Rite Aid Corp (RAD) 2011 Q1 法說會逐字稿

Good morning. My name is Darla and I will be your conference operator today. At this time, I would like to welcome everyone to the Rite Aid first quarter fiscal 2011 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) I would now like to turn the call over to Matt Schroeder. Please go ahead, sir.

Thank you Darla and good morning, everyone. We welcome you to our first quarter conference call. On the call with me are Mary Sammons, our Chairman and Chief Executive Officer, John Standley, our President and Chief Operating Officer and Frank Vitrano, our Chief Financial and Chief Administrative Officer. On today's call, Mary will give an overview of our first quarter results, John will discuss our business, Frank will discuss the key financial highlights and fiscal 2011 outlook and then we will take questions.

As we mentioned in our release, we are providing slides related to the material we will be discussing today on our website, www.RiteAid.com under the Investor Relations information tab for conference calls. We will not be referring to them directly in our remarks but hope you will find them helpful as they summarize some of the key points made on the call. Before we start, I would like to remind you that today's conference call includes certain forward-looking statements. These forward-looking statements are made in the context of certain risks and uncertainties that can cause actual results to differ.

Also, we will be using a non-GAAP financial measure. The definition of the non-GAAP financial measure, along with the reconciliation to the related GAAP measure, are described in our press release. I would also encourage you to reference our SEC filings for more detail. With these remarks, I now would like to turn it over to Mary.

Thanks Matt, and good morning everyone. Thanks for joining us today as we review our results for the first quarter of fiscal 2011. As you can see from our release, our team did a good job of continuing to weather the economic storm that is impacting the sales of most retailers. By reducing costs and operating more efficiently, we more than offset a decline in sales and margins. We increased adjusted EBITDA as a percent of sales while at the same time improved customer satisfaction ratings on both the front-end and in the pharmacy.

Our liquidity is the strongest it has been in several years with more than $1.2 billion at quarter end. This enables us to continue to withstand an economy that doesn't appear to be headed for a solid recovery any time soon. At the same time, the strong liquidity position allows us to continue to invest in initiatives designed to grow our business. We made great progress on many of those initiatives in the first quarter.

And in a moment, John Standley will update you on what we've accomplished. But before I ask him to do so, I would like to say a few words about John, who later today becomes Rite Aid's new CEO. I asked John to return to Rite Aid almost two years ago because I believed he had the right blend of operational knowledge, hands-on management and financial orientation to help us navigate through this difficult recession and bring stability to our Company. He has led the charge in making us a more efficient operation in all areas of the Company and as a result, we are much stronger today than a year ago.

At the same time, he and his team have put in place multiple initiatives to improve our results as we continue to operate, as I have said before, in one of the toughest retail environments in recent history. It has been a smooth and easy transition especially since John and I had already worked closely together 12 years ago at Fred Meyer and then worked even more closely when we both came to Rite Aid in December of 1999 as part of a new executive management team. I look forward to continuing to working with him in my role as Chairman. Now I'd like to turn the call over to John. John?

Thank you Mary for those kind remarks. As today is Mary's last day as Rite Aid's CEO, on behalf of Rite Aid's almost 100,000 associates across the country, I would like to thank Mary for her many contributions to our Company the last ten and a half years. Without her, I don't think we would have a Company today. We are fortunate that she has agreed to stay on as Chairman of the Board so Rite Aid can benefit from her experience and counsel. And I look forward to continuing the strong working relationship we have enjoyed for so many years.

Turning to the quarterly results, we held our ground from an earnings perspective in a challenging economic environment. And we made significant progress with some of our key initiatives that we believe will provide us some sales momentum in the second half of the year. Before I give an update on the progress of our initiatives, I will mention a few key points about the quarterly results and Frank will go through the results in more detail in just a few minutes. We had positive front-end comps for the combined March, April months, but they were offset by May's decline. June month to-date sales, however, are improving from May results, that are still behind last year.

We had negative script count due to growth of 90 day scripts in the quarter which was about half of our decline. We had some impact from the maturation of the Rx savings card and we are cycling some H1N1 benefit in the prior year. The year-over-year decline in pharmacy margin as a percent of pharmacy sales was 97 basis points better than last quarter, which is a nice improvement. We saw significant reduction in adjusted EBITDA SG&A with a 35 basis point improvement as a percent of sales or $55 million compared to last year's first quarter. Our distribution expenses were 1.44% of sales, our best results in recent years. We earned adjusted EBITDA of $249.8 million, which was slightly better than last year. We had a FIFO inventory reduction of $88.7 million, versus last year's first quarter.

And as Mary mentioned, we had $1.2 billion of liquidity as of the end of the quarter and maybe most importantly, we launched our wellness+ card-based loyalty program nationwide on April 18. And we now have over 12 million members. All in all, it was a pretty good quarter although we are not satisfied with sales results. After testing in four pilot markets since October, we launched wellness+ nationwide on April 18. We already have, as I've mentioned, 12 million members enrolled as of last week. We are on track to meet or exceed our original goal of having 15 million to 20 million members enrolled by fiscal year end.

Last week, 37% of our chain wide front-end sales and 36% of our chain wide scripts were from wellness+ members. Which is impressive given that we launched the program just 12 weeks ago. Two weeks ago, we launched a key feature of wellness+ called +UPs. +UPs allow customers to plus up the value by earning valuable in-store credits which are delivered via register receipts when they purchase qualifying products. The credit can be used towards the purchase of front-end items on the next visit. +UPs are featured in our ad and are called out in store through special sale shelf tags.

