Rite Aid Corp (RAD) 2009 Q1 法說會逐字稿

Good morning. My name is Darla, and I'll be your conference operator today. At this time I would like to welcome everyone to the Rite Aid first quarter fiscal 2009 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 session. (OPERATOR INSTRUCTIONS). Thank you. I would now like to turn the call over to Kevin Twomey, Chief Financial Officer. Please go ahead, sir.

Thank you, Darla. Good morning, everyone. We welcome you to our first quarter conference call. Mary Sammons, our Chairman, President, and CEO, and Rob Easley, our Chief Operating Officer, are also on the call with me. Our agenda for today's call will be as follows: Mary will give an overview of our first quarter results along with a brief update on the acquired stores integration. I will review the first quarter financial results, and cover guidance for fiscal 2009, and then we'll take questions.

Before we start, I'd like to remind you that today's conference call includes certain forward-looking statements. These forward-looking statements are made in the context of of certain risks and uncertainties that could cause actual results to differ. Also, we will be using a non-GAAP financial measure. The risks, uncertainties, and definition of the non-GAAP financial measure, along with a reconciliation to the related GAAP measure are described in our press release. With these introductory remarks in mind, let's get started. Mary?

Thanks, Kevin. Good morning, everyone and thank you for joining us today. It was a challenging first quarter as the economic climate continued to impact most retailers with rising unemployment and higher food and fuel costs. Despite these headwinds, our business in the pharmacy continued to improve as we increased pharmacy same-store sales, filled more prescriptions and increased pharmacy gross margin rate. Front end same-store sales also increased, and importantly, sales trends in the acquired Brooks Eckerds stores continued moving in a positive direction.

Increased promotional activity contributed to a lower overall margin during the quarter, which negatively impacted our adjusted EBITDA. Our promotion plan going forward will continue to deliver good value to attract a more cost conscience customer but keep markdowns and margins in better balance at the same time. Although SG&A was negatively impacted by wage and benefit inflation, and higher occupancy costs associated with our new store program, our team did a good job of expense control in other areas of our business, without impacting the customer shopping experience. Customer satisfaction ratings, which include the acquired stores, improved in both pharmacy and front end this quarter compared to last year's fourth quarter.

We passed a major milestone in our integration plan, completing all store systems conversions of the acquired stores in May. Pharmacy dispensing, cash registers and all business applications are now consistent in all stores, and we can now manage our business seamlessly nationwide. During the quarter, we also completed minor remodels in nearly 600 stores, and finished combining about 90% of the stores that are in close proximity. We're in the home stretch now, with just about 30% of the store minor remodels left to complete, which we'll do on schedule by October this year. As I mentioned earlier, same-store sales trends in the acquired stores continued to improve, although they were still negative during the first quarter. As you you would expect, front end sales are improving more quickly, and we've cut the rate of decline in half with strong growth in core drug store categories like OTC and vitamins, which include high margin Rite Aid brands. In fact, the acquired stores private brand penetration reached 11.5% at the end of May, earlier than we anticipated.

We expect front end same-store sales to grow even more quickly as we cycle aggressive below cost promotions from Brooks Eckerds old advertising program in mid to late July, when we anniversary the start of our common ad vehicle, where we had to limit assortments until planogram changes were made, and when we start advertising the grand openings of these stores by market as the remodels wrap up. While pharmacy sales take longer to improve, both sales and prescription volume are moving in the right direction. Gross profit per script is up as the acquired stores achieved a 66%-plus generic dispense rate in the quarter, continuing to close the gap with the 68% plus percent rate at core Rite Aid stores. We expect these positive trends to continue with the systems conversions now behind us, targeted marketing initiatives to gain back patients, and chain light initiatives to attract new customers which I will talk about in a few minutes. Kevin will give you a break down of same-store sales in the form of Brooks Eckerds stores in his remarks. As we said on our last call, we expect same-store sales in the acquired stores to turn positive in the third quarter of this year.

Now let me give you some more details on the first quarter. Same-store sales, which do not include the acquired stores, increased 1.5%, with pharmacy sales up 1.4%. Prescription volume was up slightly, a reflection of overall slower prescription growth across the industry, and the shift of the popular allergy medicine Zyrtec to OTC. As I said earlier, pharmacy gross margin rate also improved, in large part to growth in generic dispensing. We finished the quarter with another industry high generic dispense rate of 67.7%, which includes all stores. The rate has increased for 28 consecutive quarters, and we expect to boost it to 70%.

Improved customer satisfaction and targeted marketing initiatives contributed to the increase in our pharmacy business, as did growth in our Living More senior loyalty program to 3.5 million members, and we continued to see good results from our telephone compliance program, focusing on generic prescription refills. Our health and wellness initiatives during the quarter included health condition marketing programs on heart health and allergies and the pilot program with the Philadelphia Healthcare System on home delivery to patients just getting released from the hospital. We announced an agreement with Multi-care Health System for more in-store clinics, this time in the Tacoma, Washington area, and we held a very successful health and beauty expo in Charlotte, North Carolina, a new market for us, where thousands of people lined up for two days for free health screenings. Our file by and acquisition program returned record results including a completion of the purchase of the Farm stores in Ohio. We are on track to meet our aggressive goal for the year.

Earlier in the quarter we also hired a new Vice President with extensive internet marketing experience to focus on eCommerce initiatives for our Company, especially in the pharmacy. In the front end, same-store sales increased 1.7%, especially benefiting from strong category gains in OTC, which included the positive impact of the Zyrtec switch and in consumables and vitamins. We saw significant increases in private brand sales in these core drug store categories, as pride conscience customers increasingly look for value. Our exclusive GNC vitamin departments again delivered strong results, and we now have more than 1600 of them, including 366 that have been added to the acquired stores. Seasonal sales were weak due to colder weather than usual, but started to improve significantly as the weather warmed up in June. Photos negative contribution increased, as we began transitioning from Kodak to upgraded state-of-the-art Fuji Film technology products and services in our photo department. We expect the transition which will be fully completed in July, to help reverse the downward trend in photo in the second half of the year.

