just as you said, we've proven over the last 5 years that we're very opportunistic and if something made sense to us I'm sure we would pursue it.

Are you continuing to buy back bonds on the open market?

We are not doing that at this time.

Do you expect to do that or are you not really thinking you want to do that?

What we used our cash for what to reduce (inaudible) so we're in a net borrow position today.

So you don't think you'll continue to buy back bonds?

That's what I would say right this second. But again, we're opportunistic and I want to leave the door open (multiple speakers).

I got you. Okay, thank you.

I think this will be our last question, operator.

Sri Nadesan, Wachovia Securities.

A quick question. Could you repeat what you said on the availability on your secured facility as well as term loan?

Yes, basically at the end of the quarter we had drawn 99 million on the revolver and (indiscernible) 112 million.

And also, I'm not sure whether you touched on this, but in terms of your accounts receivable sales -- do you have an idea how much you might do in the fourth quarter as well as in the first half of next year?

I would assume that our average draw on this thing is somewhere in the $300 to $350 million range.

Okay. So does that mean -- so is that about a 50 to 60 million run rate sale into the facility every quarter? Would that be accurate?

The facility probably had a fairly steady balance to it, it could fluctuate up and down based on (indiscernible). It's our lowest cost source of funds.

Okay. It's not going to go above 330ish?

The whole facility could be as high as 400 million.

Right.

We could sell as much as that.

Okay, thank you very much.

I thank everybody for participating today. Thank you.

Thank you.

This concludes today's conference call. You may now disconnect.