We are seeing some good results from +UPs as they are driving some additional foot traffic to our stores. The information wellness+ is providing us has really validated our assumptions about the value of loyal customers. And our program is uniquely designed versus other retail programs to attract and retain loyal customers through tiered rewards with increasing levels of front-end discounts and health screening benefits based on the dollar amount of front-end purchases and number of scripts filled. We are also beginning to do targeted marketing based on the information that wellness+ provided us. Overall, we are very pleased with the results of wellness+ so far.

During the quarter in North Carolina, South Carolina and Georgia, we launched a 15-minute service guarantee, subject to certain conditions for pharmacy patients who would like to wait for their scripts. If we are unable to fill the script in 15 minutes, the customer is awarded a $5 gift card. This program has been well received by both patients and pharmacists and has helped improved the script count trend in these markets. We also began our immunization training this quarter. We expect to have over 7,000 immunizing pharmacists at over 3,000 stores ready for flu season and in addition to flu vaccine, we will provide all immunizations allowed by state regulation.

We continue to make significant improvement to our pharmacy patient services, particularly around patient communications. Automated courtesy refill notification, your prescription is ready, and will call reminders can now be received via voice, text or e-mail. For wellness+ customers, in addition to a 24 hour pharmacist available over the phone, we now have online chat with a pharmacist also available 24/7. In addition, we recently partnered with American Well to develop a real-time online medication therapy management. We will begin testing this service in a pilot market in the third quarter.

During the quarter, we began the rollout of our new private brand architecture. As a refresher, the new architecture includes the following brands -- Rite Aid Pharmacy for health products, Renewal for beauty, Pantry for food and certain consumables, Home for household goods, Tugaboos for baby and Simplify as our new price fighter brand. All of our existing private brand products, with a few exceptions, will be migrated over time to these new brands with new more contemporary packaging. This brand architecture, combined with strong promotional support, good price positioning and continued development of new items will help us grow private brand sales and meet the needs of today's consumer.

We converted 60 new items to this architecture during the quarter and expect to have 1,000 items converted by the end of the fiscal year, about 30% of private brand SKUs. During the quarter, private brand penetration increased to 15.4% from 14.9% last year. We continued to work on our segmentation initiatives which played a key role in our SG&A success in the quarter. We continued to develop and test our merchandising plan for low volume stores with 34 stores now merchandised with the new plan-o-gram. Projects simplification continues to improve our operating process so we can be more efficient and so that associate can spend more time focusing on customer service.

During the quarter, we implemented a number of initiatives designed to make our stores easier for our associates to operate, including improvements to our cash handling and reconciliation procedures, improvements to our replenishment process including weekly cycle counts and our ad ordering system and simplifying our price change procedures. As I mentioned on last quarter's call, for fiscal 2011, we are expecting that our initiatives are worth $340 million of EBITDA most of which will be offset by cost increases and pharmacy reimbursement rate reductions, which is why the midpoint of our guidance is flat to last year.

Our guidance does include the cost of our wellness+ and trained immunizing pharmacists. Of this year's $340 million in initiatives, approximately $100 million is from our segmentation goal of $550 million. We estimate that we obtained $150 million of our segmentation goal in fiscal 2010, leaving us with a $300 million opportunity after this year's savings are achieved. Looking forward, although this fiscal year will be challenging, I'm very optimistic about the future prospects of our Company and I'm very excited to be working with close to 100,000 Rite Aid associates to implement the initiatives that will lay the foundation for our future success. With that, I will turn the call over to Frank.

Thanks John. Good morning, everyone. As was mentioned in the first quarter, we saw solid progress with our various operating initiatives and continued strong expense control execution, despite sales challenges and margin pressure. On the call this morning I plan to walk through our first quarter financial results, discuss our liquidity position and certain balance sheet items. I will also provide a capital expenditure update as well as discuss the cost associated with our wellness+ loyalty card rollout. Finally, I will confirm our fiscal 2011 guidance.

This morning, we reported revenues for the quarter of $6.4 billion compared to $6.5 billion for the first quarter last year. The decrease in total sales was primarily driven by a reduction in total store count as well as decline in same-store sales. In the quarter, we opened two new stores and closed 15 stores. On a year-over-year basis we had 58 fewer stores. Same-store sales declined 100 basis points, an improvement from our fourth quarter trend. Pharmacy scripts were down 170 basis points which was impacted by 90 day scripts. Front-end same-store sales were down 130 basis points and pharmacy same-store sales were lower by 90 basis points during the quarter, which reflected a weak flu allergy season and H1N1 impact last year.

Pharmacy sales included an approximate 138 basis point negative impact from new generic drugs. Adjusted EBITDA in the quarter was $249.8 million or 3.9% of revenues which was consistent with last year's first quarter of $249.2 million or 3.8% of sales. The results were driven by strong cost control initiatives reflected in lower SG&A dollars, offset by lower sales and lower pharmacy gross margin dollars. SG&A dollars adjusted for non-EBITDA expenses was $54.8 million lower and 35 basis points lower as a percent of sales despite total revenues being down $137 million quarter-over-quarter.

Net loss for the quarter was $73.7 million or $0.09 per diluted share compared to last year's first quarter net loss of $98.4 million or $0.11 per diluted share. The decrease in net loss was driven by a reduction in SG&A expense and lower lease termination and impairment charges partially offset by higher interest and securitization costs. The lease termination charge in the current period includes for eight stores for which we recorded a closing provision of about $5.5 million during the quarter. The LIFO charge of $20.5 million compares to $14.8 million last year and the increase is due to a higher than planned Rx inflation.