Cosmetics were negatively impacted by a reset of the cosmetics department in all of our stores, which is also set to be completed in July. The good news is that about 50% of the stores are done now and we are already seeing a lift in sales. Lower sales in these three high margin categories negatively impacted front end margin rate, as did grand opening advertising for the converted stores, but higher promotional activities chain light had the biggest effect. As I said at the start our forward promotion plan gives us a better balance between markdowns and margins, and as a result, the negative impact lessened at the end of the quarter in May and as categories like photo cosmetics and seasonal strengthen in contribution, we expect front end margin to improve in the second quarter and the rest of the year.

Salaries and benefit expenses were higher this quarter because of a full year impact from last year's minimum wage increase, higher pharmacist rates, and the fact that our mix continues to change to more generics. More generics mean lower sales, negatively impacting SG&A rate, but deliver higher margins. Distribution costs were negatively impacted by higher fuel costs, but we continue to see the benefit from our spend and efficiency programs in other areas of the Company. We also made progress on our end-to-end supply chain initiatives. We are evaluating all facets of our supply chain as we look to responsibly reduce inventory, improve turns and rationalize the distribution network after acquiring six new distribution centers.

Going forward, we are focused on improving profitable sales in growing prescription count, with special emphasis on the acquired stores. That includes continuing to improve customer satisfaction and building on our health and wellness products and services. Our goal this year is to expand Living More and capitalize on the success of that program by developing additional loyalty programs that respond to the unique needs of individual customer segments. In the pharmacy, we'll continue targeted script growth promotions like fill up and fuel up, which rewards a patient with a $30 gift and a chance to win a year's worth of free gas for transferring a prescription. You may have heard of this promotion. We launched it in early June and it's received a lot of publicity for being an unusual one in the drug store sector. It runs until the end of January, and is being very well received as I said. Outperforming our normal transfer incentives in the first week out there.

Also being well received by patients is the new Rite Aid Rx savings card, which provides significant savings on more than 400 generic medications and savings on more than 10,000 prescription drugs overall. We launched the card in Michigan June 1 and will expand the program to other parts of the country later this Summer. Unlike some other prescription savings cards that charge an enrollment fee, our card is free to anyone who fills out an application. We designed it to benefit patients with no or limited prescription insurance, and for seniors stuck in the Medicare Part D doughnut hole, but it's available to anyone. With the card, a 30 day supply of more than 400 generic prescriptions is only $8.99 and a 90 day supply only $15.99. Patients also get a 20% discount on most other generics and most brand prescriptions, and unlike generic programs at mass stores, you also get 10% savings on more than 3200 Rite Aid brand products every day, including more than 1500 over-the-counter medications. We've already signed up thousands of patients and it's only been available for three weeks and in only one State.

We expect our plans to increase compliance efforts, expand the form of Brooks Eckerds courtesy resale program chainwide, and train pharmacists at the acquired stores to give immunizations as well as continuing our aggressive prescription follow by program, will also attract new pharmacy customers to our stores. We believe as we complete the cosmetic resets, rollout the new Fuji Photo Solutions program, take advantage of improved weather and keep our operational team focused on execution and improving customer satisfaction in the stores, we will strengthen front end sales too. While we expect the business environment to remain challenging, we believe that completing the minor remodels in the acquired stores, sales turning positive in the acquired stores in the third quarter, and new and expanded pharmacy and front end initiatives I discussed, will contribute to strong results in the second half of our fiscal year.

I'll now turn it over to Kevin.

Thanks, Mary. As I review our results, keep in mind the following two items to assist in the comparison. First, this year's first quarter included the result of the Brooks Eckerds acquisition and integration-related activities. Last year's first quarter did not include Brooks Eckerds results, and second, we have treated the exit of the Las Vegas market as discontinued operations with its own standalone line at the bottom of the operating statement. Las Vegas results have been excluded from the other lines in the operating statement in this year's quarter and last year's quarter.

So let's begin and talk through the operating statement which was attached to the press release. Revenues for this quarter were $6.61 billion compared to $4.43 billion last year, an increase of $2.2 billion or 49.3% increase. The increase was driven primarily by the acquired stores. There was also positive contribution from the 1.5% increase in same-store sales of core Rite Aid stores that Mary described. The acquired stores are not included in the same-store sales calculation, but will be included starting in June, 2008. We opened 11 new and relocated stores in the quarter and acquired eight stores in the quarter. We also closed or sold 68 stores in the quarter. The majority of which were related to combining acquired stores in close proximity to other stores. Front end same-store sales, which excluded the acquired stores, increased 1.7%. Sales are growing, but there was a higher percent of promotion sales in this year's first quarter when compared to last year's first quarter. Also, the weather has not been our friend, as Mary described, and the gross margin rate on weather related sales were missed.

The Brooks Eckerds same-store sales as I said will be included in the total same-store sales beginning with the June sales report, which is on which is on July that announcement, we will of course disclose the total Company same-store sales but we will also disclose core Rite Aid and core Brooks Eckerds separately. That visibility is important, but what is more important is the trend. As Mary said, the Brooks Eckerds front end sales were negative during the quarter, but their sales trend continues to improve. The Brooks Eckerds front end same-store sales going back a couple of quarters were as follows: third quarter fiscal 2008 were a negative 13.7%, including the removal of the non- go forward inventory, the retrofitting of the planograms, and the minor remodels. The fourth quarter of fiscal 2008 was a negative 10%, including a weaker cough, cold, and flu season, commencement of the minor remodels all of which were partially offset by the Zyrtec switch that Mary described. And first quarter fiscal 2009 was a negative 7.6%, including the minor remodels, the systems conversions, the photo and cosmetic disruptions, all of which were partially offset by the Zyrtec switch. So the quarterly progression of a negative 13.7 to 10% to 7.6% validates the progress.

