Rite Aid Corp (RAD) 2011 Q4 法說會逐字稿

Good morning. My name is Leah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rite Aid fourth 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).

Thank you. Matt Schroeder, you may begin your conference.

Thank you, Leah, and good morning, everyone. Welcome you to our fourth-quarter, year-end conference call. On the call with me are John Standley, our President and Chief Executive Officer, and Frank Vitrano, our Chief Financial and Chief Administrative Officer.

On today's call, John will give an overview of our fourth-quarter results and discuss our business. Frank will discuss the key financial highlights and fiscal 2012 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, including annual earnings and sales guidance, on our website, www.RiteAid.com, under the Investor Relations Information tab for conference calls.

This guidance is a point-in-time estimate made early in the fiscal year. The Company expressly disclaims any current intention to update it. This conference call and the related slides will be available on the Company's website until the next earnings call unless the Company withdraws them earlier, and should not be relied upon thereafter. We will not be referring to the slides 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. These risks and uncertainties are described in our press release, in Item 1A of our most recent annual report on Form 10-K, and other documents we file or furnish to the Securities and Exchange Commission.

Also, we will be using a non-GAAP financial measure. The definition of a non-GAAP financial measure, along with the reconciliations to the related GAAP measure, are described in our press release.

With these remarks, I would now like to turn it over to John.

Thank you, Matt, and thank you, everyone, for joining us this morning to review our fourth-quarter results and discuss our fiscal 2012 guidance. We made a lot of progress in the fourth quarter on our key initiatives and they are clearly starting to have an impact on our results.

During the fourth quarter, we saw a significant improvement in sales trends, with same-store front-end sales, same-store pharmacy sales and script count growing during the quarter. Front-end same-store sales grew 1%, and pharmacy same-store script count grew 80 basis points. Same-store script count continued to grow in March with an increase of 60 basis points, while front-end same-store sales turned negative, mostly due to the impact of a later Easter holiday. Both those trends continued in the first part of April.

Customers continued their search for value during the quarter, as our private brand penetration increased to 16.5% from 15.4% last year. We continued the rollout of our new private brand architecture, and now have over 1000 items converted. We are on track to have 2200 items in these brands in fiscal 2012.

Adjusted EBITDA increased $10.3 million to $215.4 million this year versus $205.1 million in last year's fourth quarter. Although our investments and our sales growth initiatives reduced fourth-quarter front-end gross margin, our good cost control and higher pharmacy margin helped us grow adjusted EBITDA. Pharmacy margin was up due to strong generic penetration, generic purchasing improvements and a more stable, but still difficult, reimbursement rate environment. Adjusted EBITDA SG&A declined 30 basis points as a percent to sales due in large part to another great effort from our store teams.

Liquidity remained strong, with more than $1 billion of revolving credit available at fiscal year-end. Just after year-end, we completed a refinancing of a portion of our term loan facility, which reduces our interest expense and extends the maturity. Frank will take you through the financial results in more detail in a few minutes.

During the quarter, wellness+ continued to gain traction, and combined with the late flu season, were the significant factors contributing to our fourth-quarter same-store sales growth. As of today, we have over 36 million members enrolled in wellness+. Wellness+ members accounted for 67% of front-end sales and 58% of our script count during the quarter.

In addition, members continue to have larger basket sizes than nonmembers, and among members, gold and silver members have higher basket sizes and frequency than our plus members.

In the pharmacy, we continue to see a much higher retention rate with members versus nonmembers, and members are a very high percentage of our best patients.

Our segmentation initiatives also continued to bear fruit. Both our Save-A-Lot Rite Aid stores and the Rite Aid Value stores continued to show solid sales gains, and we continue to have discussions with Supervalu about the future potential of the Save-A-Lot Rite Aid stores.

In March, we launched our pharmacy 15-minute guarantee program chainwide, except New York, after testing it for about a year in our North Carolina, South Carolina and Georgia stores. Both internal and external research tells us that the timely filling of prescriptions is one of the most important attributes of pharmacy customer satisfaction. Prior to launching this program, we already filled the vast majority of our prescriptions in 15 minutes because of our state-of-the-art next-gen dispensing system and workflow and quality assurance procedures. So the purpose of the guarantee is to encourage customers to try us and experience how we've improved our overall service.

If you drop off your prescription in-store or at the drive-through and choose to wait and we don't fill your script in 15 minutes, we will give you a $5.00 Rite Aid gift card, as long as filling the script doesn't require additional professional services, like calling the doctor or an insurance company. Patient counseling is always separate and not included in the 15-minute time frame.

Our pharmacy teams have done a great job embracing this program and delivering it to our customers. The 15-minute guarantee program and wellness+ are key factors in our script count growth in March and the beginning of April.

Also in March, we launched an initiative to deliver scripts in the New York market free of charge. We will see how it works and, if successful, consider expanding it to additional markets.

As part of our segmentation strategy, we recently completed our first six Wellness store renovations. These stores have a new look with a new decor package, lower shelf height with a clear view of the pharmacy, wider aisles and brighter lighting. There are significant changes to our merchandising, including the addition of an expanded selection of organic foods, all natural personal care products and homeopathic medicines, just to mention a few of the changes.