Interest expense of $141.6 million was $17.7 million higher than last year's interest and securitization expense due to the refinancing of our September 2010 maturities. Non-cash interest, primarily debt issuance and cost amortization, as well as workers' compensation interest accretion was $11.7 million. Total gross margin dollars in the quarter were $62.4 million lower than last year's first quarter or 39 basis points as a percent of sales. FIFO gross margin dollars was lower by $56.6 million or 30 basis points. Front-end dollar margins were unfavorable $18 million essentially driven by a $44 million sales decline. The front-end rate was flat to last year as a percent of sales.

Pharmacy margin dollars were lower by $41.8 million or 45 basis points of pharmacy sales driven by lower third party pharmacy reimbursement rates as well as lower Medicaid reimbursement rates largely influenced by the AWP rollback. The lack of new generics and less benefit from generic product cost improvements have also impacted the numbers. The year-over-year decline in pharmacy margin as a percent of pharmacy sales was 97 basis points better than last quarter. The pharmacy margin pressure slowed in the first quarter of fiscal 2011 compared to the fourth quarter of fiscal 2010 as we began to cycle the more significant [making] of new generics which occurred last year.

The margin dollars shortfall was partially offset by lower distribution center costs driven by closure of two distribution centers and the realignment of some truck routing. Product handling and distribution center expense as a percentage of sales was slightly favorable to last year. Selling, general and administrative expenses for the quarter were lower by $88 million or 81 basis points as a percent of sales as compared to last year. SG&A expenses not reflected in adjusted EBITDA were lower by $33 million or 46 basis points primarily driven by lower depreciation and amortization costs as well as securitization costs from the accounts receivable facility reported last year as SG&A.

Adjusted EBITDA SG&A dollars which excludes specific items, the details of which are included in the first quarter fiscal 2011 earnings supplemental information which you can find on our website, were lower by $54.8 million or 35 basis points lower as a percent of sales. This reduction in dollars reflects the various cost savings initiatives that have been implemented over the past 12 months as well as store closings. The SG&A improvement was driven by better labor control and lower field controllable costs, including utility cost and supplies.

I should point out that the timing of the Memorial Day holiday favorably impacted our store level non-work holiday payroll cost in the first quarter by $9.3 million as those costs will be incurred in the second quarter of fiscal 2011 whereas they were incurred in the first quarter of fiscal 2010 last year. This benefit in the quarter was offset by $11.8 million in incremental advertising and supply costs associated with our wellness+ loyalty card rollout. We also incurred $2.3 million in training costs associated with our pharmacists immunization program in the first quarter with a higher training cost expected in the second quarter.

Our strong liquidity position benefited from the various working capital initiatives and spending our capital wisely. As compared to the first quarter of fiscal 2010 FIFO inventory is lower by $89 million of which 60% is due to the initiatives and the balance due to net store closings. FIFO inventory decreased $42 million from year end. Our cash flow statement results for the quarter show net cash provided by operating activities in the quarter as a source of $520 million as compared to a source of $358 million in last year's first quarter. Prepaid rent, interest expense as well as the timing of purchases and accounts payable payments influenced the balance.

Our days payable outstanding in the quarter was 24.8 days. This compares to 24.1 days in the first quarter of last year. Net cash used in investing activities for the quarter was $36.6 million versus $15.5 million last year. Last year, we received about $29 million in script file sales. During the first quarter of fiscal 201, we opened two new stores, relocated eight stores, remodeled one and closed 15 stores. Our cash capital expenditures was $40.6 million of which $5.5 million was from script filed [bys].

Now let's discuss our liquidity position. At the end of the first quarter we had $1.234 billion of total availability including just over $1 billion under our credit facility and over $200 million of invested cash. We had zero revolver borrowing outstanding under our $1.175 billion senior secured credit facility with $143 million of outstanding letters of credit. Today, our liquidity is slightly higher at $1.251 billion. Total debt net of invested cash was lower by $143 million from last year's first quarter and $295 million lower from the fourth quarter of 2010.

Now, let's turn to fiscal 2011 guidance. Our guidance is based upon our current trends and a continued difficult economy. We have not factored in any reimbursement rate impact of the recently passed healthcare legislation. The Company confirms our existing guidance and continues to expect total sales to be between $25.1 billion and $25.6 billion and expects adjusted EBITDA to be between $875 million and $975 million for fiscal 2011. Same-store sales are expected to be in the range of down 100 basis points to positive 100 basis points over fiscal 2010. Net loss in fiscal 2011 is expected to be between $355 million and $570 million, or a loss per diluted share of $0.41 to $0.65.

Our fiscal 2011 capital expenditure plan is $250 million with a $50 million allocation for file bys. We expect to open three net new stores and relocate 30 stores. We are not planning to complete any sale lease back transactions and we expect to be free cash flow positive for the year. The guidance includes a total of 80 store closures, half of which include a store lease closing provision with the balance of stores closing upon lease expiration. The adjusted EBITDA guidance includes the start up, advertising and supply costs and discounts associated with the cash -- with the chain wide rollout of our wellness+ customer loyalty program.

The advertising and supply costs for the program are estimated to be $31 million with the lion share incurred in the first two quarters of the fiscal year. In addition to these costs, Generally Accepted Accounting Principles require us to defer a certain portion of the revenues generated by customers as they qualify for their tiered discount benefit. A silver member earns 500 points -- must earn 500 points while a gold member needs to earn a 1000 points. Once a wellness+ member qualifies as silver or gold and begins to use their tiered discounts, we are permitted to recognize the deferred revenue as income to offset a portion of the tiered discount.