Pharmacy same-store sales, which excluded the acquired stores, increased 1.4%. New generics had an approximate 366 negative basis points impact on pharmacy same-store sales during the quarter. The increase in pharmacy same-store sales was due to a 0.2% increase in the number of prescriptions, mix changes, and inflation. Similar to the Brooks Eckerds stores front end same-store sales, the acquired stores' pharmacy same-store sales were also negative during the quarter but the sales trend continues to improve. More specifically, the third quarter fiscal 2008 pharmacy same-store sales were a negative 4.7%. The fourth quarter fiscal 2008 pharmacy same-store sales were a negative 6%, including a higher mix of generics, the pharmacy systems conversions, a weaker cough, cold, and flu season, and one month of the Zyrtec switch.

The first quarter fiscal 2009 pharmacy same-store sales for the acquired stores were a negative 5.2%, including increasing generic mix again, the final pharmacy systems conversion, and three months of the Zyrtec switch. So the quarterly progression of of a negative 4.7% to 6% to 5.2% after considering the factors I described shows the progress we are making. The progress in pharmacy is different than the progress in front end, because of the nature of the customer and their decision where to shop. Overall, we have seen a slower rate of growth in prescriptions, as has the rest of the retail drug store industry. This is due to a lot of lot of different factors, to name a few, slower growth in Medicare Part D program and prescription drugs switching to over-the-counter medicine.

In the first quarter, Medicare Part D sales continued to grow, and represented approximately 16% of pharmacy sales. Our mix of generic prescriptions continued to increase during the quarter, all generic prescriptions were 67.7% of total prescriptions, which was over 357 basis points higher than last year's first quarter. We expect generics and Medicare Part D to continue to become larger parts of our pharmacy business. Medicaid sales represented approximately 9.5% of pharmacy sales during our first quarter. Gross of profit was $1.81 billion or 27.34% of revenues for this quarter, versus $1.22 billion or 27.44% of revenues for last year. Gross profit dollars increased primarily due to the sales increase in spite of a lower gross margin rate.

The current quarter included a non-cash LIFO charge of $15.1 million versus a $9.3 million charge in last year's first quarter. The increase in the LIFO charge in the current fiscal year's quarter was due primarily to higher inventory levels than last year due to the acquired stores and our estimating product cost inflation. Excluding LIFO, this quarter's FIFO gross margin was 27.57% of revenues, compared to 27.65% of revenues last year, a decrease of 8 basis points. In general, the decrease is primarily the net result of a lower front end gross margin rate and an increase in product handling expense and distribution expense as a percent of revenues, mostly offset by an increase in the gross margin rate for pharmacy.

Pharmacy gross margin rate was 108 basis points better. Positively impacting the pharmacy gross margin rate were first, the increase in the generic sales mix, and that increase came from new generics as well as dispensing more of older generics. Second, the generic purchasing synergies related to the acquisition that lowered the cost of product. These positive factors were partially offset by continued reimbursement rate pressures. The front end gross margin rate was 75 basis points lower, although we had strong vendor support for our promotions, we were more promotional in order to meet competitive offerings and to support the grand reopenings of acquired stores' minor remodels. Product handling and distribution expenses as a percent of revenues for the current quarter were 15 basis points more than the prior year's first quarter. This was due primarily to an increase in the cost of fuel and lower productivity of the acquired distribution centers.

Selling, general, and administrative expenses for the quarter increased as a percent of revenues by 108.4 basis points compared to the prior year. 47 basis points of the increase was due to $44.5 million of acquisition related expenses in the current quarter, whereas the prior year's quarter only had $11.2 million. This year's first quarter also had a 43 basis point increase in occupancy expense, primarily due to our new and relocated store openings, and a 64 basis point increase in depreciation and amortization due to the acquisition, the prescription file purchases, and the new and relocated store program. After considering these items, SG&A as a percentage of revenue between the quarters increased 30 basis points, which was due primarily to increases in wage and benefit expense, partially offset by expense reductions in other areas. We have initiated new cost reduction initiatives, but we will not see the results of those until later in the year.

Adjusted EBITDA for the current first quarter was $236.4 million, or 3.6% of revenues, an increase of $43.6 million from the prior year. The increase was primarily due to the increase in revenue and an increase in pharmacy gross margin rate. Partially offsetting these positive factors was the front end gross margin rate decrease along with the increase in wage and benefit expenses relative to revenues. The schedule attached to our press release reconciles our net loss to our adjusted EBITDA.

Turning to the cash flow statement which was also attached to the press release, net cash used in operations was $105.3 million this quarter versus cash provided by operations of $186.3 million in last year's first quarter. The change from a source of cash to a use of cash was primarily due to a temporary increase in working capital and an increase in integration expense. The timing varies throughout the year for accounts receivable remittances, inventory receipts and vendor payments. We expect the net change in working capital to be a net source of cash for the full year, primarily coming from a decrease in inventory, albeit later in the year. Also remember, integration expenses go away by the end of the year. An increase in cash interest expense as I said also contributed to the net cash used in operations. The increase in adjusted EBITDA partially offset these negative factors.

Net cash used in investing activities for this quarter were $93.8 million versus $1.4 billion for last year's first quarter. Last year's $1.4 billion included $1.2 billion we placed in escrow in anticipation of closing on the Brooks Eckerds acquisition at the very beginning of the second quarter on June 4, 2007. Setting that aside, the cash used in investing activities for the current quarter was $27 million less than the previous year's first quarter. The current quarter had a higher level of capital expenditures partially offset by our higher level of sale and lease back proceeds. For the quarter, we spent 149.9 million for property, plant and equipment and $36.1 million for prescription file purchases for a total of $186 million of capital expenditures in the quarter.