Within each customer's qualification and discount use period, which can span multiple calendar years and fiscal periods, the net impact of these adjustments has no affect on the income statement as the entries will net to zero over time. Included in our net income guidance is a wellness+ deferral provision range of $30 million to $40 million which covers fiscal 2011. Fiscal 2012 will have an additional charge to reflect a full 12 month qualification period. Our bank credit facility has a fixed charge coverage ratio test which increased from 1.05 to 1.10 beginning in the first quarter of fiscal 2011. The impact of not meeting this ratio will limit our ability to access the last $150 million under the facility.

At the end of the first quarter, we were in compliance with the fixed charged coverage ratio test. However, given our range of guidance we may be restricted during the third and fourth quarters. Based upon our liquidity position, we do not expect these restrictions to have any impact on our business. This completes my portion of the presentation and we will now open the line for questions. Operator, we are now ready for the first question.

Thank you. (Operator Instructions) Your first question from the line of Emily Shanks of Barclays Capital.

Good morning. Frank, I was hoping you could just talk a little more about SG&A. I know that you gave us a couple of one timers specifically around the Memorial Day impact, wellness+ and the pharmacist training. I'm assuming those three roll through SG&A. But can you give us a little color as to what really drove that year-over-year reduction? The $54.4 million that you quoted?

Sure. John had referenced earlier in his remarks some of the benefits that we got from project simplification and some of the other SG&A initiatives that we've had in place here. If you look at overall store level payroll, we saw a pretty significant decrease in what our costs were on the payroll line. From a labor benefit standpoint, we saw some improvements in terms of our medical costs and then if you look at some of our individual operating costs, supply costs were lower on a year-over-year basis.

We are continuing to get some benefits from our indirect procurement initiative that we have in place where we are going out and auctioning off some of our ongoing costs. We were able to get some benefits in our advertising line, in our circular costs. We actually did a rebid this past quarter and was able to get some of the benefits of that rolling through the numbers. So, we have been, over the last 12 months, continuing to search for ways for us to be more efficient in the store as well as in the back office, a lot of those benefits now are starting to roll through our numbers.

Okay, so if I look at what adjusted SG&A dollars on a per store basis did quarterly over this quarter, obviously, it was down a couple points on a percentage basis. But it looks like last year in the second through the fourth quarter you had some pretty nice year-over-year improvements. Is it a fair assumption from what I'm hearing that we should see incremental savings on a per store basis in these out quarters in fiscal year 2011 due to these issues?

We will obviously continue to get the benefit of it. As you recall last year, if you look at it on a quarter-over-quarter basis we did have some choppiness in our SG&A. There were some credits that we gotten in the prior year, and if you recall in the second and third quarter last year we had gotten some workers' comp and general liability credits that did influence the numbers in the second and third quarter. But generally, as you look at the trend for the full year, we would expect to continue to see some improvements.

It's going to tighten, right? The SG&A improvements will tighten as we go through the year a little bit. So we're going to cycle some of the initiatives that occurred during the year last year as we proceed through this year, so --

Great. Thank you. Good luck guys.

Thank you.

Your next question from Karru Martinson of Deutsche Bank.

Just so that we're clear here. There was a $9.3 million benefit to SG&A here in the first quarter because of the Memorial payroll shifting now into the second quarter. So we will see that coming, correct?

That's correct.

Okay. Just wanted to be sure on that. And then when you guys said that the June month-to-date comps are improving from May but still down from a year ago. So May was down 1.7. Are we talking within the range of your guidance here or how is that trending?

I think sales are -- so far, obviously we gave annual guidance but we are still comfortable with our sales guidance.

Okay. And just -- there has been a lot of headlines, a lot of noise with CVS and Walgreens having a bit of a spat over the PBMs. What's the impact to you guys, if any, and how is your relationship with CVS (inaudible) and the other PBMs?

We obviously watched all of that. I think our relationship is okay with the PBMs. It is a difficult reimbursement rate environment and we are negotiating with the PBMs all the time. As you know, contracts have some vaguities in them around generic reimbursement rates and those things. So there's always a fairly constant dialogue going on with our PBM partners about reimbursement rates. So, it is an ongoing discussion all the time.

Okay. Just lastly, in terms of the script counts trading off here, what are the expectations for the year in terms of replacing some of that lost business with the file bys and how do you see that going forward?

Let me jump backwards for a second. On the -- we were talking about the June sales and the comment I made there was really focused on front-end. The front-end comps were actually significant -- May was a little tough on the front-end and June has gotten a lot better. On the script counts, we're going to have a funky thing on pharmacy fill and script counts in June because of the way Memorial Day fell. On Memorial Day, the holiday, you don't fill a lot of scripts. So that's going to put a little bit of a negative into June's sales on pharmacy that we've got to get around. But once you get past the holiday, the script count trend is more in line with what we saw last month. So that's back to the sales thing we talked about earlier.

Right, in terms of some of the initiatives we are continuing to ramp up the file bys. John had talked earlier about the immunization program that we had and the expectation here is for us to get incremental scripts out of that as well.

So, a couple things -- one is, and I mentioned it in the comments -- there is a 90 day thing going on here. What's basically happening is we are filling more days in a 90 day fill versus a 30 day fill. So, in terms of script count that is a negative headwind we are fighting. That was about half the decline from last quarter in terms of script count was that right there on that single issue. So, we've got to fill that bucket before we turn positive again in terms of script count. We also had -- last year this H1N1 hysteria that lasted for awhile here in the summer that we've got to get around a little bit of that headwind as well.

Ultimately, all the things we were doing around making our pharmacy service more friendly with the communication aspects of it, the 15 minute guarantee which we're testing in some markets, and most importantly, wellness+, which we think as consumers begin to understand it and use it, it's going to help us get script count in the long run where we want it to be. And I'm very encouraged early on with wellness+ that the penetration in the pharmacy is almost as high as it is in the front-end. Chain wide we're 37% penetration on the front-end but we're 36% in the pharmacy. And I think that is just very, very impressive. We are getting a great penetration in the pharmacy where people are starting to understand the benefit of using our pharmacy and the points that they get and the value that's going to bring them on the front end. I think that's going to help us in the long run here with script count growth.

Thank you very much guys.

You're welcome.

Your next question from Ed Kelly with Credit Suisse.

Hi, good morning. I was hoping that we could go back to the reimbursement rate question and maybe you can provide a little more color on what you think really drove the leg down that you talked about last year. And then more importantly how you think this plays out into the ramp of the generic wave. What's the chances here that more aggressive MAC rates offset the significant part of that catalyst?

Well, it is a chance. First of all, I'll start at the beginning. In terms of what we saw in the leg down last year, the single biggest issue in that related to the fact that the year before there was a volume of new generics that we didn't repeat last year. We had four or five fairly big ones that came out which would be our fiscal 2009. They were helpful to fiscal 2009. In fiscal 2010, those new generics were heavily MACed as they came through either their six month or one year anniversary. They got hit very hard and quickly by certain PBMs and we didn't have a lot of new generics last year to replace them.

Normally,you have new generics come in and by the time they get to the second year of their life cycle where they're heavily MACed, you have another group of new generics that comes in and replaces them which either holds or in prior years, maybe grew your profitability a little bit. We hit a patch in the road where we didn't have a lot of new ones coming in, but we had ones from the prior year that got heavily MACed, which really drove down generic reimbursement rates last year, particularly in third and fourth quarter where we saw some very significant impacts.

In the first quarter here, we have cycled some of that MACing a little bit. There's still not a lot of new generics, a couple but not a ton. And so the situation in the first quarter seemed much more stable, still declining but at a much slower rate than what we saw in the fourth quarter and even in the third quarter. So that's the big dynamics from our perspective that we're rolling around the reimbursement rates. Now we also had the AWP rollback and we've seen some very aggressive reimbursement rate declines in states on Medicaid.

Medicaid reimbursement rates are -- have plummeted here over the last couple quarters and I think that's a trend that's going to continue during the year. So, as I mentioned earlier, we are in discussions all the time with our PBM partners about reimbursement rates, about the generic situation. And I think it will be a difficult negotiation as we get into the generic boom here but we're going to do our best to try and defend our profitability as it relates to those drugs.

Great. My next question relates to your immunization program. Could you provide more color as well? What percentage of your stores will be able to give shots this year versus last year? How many shots did you do last year and how many do you think -- where do you think for this year and what type of marketing support are you going to do?

Sure, and I don't want to go too crazy with all of that just because for obvious reasons. But last year, we had, I think, around 2,000 immunizing pharmacists. This year we're going to be a little north of 7,000. This year we will be at 3,000 stores. Last year, we did, I think, around 150,000 or so immunizations. If everything goes like we want it to and we'll have to see what happens in the marketplace.

But I think we can do as many as a million immunizations this year potentially if things go well and in terms of marketing, I think the way we have structured the program is to focus our stores so we have a good network in key markets where we can really promote it and advertise it and support the customer base around those stores. So that's how we're going at it.

What is the competition looking like this year? I mean, what is your expectation?

I think everybody will be out there with it.

Yes. All right. And then just last question for you, could you also provide some more color on this 15 minute guarantee program that you launched? What impact does it have on scripts? What impact does it have on labor costs, what type of lift do you need to breakeven?

It is not a huge impact on labor costs. I mean, honestly, I think our team did a great job and the reason why it is in the limited number of markets it is in because we spent a significant amount of time working with the pharmacists in those markets talking about workload, talking about safety, trying to make sure this program is really presented the right way. I think it has been fairly effective in that there was not a -- other than some training initially, there was not a significant investment in labor investment in the program and it's probably been north of a 100 basis points in terms of what it has added to script count in those markets. It's been a reasonably successful program for us there. Now, it would be a different situation if you were in markets maybe that had more scripts for us. The reason why we have picked these markets is because they have been more difficult markets for us.

Okay, great. Thank you.

You're very welcome. Your next question comes from the line of Mark Wiltamuth of Morgan Stanley.

Hi, good morning. I would like to congratulate Mary on her tenure and wish her well as she moves into the Chairman role and also, John, congratulations for you on your new role.

Thank you.

Thank you.

Wanted to ask a little bit more on the generics question. You mentioned that the current generic wave was a little soft. What is the outlook as you look into 2011? Because it seems like things could slow down even further on the generics into 2011 before we get to the big wave in 2012 --

I think 2011, on our forecast as 2011 picks up a tad bit from where we are in this year.

That's calendar for you or, fiscal that you're talking about?

I'm looking at calendar. You are talking about next year, right?

Right. Do you look at it on a rolling basis or do you look at just big molecules are coming out this year and that's the gist of it?