During the quarter, we opened five new stores, relocated six stores, acquired eight stores, and remodeled 39 stores. We also completed the acquired store systems conversions, combined 40 stores and completed 557 minor remodels. The remaining integration activities are the minor remodels which are expected to be completed by October, the shutting down of the old headquarters which is expected to be completed by August, and complete the combination of eight stores. We had sale and lease back proceeds of $99 million in the current fiscal quarter, $88 million of it is shown in the investing section of the cash flow statement and $11 million of it is shown in the financing section. Net cash provided by financing activities for this quarter was $195.6 million versus $1.2 billion for last year's first quarter. Again, last year's $1.2 billion included the $1.2 billion of bonds we issued in anticipation of closing on the Brooks Eckerds acquisition at the beginning of the second quarter on June 4. Setting that aside, the current quarter's cash provided by financing activities was primarily due to additional borrowings under the revolver to fund the negative cash flow, the cash from the issuance of the convertible notes approximated the cash out for the retirement of the 6 1/8 note.

Now let's discuss debt and liquidity. Total debt at the end of the first quarter increased $195 million since the beginning of the fiscal year and advances from the sale of accounts receivable increased $70 million. The combination of the balances at the end of the first quarter increased $265 million since the beginning of the fiscal year. The increase was due primarily to the temporary increase in working capital I described earlier. Current liquidity has already increased since quarter end due to the reversal of some of these temporary differences in working capital. With the completion of our announced refinancing, availability of the revolver would have been 530 million at the end of the first quarter on a pro forma basis. At the end of the first quarter we had $1.035 billion outstanding under the 1.75 billion senior secured revolving Credit Facility. We also had outstanding letters of credit of $185.3 million at the end of the quarter. At the end of the current first quarter we had utilized the securitization agreements for $505 million. The eligible receivables will continue to grow and we expect to use the securitization agreements for additional liquidity. The sale and lease back markets continue to be open to us and we were working on additional transactions.

As previously announced during the quarter, we issued the 8.5% convertible notes and redeemed the 6 1/8 notes that were going to mature in December 2008. We have no significant required maturities in the foreseeable future. Our required maturities currently are less than $20 million for the next 23 months. Once we complete the refinancing, the only significant required maturity from now until August of of 2013 is the revolver and the 145 million term loan when the time comes, we expect to be able to refinance them with similar first lien secured debt because of the amount and quality of the collateral.

Finally, let's discuss guidance. Our guidance is based on the following assumptions and outlook: successful completion of the acquired stores integration, including minor remodels completed by October, store sales growth turning positive starting in the third quarter, which is starting September, realization of our $300 million of cost savings, integration expenses of $110 million. Our guidance is also based on the assumption that a tough economy and aggressive competition will continue. Competitors are being more promotional and we must respond. There is a continuation of slower prescription growth assumed, fewer new generics than fiscal 2008 are expected, but more total generic prescriptions for the year are expected. Pharmacy reimbursement pressures are expected to continue. We will continue our expense control and see some traction from additional expense reductions, and we are planning on opening 85 new and relocated stores during the year.

One more comment about guidance before we get into the details. We have said that normally our first and fourth quarters are the strongest because of the number of events or holidays and in the case of the fourth quarter, the cough, cold and flu season. We've also said that fiscal 2009's results will be negatively affected by the acquired stores' negative sales growth in the first half of the year. Further, we have said we expect the acquired stores sales growth to turn positive in the last half of the year. I mentioned these factors because many of you make quarterly estimates, although we do not provide quarterly guidance. We hope that investors understand that when one considers both the seasonality of our business and the expected sales trends of the acquired stores turning positive later in the year, combined with good expense control, that our operating results for the year are expected to be weighted accordingly. We are estimating fiscal 2009 sales to be in the range of $26.7 billion to $27.2 billion. Same-store sales guidance, which includes the Brooks Eckerds stores starting June 2008, is 2% to 4%. We are estimating fiscal 2009 adjusted EBITDA to be in the range of $1.0 billion to $1.1 billion. Our fourth quarter is expected to be our strongest quarter.

We are estimating our operating results for fiscal 2009 to be a net loss between $260 million to $375 million or a loss between $0.34 to $0.48 per diluted share. The net loss estimates include acquisition related integration expenses of 110 million and the full year effect of higher interest expense and depreciation expense. Attached to our press release is a table that reconciles our adjusted EBITDA guidance to our guidance for net loss. Capital expenditures before sale lease back proceeds which includes the continuing new and relocated store program and integration rated capital expenditures are estimated to be $600 million for fiscal 2009. We are also expecting sale lease back proceeds to be $150 million. We expect fiscal 2009 investment and working capital to be lower than what it is today and along with the results of operations, we expect fiscal 2009 operating cash flows to exceed our capital expenditures net of sale lease backs.

Our objective is to improve our leverage ratio and get back to the level it was just before the Brooks Eckerds acquisition. That means our goal for the leverage ratio is 4.5 times and we expect to get there by fiscal 2011 or earlier. Keep in mind our best return on capital is to invest in the store base, so our plans are not necessarily to reduce the borrowings under the revolver by a significant amount, but to keep things in balance. This concludes our prepared remarks. Darla, we're ready to take questions.

Thank you. (OPERATOR INSTRUCTIONS). Your first question comes from the line of Meredith Adler with Lehman Brothers.

Good morning, everybody. A couple of questions. Could you talk a little bit about the promotional programs and you talked about needing to balance it better and you've already started to do that I think in the last quarter or last month of the first quarter but could you talk a little bit about what you needed to change or did you go astray in some way?

Meredith, I'll do my best on this one. Really, we had in light of what was going on with the customer and the competition, we had upped the overall promotional effort and that included what we did for all stores as well as what we were doing for them, the kicking off of the acquired stores once they completed their remodels, but we were probably putting too many, what I'd call, hot prices throughout the ad and instead have gone back to really making sure that our offers are extraordinarily compelling in terms of what's on front and back page so that we really balance what needs to happen relative to the category sales, based on really understanding what is important to the customer.

So when you look at May sales, I know you've reported this but did you see as you made these changes to your promotions did it have a negative impact on sales, because obviously there's this trade off between sales and front end versus profit.