I look at a number of different things but I tend to look at the year-over-year benefit of what it's going to do when that drug comes out and then I look at what the impact I think is going to be of the MACing or whatever that's going to occur as it goes through its life cycle. It is a layered cake.

Okay. And maybe you can give us a little more color on the nature of those H1N1 headwinds from last year. Was it a big boost to the front-end last year and was there a prescription impact also?

I'm sorry. Say that again? I missed that.

Looking at the H1N1 ramp up last year, the swine flu outbreak and the -- was there a big sales impact last year on the front-end and was there a prescription effect as well?

I think the answer is yes and yes probably and it fell funny. Basically, I think if you took H1N1 and the whole flu season, and added it all together for the whole year it probably wasn't a lot different than the year before. But what happened is we got into the summer panic and we probably got into October and November with a lot more flu shots, a lot more flu scripts and a lot more OTC-related products and even things like hand sanitizers and that stuff going on. And then when we got to the more normal period of time for flu season there just wasn't a lot there.

So it's like the flu season moves around a little bit here. So, I think we have some early impacts to get through over the next several months and if the flu season felt like it did two years ago, we would probably be ahead in the winter months on flu. But it is just hard to know how things are going to shake out.

Okay. And then just to dig in a little more on your segmenting initiatives, you said, I think, after the end of this year, you will have another $300 million left of opportunity. What are the big buckets you are shooting for as we get into next year?

A lot of it will be driven around the sales side of segmentation. We've done a lot of work on the cost side. But the big bites are on the sale side. We had some charts we put up at some investor presentations that showed when we looked at our cross shop and maybe who was shopping our front-end and who was shopping our pharmacy and that thing that we thought we had some real sales potential probably here. And that's where we think wellness+ as it matures like next year really will give us the opportunity to get at some of the customers who are maybe a front end customer that don't use our pharmacy.

And we have done some work already at looking at the information that we have that really validates that there is something there related to that. That there are some customers, as an example, that use the front-end who are pharmacy users but for whatever reason have chosen not to use our pharmacy. And so that will be one of the big buckets. There are two big merchandising things going on that I think will mature next year.

We've been working on merchandising for lower volume stores. We've also been working on some merchandising ideas for some more health and wellness focused stores and we will talk about that more as it gets a little more wind underneath its sails. So those are some of the big segmentation opportunities as we go forward. And all of those things we are talking about on the merchandising side ultimately roll into opportunities in the distribution network as they come to fruition.

Okay. Obviously we had cost cutting has been a big factor here in the last several quarters. And how much more of that is to go? You said you're going to lapping some of that but is there a dollar number that you are still targeting left to attack?

I mean there are still -- we still see we think some opportunities -- I don't know if they will come in quite as big of bites as some of the early things we got. But we still have some areas to work in -- I don't think I have an exact dollar number to throw to you right this second. But there's still going to be, I think, a few nibbles that we get on the SG&A side.

Okay. Thank you very much. You're welcome. Thank you.

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

Hi. You mentioned you expect to open a net three stores. Can you talk about -- just ballpark how that falls into terms of openings and closings?

Carla, the closings here will be pretty much throughout the year. There's no one particular quarter. We closed eight here in the first quarter. In terms of the openings on the remodels or the relos -- Chris, do you -- any sense of timing on the relos by quarter?

I can figure it out.

Carla, we will come back.

Okay. And in the first quarter you mentioned for the eight stores you took about $5.5 million lease termination. Does that imply that -- you said 80 store closures for the year. Half of them will have lease provisions. Does that mean we are expecting another $27 million or $28 million or so for the year? Or a total $27 million or $28 million for the total of $40 million that would have lease termination? Is that a good way to look at it?

That would be a good way of looking at it.

Okay and then what percentage of your scripts today are 90 day? You mentioned that it has trended up in the quarter?

It is about 7%.

And where do you see that going?

Higher.

Okay. And then can you just update us where you stand in terms of interest rate hedges?

Do not have any.

Okay. And then the cost to open a store or a relo for a new store -- it looks like it is trending only about $1.5 million. And that sounded a little bit low to me.

I mean, typically it's -- these are -- we are not building them ourselves. Typically, it's a landlord build here. So our costs are basically. fixtures and equipment to open up the store.

Okay. Great. Thanks.

Your next question from are the line of Neil Currie of UBS.

Good morning. Thanks for taking my question. Looking at your overall guidance for comps for the year and the fact that through the first half and June to-date you are below that level, obviously it assumes quite a rebound in the second half of the year. Given what you said about the economy, I'm just wondering whether this is more of a function of comparisons you're using or some real confidence you have in wellness+ to drive the comp in second half of the year.

Some of both. I think wellness+ has done well and we have only really had an opportunity to test drive it so far. So as we get a chance to really work it here over the next couple of quarters, I'm excited about what I think it can do for sales. Obviously you don't know for sure until you really get out there with those things. But I'm encouraged by what we've seen so far. Obviously, like you mentioned, we have some comps that are soft as well to come around again and it will help us a little bit. So, it is a combination of those things.

Thanks. It's been noticeable in the last 18 months or so when the economy took a downturn that drugstores have generally been having a tougher time around seasonal events than they have had in the past. And I wonder whether -- if you continue to see that happening and what your approach might be towards how much inventory you are allocating around seasonal events?

I would say for us we feel like there are two things going on in this story. One is, the first Christmas, I guess that was 2009 if I've got my years right, when the economy first fell apart, we really got hit hard in seasonal items. Nobody showed up to buy that stuff and we really struggled our way through that clearing it out and cleaning it up. And our reaction to that and probably appropriately so was to really try and dial in the merchandising quite a bit tighter, reduce the number of items, try and focus on the items that we thought were key to the holiday. And I think that has honestly been fairly effective. We've really managed, I think, the inventory substantially better. I think it has become a little bit for us of a self fulfilling prophecy. And so what we're trying to do is to balance a little bit better our concerns about holiday sales with having the right selection of inventory and the right levels of inventory in the store and I think that's how we're going to go forward.

Until you see in those events, your customers are going to if they are not going to Rite Aid, is it dollar stores or discounters or a combination?

I think it is some of that and some of it is they are just not buying the stuff.

Thanks very much.

You are very welcome.

Your next question comes from the line of Kathleen Brady of Citadel Securities.

Hi. On the cash flow statement you had given a callout (inaudible) with regards to the accounts payable. I just wanted to explore that a little more. You mentioned the affect of timing. Will we see a snap back on the accounts payable for the next quarter?

Actually I think what you'll see is really -- this is an impact from the fourth quarter to the first quarter here, Kathleen.

This is the snap back.

Okay. Also, with regards to the generics and the MACing on the generics, how much insight do you have on that right now? As you enter into negotiations with the PBMs do they generally lay out a schedule for you such that you have good insight for the rest of the year and how these will MAC out?

No, it really varies quite a bit by PBM in terms of how it works. It is different by contract. So there are different situations that we have. Some we have more insight than others of how it will work and how it's going to play.

So as they reach their maturity date, that's when the negotiations start?

It is not so much that you can negotiate each individual generic necessarily as it comes across so we generally know, we know what's in the market and we know what we are filling. We know what the reimbursement rate is. We are in discussions. We know it's probably going to get MACed at some point. We are not necessarily and often not told in advance what the MAC is going to be but we can see it as it occurs but if it is out of line or out of sync or not what we were expecting, that starts the dialogue.

Got it. Also, you had entered into a new contract with [Michelson]. That has taken hold, correct?

That's correct.

Can you talk about the impact that, that's had on your pharmacy margins.

Yes. What was the annual -- we didn't disclose the impact. Everyone is looking at me like I'm crazy.

I assume it was positive impact margin.

It was. We definitely -- we improved the contract. I guess we didn't give the numbers, so -- I was going to say $20 billion but I stopped so --

And then also with regards to June, you had said that June was trending better. Is a good portion of that related to seasonal? If I remember with May, you gave a callout to California being weak, which sounded like it was weather related.

That is certainly a part of it. Weather has gotten a little bit better out west and that has clearly helped a little bit. In fact, probably weather is a little better everywhere. That has helped some. Also, though, I think some of the things with wellness+ are getting a little bit of traction, particularly the +UPs are effective in our ads.

Great. That's all for me. Thank you.

Okay. Just going back to Carla's question with regard to the new store openings, basically the plan is for seven second quarter, 9 third quarter and seven in the fourth quarter.

Your next question from the line of Bryan Hunt of Wells Fargo Securities.

Excuse me, thank you. Could you talk about your cash balance? I think the goal this year was to pay down debt with free cash flow and yet you are sitting on a big pile of cash. Do you foresee using that cash to fund working capital as you move throughout the year or do you feel like there is a real opportunity to take down some debt in this upcoming quarter?

Brian, as we look at the full year we are expecting to generate about $100 million or $110 million of free cash flow and obviously the balance here is one portion of that we need to invest back in the business and the other piece is to pay down some debt and we want to really try to accomplish both. If we were to increase any incremental dollars on the CAPEX side, it would probably be in the areas of file bys, [pendore] technology, and then with regard to paying down debt, we would look to be opportunistic with regard to the ability to do that in terms of paying down some of our outstanding bonds.

If I recap the call appropriately in my head, you all sound very optimistic about wellness+ and generating some stability in the business from cost savings and yet you are sitting on a vast amount of liquidity. Other than file buys or technology, where do you see yourself really spending some CAPEX or do you feel like there is a real opportunity to accelerate CAPEX given what you have done with the business over the last quarter or two?

Bryan, I mean, clearly if we look at our CAPEX spend today as 1% of sales that is not a long-term sustainable CAPEX spend rate. We did it over the last year and a half for all the appropriate reasons and we are comfortable at that level this year and we did increase it last year to this year. But there are still opportunities for us to deploy capital, to get good returns, file bys, investment technology. There is still opportunities for us in the stores to continue to remodel some of the existing Rite Aid stores. If you recall we spent a fair amount of the money as part of the acquisition in the BE stores but really haven't gone back and invested in the core Rite Aid stores. So there are opportunities for us to put some incremental dollars back into those stores.

Okay. And my last question is if you look at inventory per store, it is at its lowest level really since Q1 fiscal 2005, granted you didn't have the extra stores at that time. Do you believe you are at an appropriate level seasonally on inventory and do you feel like your inventory maybe too low on your impacting sales at this point?

I guess yes and no. On the one hand, I still think we see some things from an inventory perspective that are opportunities. On the other hand, I think we have seen some instances where we came out a little tighter on inventory on some things than we wanted it to be. So, it is hard to broad brush the answer because you are talking about 20-plus thousand SKUs and 4,700 stores. But I think there are still opportunities on both sides of the coin. We are very focused right now on improving our ad in stocks. Making sure that those featured items are where we want them to be.