No. We were pleased with really the fact that our sales results still stayed up there relative to our promotion spend, and you really have to watch it during this kind of economy because customers do tend to buy more on sale anyway but you want to use your promotional spend to help create traffic and both customer count was up as well as market basket and that's kind of what we want out of it. That means we're getting other than just promotional sales and the mix.

Great. And then maybe you could just talk about whether the first quarter met your expectations maybe if you put aside the promotional issue, were there any particular surprises certainly compared to what you'd expected as we were going into the quarter?

I think probably the biggest disappointment would have been the fact of the gross margin impact on the front end. We were really pleased with the pharmacy gross margin rate improvement, really pleased that we kept pharmacy sales positive, created a lot of new initiatives to move us forward, Rob and his team have really worked very hard at really using customer insights to build some great programs as we go forward and I think that's going to show up for all stores as well as for our acquired stores in the back half of the year.

And I would echo that from, if you will, the capital employed perspective, also that we met our expectations in CapEx and sale lease back and like I said these temporary differences in working capital, we feel like we're getting where we need to go.

Would it be fair to assume that we would know that comps for the acquired stores in June will be negative because you won't have cycled this aggressive promotion and it sounds like you could still be in that place in July as well, because you didn't stop it until mid to late July. Is that fair to say?

Yeah, our common ads started late in July and up until then we were running the ads that had already been put together by the former Brooks Eckerds advertising department so we're still really going up against them until then and then really when we went to the common ad, remember we had just barely started the merchandise resets, cutting in items, etc, So it really limited what we were able to advertise during that first time period, so once we sort of posed that too, we're now able to advertise a full assortment and as you move into that August time period on, you're going to begin seeing impact of just a more complete advertising assortment.

And my final question is about the stores that have been grand reopening for the acquired stores. Do you, I mean obviously, grand reopenings can be expensive and you should get some lift but do you have anything that says to you that everything you're doing is being understood by the customer and being responded to positively?

When we run the grand opening ads and I think we've gotten progressively stronger at the program we have out there because we do a series of these and each wave has gotten progressively better but what we are finding is customers are absolutely responding to the grand opening ads but we're not retaining as much of what we build in customer account during that time period so I think you're still getting a fair amount of the old cherry picker customer from the old days in there and you've got to be pretty hot on grand opening ads because you're trying to get testing from customers but as we talked about, our sales continue to improve and on the front end we've really been able to sort of cut that negative trend in half and I think that means we're beginning to win more and more customers that understand and appreciate the value that we offer with what we're doing.

And Meredith I'd like to add that as of the end of the quarter, there were only about 285 stores that had, that had completed their grand reopening marketing campaign so in other words that takes about four weeks so only about 285 stores had five weeks or more after that, so it's still we're seeing good results and the earlier stores, I think as Mary said were positive, and so we just need a little more time.

Okay, thank you very much.

Thanks, Meredith.

Your next question comes from the line of Ed Kelly with Credit Suisse.

Good morning.

Good morning.

I'm trying to get more comfort on your ability to drive positive comps at Brooks Eckerds in the back half of the year. Can you maybe just help us understand how much of the decline we saw in the back half of last year? Was it related to what you would call disruptions associated with the integration as opposed to just a continuation of the negative trend that you inherited at the stores?

Ed, a tremendous amount was the disruption. If you think through what went on in the front end of the store, we went through virtually all the planogram changes in that September through December time period because we tried to stop it during the holiday season to give customers and Associates a break during that time period, but I think Kevin mentioned in his remarks that we were down almost 14% in that quarter and a lot of it was inventory churn, in and out disruption from the remodel and if you also think about just the sheer number of systems conversions that had took place through that time period on into the first quarter, because you remember the first quarter, we ramped up the number of stores that we were doing per week as we had improved the overall conversion processes and so we were doing like 66 conversions a week, and no matter how good you are at it and how much support you give you're going to have some disruption and so getting those behind us was really important on the pharmacy side because pharmacy is where you get more impacted by systems change. So it's another reason why as we finished up all of those at the end of May you think about getting further and further away from when those conversions took place and we are using some of the integration specialists that we had out there to help stores during the conversions to really continue to work with any store that has additional work flow issues or any difficulties with the system, so we really feel we'll get past any issues there pretty rapidly.

So it sounds like the stores that are remodeled and grand reopened will naturally have higher sales I guess in the back half of the year relative to where they were last year just because you cycled those issues. Is that how we should think about that?

Absolutely. If you think about what happened to our sales during that time period and by the time we hit that Third Quarter, we're virtually done with everything from conversion standpoint and able to also run our full Marketing program in terms of grand openings in Markets too, and I think that's going to make a tremendous difference, and I think that we are very reasonable too in what we've built as our sales expectations month to month on both the front end and the pharmacy and where we expect to be by the time we finished this year.

All right, and what's the schedule for grand reopenings kind of going forward from here? I guess I'm a little surprised that only 285 stores have been grand reopened but I don't know how that is relative to your initial expectation.

Well, we're on track, Ed, because what's happening is that the minor remodel, if you will, process, is is going to be done by October and we're at a ramp up right now and what's happening is each week or so, there's 100 or more stores that are in what we call the grand reopening waves.

So that's really just beginning to accelerate right now is what you're saying?

Yes, and see as we also get a market complete then we can go back into that market and do the sort of overall grand reopening which lets you make a bigger splash with the customer where when you're still doing a smaller number of stores at a time you're a little bit more limited in how you zone an ad for a grand opening.

Okay, and how aggressive have your competitors been in your Brooks Eckerds Markets? I mean, are there people out there looking to sort of take advantage of your disruption?

Oh, absolutely. I mean, I think even up until today, they still have banners out on some of their stores welcoming our customers, so I mean that just tells us how much or how important it is for us to deliver a great experience for customers and keep up our marketing efforts and get really the stores delivering what they need to deliver but they aren't shy about coming in and trying to recruit our people either and so we've had a full court press on really helping our pharmacists feel supported and helping our store teams feel supported.