We have been working on the store level ordering. There is some work going on behind the scenes in terms of how we actually purchase the product and how much we put in the warehouse and how much we make available to the stores. On the flip side, we still see some inventory, some categories and some items that don't have the velocity that they probably should have for the level of inventory that we have got. It is still both ways in my mind. Not one single answer to this one.

Looking at and I have had the luxury of being in your market and seeing the advertising on the 15 minute guarantees. Could you talk about how you are fulfilling the 15 minute guarantees? What's your -- maybe your hit rate is in terms of getting the 15 minute guarantee out the door versus having to issue that $5 gift certificate?

It has been fine -- been very high, I mean, in terms of hitting the 15 minutes. It's actually been very good.

Are you running in the 90% plus level?

Yes.

Congratulations and thank you for your answers today.

You are very welcome.

Your next question from Mary Gilbert of Imperial Capital.

Good morning. I wondered if we could get an update on your dark rent particularly with the store closings that have occurred in the first quarter and what you anticipate for the balance of the year? What will that take us for dark rent in total for this year and as we go forward?

Total dark rent costs for the year, Mary, is still estimated to be about a $100 million.

For this year and then going forward, will that start to come down or how should we look at that?

It layers off -- it's really over the next seven or eight years or so. It layers off depending on the year anywhere between $5 million and $8 million.

Okay. So $5 million to $8 million. Okay, that's helpful. And then how should we look at -- it looks like you have continued to make progress on the working capital side. So in looking at the free cash flow generation this year, the $100 million to $110 million, how much of that is cash generated from working capital excluding the impact of this dark rent? That and --

Basically we think -- we are planning to be able to reduce our store level distribution center level inventory by about $100 million.

Okay. Great.

Most of the cash flow -- free cash flow we hope to generate is from the inventory benefit.

Okay. And that $100 million to $110 million covers lease termination costs for this year?

Yes.

That's the $27 million, right?

In -- yes.

Okay. Perfect. That's helpful and then I thought earlier in the call when you were talking about reimbursement rates in providing guidance, I think that you said that the guidance didn't include the impact of -- I forget what reimbursement? So I wanted to --

Healthcare reform, I think?

Do we have an idea of what that impact could be?

We don't and I'm not sure it's going to be in this fiscal year.

Okay. And then when you talked about new generic introductions next year just being modest in terms of the benefit, can we get anymore clarity on that? Particularly in terms of timing, is it more towards the end of 2011? How should we look at that?

Looking at the schedule, with this thing basically says is that 2012 and 2011 in terms of its net impact on us are going to be fairly similar. Our fiscal year 2012 and fiscal year 2011. So your calendar year 2011 is our fiscal year 2012. In fiscal -- in next year, just looking at this, it looks like in terms of the items they fall throughout the year but in 2011 lipitor comes in late in the calendar year and it is a chunk.

Okay. So it comes in late. Do you have the timing exactly when?

We have estimates honestly. I will just say it is late in the fiscal year.

Okay. Got it. So that's where we're going to get the real benefit in calendar 2012.

That's the beginning. It starts late in the year and it's -- I'm sorry, in calendar year 2011 lipitor starts late in the year and hits calendar 2012 big time.

Okay. Perfect. That's very helpful. Thank you very much.

You're welcome.

And Darla, we'll take one last question here.

Thank you sir. And your final question will come from the line of Rosemary Sisson of Knight Capital.

Good morning. I wanted to ask some questions about capital spending and remodeling. How much of the $250 million that you plan to spend this year will be for remodels?

The question was how much of our CAPEX spend this year is going to be for store remodels?

Yes.

The answer is about $30 million, $31 million.

Okay. When you actually remodel a store, what do you generally get -- I know it probably varies a lot, but what do you generally get in terms of a pickup in sales?

It depends on the situation honestly.

It is a wide range?

It is a wide range.

Okay. But when you go into remodel a store, what do you expect in terms -- how much do you spend per store and what do you expect to get in terms of return whether it is payback period or whatever, just to give me a sense of what -- how you decide what stores to remodel.

Well, there are some stores you've got to remodel just because they need to be remodeled. They're not necessarily going to pay you a huge return. There is a maintenance aspect to these things. A remodel could be anywhere from $100,000 to probably -- what would you say, Chris? $1 million seems like a big remodel to me but anywhere in that range, I guess, depending on what we do. So we have some paint and powder things that we do and really just clean the store up and those are in the low $100,000s. And I guess for $1 million dollars we gut the thing and replace everything.

Could you characterize the stores if you had a bunch of money that you could to spend to remodel, could you characterize how many would be on the lower end and upper end of that range?

Well, I think -- I would peg it somewhere towards the middle, honestly. Most of the stores you'd go into you would want do probably floors, ceilings, paint the walls, new shelves, and fix the refrigeration, so you're probably $500,000 to $600,000 I'm guessing to get that done.

About how many stores -- I mean you mentioned that the Rite Aid core stores need it more than Brooks/Eckerd stores --

There are a number of them. There is a lot. Once we turn the spigot back on, we will be doing a fair number of remodels --

Once you get through this year, do you have -- I mean is the $250 million -- does it need to go to $600 million or give me a --

I think. The question there -- I don't know if everybody can hear you because you're fuzzy. But so, the question is what should normalized CAPEX be and we have been fairly consistent in saying it should be about $500 million, probably double of what we're going to spend this year.

And that would be something that -- over the next two or three years what we would eventually move to.

Okay. All right. Well, thanks very much.

I think that's it. We are done. Thank you all very much for joining us today and we will talk to you soon

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