Okay. And one last question for you, I know you get asked this a lot but what's the rationale long term for keeping the West Coast?

Well the West Coast is a very strong contributor to our overall results. It's also a strong contributor to what we called scale, our ability to really have greater capacity to buy better and do what we do and leverage expenses. We have strong market shares out there. We've invested a lot of dollars out there, and frankly, if you hold it off unless you got some extraordinary price for it, you you really wouldn't be able to reinvest it as to really offset what you'd lose from our selling.

Even under the most optimistic net proceeds assumptions, if you will, the leverage ratio would not go down much and so with the combination of not really being significantly de levered and the loss of scale and the exit of a pretty nice growth market, it just doesn't make business sense. Okay, thank you.

Thanks, Ed.

The next question comes from the line of Lisa Gill with JPMorgan.

Thank you and good morning.

Hi, Lisa.

How are you? Kevin, I was wondering if maybe I could start with just some questions around the guidance. It looks like there was a change to G & A as well as the expectation around the cost for store closing so have your expectations as far as store closing changed and then secondly, Mary, I know you've talked a lot about increasing same-store sales and some of the things you'll do but specifically I think you mentioned there will be new pharmacy and front end initiatives. Can you just give us a little bit more color as to what those will be?

Lisa you asked three questions, that's cheating, but you -- That's okay, let me tackle the first one. In the first quarter, we finalized a purchase price accounting allocation and obviously, that allowed us to get a real firm handle on what our fixed assets were as well as the intangibles and there for we trued up the depreciation amortization estimate. As far as the closed stores change, what we're really doing is we are getting better information and intelligence with regards to which is a continuous process but we really have it sort of like going on at the very end of our planning process for forward year and in the first part of a year which stores we think just there are no longer store improvement opportunities and/or a final assessment of the real estate market that says it's best cash flow wise to close the stores, and therefore we do. Now, remember, that charge is non-cash flow, and generally speaking we will not do something that's going to hurt cash flow, so I think in our last quarter call, we said that the rent cash out flow for closed stores for the year was going to be about $65 million, and even though that charge has gone up, that cash out flow for rent has not changed.

Okay, great.

And then the third question, I forgot. What was it? Pharmacy and front end initiatives, I tried to talk about a number of them probably more broadly than you might like in my comments because you don't want to give away too many trade secrets publicly, but we're really doing a lot around for all of our stores say that have potential to sell GNC to get that into more stores throughout the year because that expands our presence in health and wellness and again, that customer carries higher market basket, higher margin, and that's a piece of it. We're doing a lot around pharmacy compliance and also using our data to really better understand our pharmacy customers and be able to really target our offers to them more.

I mentioned in my comments that we've hired a VP in the eCommerce area as part of Rob and Mark's team to really be able to help drive initiatives in that area and got a lot of different pilots going on right now that we feel really positive about and I also mentioned that as we move through next month, month and a half, we finish up the cosmetic reset and it's a lot more than a reset. We really totally redid that cosmetic department in terms of adjacency, space for lines and that's a massive undertaking across the chain, the whole Fuji photo film and services rollout, which will also complete in July which gives us really state-of-the-art capability in that area which has been a real drag on our sales for the last the few years, so we're expecting real positive contribution out of that, and I think I mentioned also in my comments just the uptick on seasonal once we got a little cooperation from the weather that makes a difference too, and I think last year we had fairly weak seasonal sales throughout most of the year and so even for not just acquired stores but core stores we've got lots of opportunities to improve results there. I guess other important area for pharmacy and it's not sales initiatives so much that it is a productivity improvement initiative is just our push on file buys and the first quarter was highly successful. We have a very aggressive plan with one of our stretch goals for this year and that's a piece that we really protected in our overall CapEx plan too, and feel really good about what that's going to contribute by the time we move through another quarter or so here.

Okay, great. Well thanks for letting me sneak in that third one, Kevin.

That's okay. You can even have a fourth one if you'd like.

Well, just to follow-up on Ed's comments, just about the progression, I think a lot of us are just looking at this big ramp in the back half of the year and I think you talked a lot about the opportunities and how you'll try to get there, but Mary, I mean if the economy got substantially worse do you feel like you have fully accounted for that as far as how you're looking at the back half versus the first half?

Yeah. We were very, I think, very prudent as we approached how we buildout what happens month to month and as we move through the year, there can always be surprises in the economy. We've seen what's happened with fuel costs and all of that and that's one of the things we can't control a lot, but we've just even coming up with initiatives on what we've done with our card program in Michigan, where they're more economically hit, we're going to keep coming up with ideas and ways to if the economy worsens to find ways to bring value to customers and but we'll at the same time, we'll watch what we spend. We'll watch inventory levels. We'll watch anything that impacts obviously our financial strength and we'll make proper decisions. Kevin mentioned that we've got sort of a full court press on expenses, and we're looking at everything from process improvement in functions across the Company corporately in the distribution centers, we're looking at work flow, we've got I think a lot of opportunities to help us there.

And I would like to add to that too, Lisa, that we've been I think pretty realistic with regards to the reimbursement rate environment out there and the outlooks for it and stirring in the whatever you want to call it, the continuation of the pressure that even some increases in light of the developments that we've seen and expect.

And I think we get a little reprieve with AMP looks like it's going to be pushed out for at least a year.

Yeah, that's it.

Very good news. Thanks again for all the comments. I appreciate it.

Thanks, Lisa.

Your next question comes from the line of Mark Wiltamuth with Morgan Stanley.

Hi, good morning.

Good morning.

You had a lot of store closures in the quarter. I'm just curious how many more store closings you have to go and if you could let us know how many of the existing Rite Aids are benefiting from closures of Brooks Eckerds nearby?

Well, Mark, the 68 in the quarter were kind of split 50/50 in terms of remember we have pairs of Brooks Eckerds and Rite Aid stores that we're combining, and there's less than 10 of those left for the year, but nonetheless, there will be some of those closed stores going into the future. Also, it's a continuous process for us and as I mentioned earlier that's why we adjusted our closed store expense outlook for the year but it's not about the number of stores we look at as much as it is about the impact on cash flow. I know that for modeling purposes though I guess it's helpful to have the number of stores, so I'm trying to think of a way to help you in terms of the number of stores looking forward, it's just never that precise of a measure but my guess is that besides these 10 or so of stores that we're still going to combine, we're probably looking at, another anywhere from 25-40 stores.

Yeah, so less than in the First Quarter.

Yes.

And any way to quantify what that lift to the comp is for the core Rite Aid stores because I'd imagine those are in the comps.

Well, if you will, the Brooks Eckerds and the Rite Aid stores that are combined are only like 150 pairs of stores and we're all said and done and that's on a store base of 5,000, that's just not that material. It is is a lift as you point out but it's really not that significant and as far as the other stores that are closed because they're under performing, most of that business is lost and not pulled into the other so it's really not, it's even less meaningful.

Okay. And just to kind of step back and look at what's going on with the broader prescription trends out there, are you seeing changes in compliance rates with consumers, any signs of economizing on prescription usage and is there any difference between your East Coast business and West Coast business in those trends?

Well, I think we are all aware that IMS data out there definitely shows that there's slower prescription growth this year and we know that a decrease in Medicare scripts and switches to OTC can impact that too, but in as far as what customers are doing in their hopes we can only speculate, but just the fact that this slowdown has occurred and the customer being very value conscience, you have to I think have programs in place like we do around our compliance programs to help remind patients and be actively involved in getting them to do their refills and we think that is having some positive effect. I don't think that there's been any specific national difference or West Coast versus East Coast. We do know that where the economy is harder hit like the Michigan area that really to really help sales there and help the customer there because of the economic situation that was the market where we really put our original pilot for our Rx savings card.

Okay. And just to get back to the acquired stores, I know you did pilot stores really to be your lead indicators on how the acquired stores will do. Those stores have been remodeled for some time now and some of them have gone through the grand reopenings. How is that group doing relative to the rest of the acquired stores?

They are positive on both the front end and the pharmacy now.

Okay. Thank you very much.

Your next question comes from the line of Karen Eltrich with Goldman Sachs.

Thank you. You guys have mentioned with this refinancing that there were external factors in this credit environment that kind of drove you to increase your flexibility. Are you referring to your vendors and if so, what level of liquidity do you need to maintain to keep them comfortable?

We are are not referring to our vendors, Karen. I think it's more of a external factors like a prolonged economic downturn and continued unsettled capital markets, and so just when you stir into that just a thought process of being cautious, that's what we were referring to and let me just specifically as far as vendors are concerned, myself and our Treasurer field almost all the calls with regards to credit Managers and of our vendors as well as their leadership and the number of calls that we receive as well as the tone and the discussions have not changed.

No, we have actually I think some of the best vendor relationships and partnerships in the industry and we worked is very hard on that over the past number of years and our team continues to be very focused on those relationships.

Great. And can you give us what was actual availability under the revolver and can you also comment on what are your cash flow projections for this year? You mentioned you expect to be positive in the fourth quarter but what about for the full year?

Well, when I said, by the end of the fourth quarter, in other words for the full year, Karen, we will have operating cash flows exceed the Capital Expenditures less the proceeds from the sale leasebacks. So maybe I didn't describe it accurately enough but that is the full year picture of things.

Great.

So and as far as the availability of the revolver is concerned what we said is it's a Bill, 035 at the end of the quarter and letters of credit are 185 million, so that's that 530, but the in denture restrictions limit that 530 some more.

What did it limit it to?

I think that it's somewhere around 190 million limitation , so that under the indentures, it's like 240 availability but liked to, my working capital temporary changes have gone down and I have more availability and it's even more, but

And again, with timing on different parts of your working capital components you can have fluctuations so that's another reason to really have a question and that's why we're really out there looking at the refinancing.

Perfect. Thank you so much.

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

Hi. One housekeeping item. Can you give us what rent expense is for the quarter or if not if you could give the expected for the year?

It hasn't changed the estimate for the year, Carla, and let's go on to another question while I dig up the number. I forget it off the top of my head.

Okay, that's fine. And then on the gas promotion that you mentioned that's been so successful, are you starting to see any of your competitors match that promotion or anyone do anything as in response?

No, we haven't seen it yet. I think everyone is doing some kind of transfer activity or some type of event to try to get again customers to switch, and but I think ours was a little more innovative and like I said, we only have a little bit of experience with it so is far but customer response has been really good up until now.

Rent expense, Carla for the year, as we said last quarter is estimated to be $955 million.

Okay. Great. And then you mentioned this a little bit in Karen's questions but on the cost payable front, the days payable was a little bit lower. Is that a timing issue or should we expect that to be about the same or are you just paying sooner?

Well, we don't do any window dressing, and all you have to do is have just some kind of inventory -- I'm sorry, is there somebody --

No, shouldn't be on my line.

Can you hear us okay?

I can hear you fine.

Okay, so in terms of the payables, the increase is down just simply because of the timing of those inventory receipts, and if you recall we are working our inventory down in terms of some of the last residuals of the non-going forward inventory and you you have what I would call you still working through some of your, the offsetting debit in payables for the vendors crediting for that returned inventory and that's just as inventory returns and as we progress through the year, that just timing is temporary.

Okay, great. Thanks.

There's been no changes in terms or business practices.

Okay, great. Thank you.

The next question comes from the line of Neil Currie with UBS.

Thank you, good morning. You mentioned I think very early on in your comments about OTC pricing. I wonder whether some of the pricing changes were in response to what Wal-Mart has been doing with private label OTC pricing and just generally what you think about pricing in that quite important segment?

In terms of pricing, I don't, I'm not sure I recollect exactly what comment, Neil, you're referring to. I think I did mention we have a high percentage of private brand in OTC, and again, our OTC business has been very robust and I think that what we've done around private brand to promote it both in our ads and in store has really shown value to customers, so that's probably been the most positive there, but in terms of just overall pricing, I think we're very aware of staying competitively priced, in lots of categories have been cost increases that have come through and for the most part you're able to pass those along but you still have to watch them. You've had other things that like outbound fuel costs that we have to incur, that we haven't built in really into our pricing because again, the customer is very value conscious, but so you have to watch what you're doing there.

Thank you. Just another question is that other drug store retailers have also seen some SG&A issues as well, and finding it difficult to get leveraged because gross margin dollars have been under pressure due to the exclusivity periods coming off on recent generic introductions and they're going down. Is that something that you've been noticing as well and what do you expect in the next sort of six to eight months as new generics start to come on stream. Do you think that will improve?

Well actually, our gross margin rates for pharmacy have been quite strong, and thinking about our GP per script and it's not only new generics, it's really what you're doing to continuously increase penetration with your whole book of generics, and we have a lot more opportunity because we had our acquired stores at a lower level of penetration and I think I've mentioned that we've been able to really get their penetration not pretty rapidly and yet they still lag our core stores in those same areas by two to three percentage points, so we'll keep pushing there too. I think we all know there can be sort of lulls in new generics but if you look out over the next few years, there's still a significant number of new generics coming out and we'll keep pushing on those too.

So you wouldn't call that an issue in the way that Walgreens has?

Not at this point, no.

Okay, thanks very much.

Your next question comes from the line of Bryan Hunt with Wachovia Capital Markets.

Thank you. Mary, I think you mentioned that you're going through further SG&A expense and distribution expense analysis. I was wondering if you could talk about one, when that would be completed and two, what you believe the magnitude of any potential cost savings could be?

Well let me talk just a little bit about distribution. Probably the first thing we've done relative to the acquired store distribution centers is sort of match up the right store with the right distribution center, whether it's one of the acquired ones or one of putting it against a core distribution center, so that was sort of of our wave one and then we hired an outside Company to work with us on the overall rationalization of the network itself, based on where our store density is today and where it would be expected to increase. That is in process right now and we would expect to begin working against that in the back half of this year too and just begin that process, so I'm not quite ready to put a number on it, but I think it could be very significant and even within the distribution centers, looking at additional productivity improvement, because I mentioned that the acquired stores distribution centers had a lower productivity than the core stores, and we are just finishing putting in our Pro Rep system for scheduling, which is going to help us get that productivity up so we expect improvement s there probably starting in a few months, and that will continuously get better, so there are all sorts of pieces to that improvement on that expense line.

We have a major program in the Company on indirect spend and we've been working on that now for I'd say about three quarters now, and we are all continuing to be very pleasantly surprised with what we're getting out of that, and we will beat what we put in as our original projection this year on savings across-the-board from the combined Company in that arena, and then we're also working on just process improvement and work flow improvement in terms of the store side of our expense spend too because we think that's an opportunity to both better use our labor investment out in the stores, deliver better customer service, and also be able to save some labor dollars. So we've got I think just a real high level focus on expense. You can't be in the retail today or in business today without that, and it becomes sort of your hedge against what might happen in the economy, so we're focused on it.

And then my next question is when you look at the stores, the acquired Brooks Eckerds stores that have either pilot or remodeled ones that have gone through the grand opening phase and you're seeing same-store sales increases, is it pharmacy or front end weighted and can you talk about the relative basket? Are you seeing basket sizes increase substantially or is it a customer count driven same-store sales growth? And that's it, thank you.

Well I mentioned the pilot stores themselves are positive on both the front end and the pharmacy and I'd say it's very sort of similar which I think I'm personally quite pleased with because sometimes you can get the improvement first on the say front end side but not on the pharmacy, so it's a good sign that they've turned positive on both. On the grand reopening piece of your question, just remember that Kevin said we've really only completed that in those 200 some stores and the big waves are just starting and within those grand opening stores, once they're through their wave of grand openings, it's mixed on what happens with their sales results, so again, it's really getting further away from the conversions, getting past those couple of factors that I mentioned are still with us from the old Brooks Eckerd ads that were running through that July time period, having our full program in there, so we would expect and being able to then go back into a market and really grand open that whole market once we finish these minor remodels, we would expect to see a lot stronger sales contribution and we believe we'll have great results out of these stores in the back half. And we'll take one more question, Operator?

Thank you. Your final question comes from the line of Emily Shanks with Lehman Brothers.

Good morning. Thank you for taking the question. If you could just help me out a little bit, I'm trying to understand what the temporary working capital changes are specific to the inventory. Is that just actual inventory that you're trying to move out as a result of the conversions or how should we think about that inventory?

You should think about it generally as just normal and just the timing of the receipt of it and I guess that's the best way to describe it.

Okay. So then that would explain why your payables, accounts payable leverage has ticked down then?

No. I mean, to some extent, they're somewhat unrelated. I know that when you model things you'd like to have a constant relationship between inventory level and payables but it just is not that neat and tidy and if you especially have a change in like your inventory, the increases whether it's coming from front end versus pharmacy, you can also have a significant change in accounts payable.

Okay. And then if I could just one final question. You you gave us the pro forma liquidity if the refinancing makes it through, thank you for that. Can you give us a sense of what the total debt incurrence is going to be on the first lien and a second lien basis if this entire thing goes through?

I guess the only thing I could tell you Emily that we will have more capacity for secured debt upon completion of our refinancing, but remember, we've said our overarching goal is to get our leverage ratio to that 4.5 times and keep things in balance with regards to operating cash flows and capital expenditures.

Okay, thank you.

Thank you, Emily. Thank you, operator, and thank you, everyone for being on the call today.

Thank you. This concludes today's Rite Aid first quarter fiscal 2009 conference call. You may now disconnect.