These stores have additional resources to help customers obtain their wellness objectives, including expanded clinical pharmacy services, wellness ambassadors and additional resource materials. The expanded clinical services include pharmacists who are diabetes care specialists, certified immunizers and medication therapy management experts. Wellness+ ambassadors will work closely with our pharmacists and are specially trained to provide customers with information on over-the-counter medications and vitamins and supplements, based on a customer's specific needs.

While the wellness+ store format will continue to evolve, the key elements of these renovations will form the basis of our store remodel program in fiscal 2012.

Our goal for next year is to continue to improve the customer and patient experience in our stores through improved service and our focus on helping our customers live healthier lives. Our key areas of focus to achieve this include our continued focus on the execution of wellness+, including marketing programs directed specifically at our segmentation opportunities; the 15-minute guarantee program in the pharmacy, which is helping us improve our image as a pharmacy service provider and attracting new customers by making them comfortable about our ability to provide timely service; 500 store remodels, including Wellness store renovations and value formats that will help us tailor our store formats to meet the needs of the community that the store serves as part of our segmentation initiatives. Acquiring new customers through $75 million of prescription file purchases. Providing customers with friendlier customer service by greeting them and assisting them with their purchases more frequently. By continuing to make progress with our in-stock conditions for both ad and non-ad merchandise through continued improvement to our forecasting processes and improvement in the accuracy of our perpetual inventory system. Providing immunizations at all stores chainwide, up from 3000 stores last year. This will give consumers the flexibility to get immunizations where and when they want. And the completion of the rollout of our new private brand architecture and packaging, which will meet the growing demand for these types of products.

We believe that these initiatives will help us to continue to improve our customer service and fuel our same-store sales growth, which is critical for our future financial success. Based on our estimated impact from these initiatives and our current trends, we are estimating same-store sales growth to be in the range of 50 basis points to 2%. These initiatives will require additional investments in training, advertising, markdowns and store remodels, which is reflected in our guidance and is the major reason that the midpoint of our adjusted EBITDA guidance is relatively flat compared to last year.

In terms of gross margin, wellness+ will continue to have some negative impact on our front-end margin. In the pharmacy, we estimate that reimbursement rates will continue to decline at a rate that is consistent with this year for most parts of the business, though we could see even more pressure from government-funded programs, especially Medicaid, as states continue to struggle with large budget deficits.

On the positive side, we expect to get some help late in our fiscal year from new generics and we expect to continue to make improvements in generic purchasing.

Looking at SG&A, we will continue to focus on good cost control through initiatives like project simplification, but we expect to see continued inflation in employee healthcare costs, fuel, and to a lesser degree, wages.

Putting this all together, we expect adjusted EBITDA to be in the range of $800 million to $900 million for our 53-week fiscal 2012. Our guidance reflects our Companywide focus on taking better care of customers and growing our top-line results. Although there are some costs associated with this that will depress our earnings in the near term, we believe that meeting the needs of consumers is critical to our long-term success.

With that, I will turn it over to Frank.

Thanks, John, and good morning, everyone. As John mentioned, the fourth-quarter sales and earnings results reflect early benefits of the various initiatives we have been working on for the past 12 months. On the call this morning, I plan to walk through our fourth-quarter financial results, discuss our liquidity position and certain balance sheet items, our capital expenditure program, and finally, review our fiscal '12 guidance.

This morning, we reported revenues for the quarter of $6.5 billion, which was essentially flat to last year's fourth quarter. The increase in same-store sales was offset by a reduction in total store count. In the quarter, we closed 17 stores, and for the full year, we closed 69 stores and opened three new stores. On a year-over-year basis, we operated 66 net fewer stores.

Same-store sales increased 90 basis points in the quarter, reflecting the positive impact of wellness+ and a stronger flu, cough, cold season. Front-end same-store sales increased 100 basis points, and pharmacy sales were higher by 80 basis points during the quarter, despite continued high unemployment.

Pharmacy scripts were positive 80 basis points. Pharmacy same-store sales included an approximate 226 basis point negative impact from new generic drugs.

Adjusted EBITDA in the quarter was $215.4 million, or 3.3% of revenues, which was a $10.3 million or 5% increase from last year's fourth quarter of $205.1 million. The results were driven by favorable sales trend and lower SG&A dollars. SG&A dollars were $11.5 million lower and 15 basis points lower as a percent to revenues.

Net loss improved slightly for the quarter to $205.7 million or $0.24 per diluted share compared to last year's fourth quarter net loss of $208.4 million, and flat to last year's $0.24 loss per diluted share. The net loss was impacted by an increase in lease termination and impairment charges of $76.9 million, offset by a lower LIFO charge of $43.3 million, lower interest expense of [$9.2 million] and a $12.9 million increase in the gain on sale of assets, all as compared to last year.

Income tax was lower than last year due to a charge taken in last year's fourth quarter.

The increase in the non-cash lease termination and impairment charge to $154.1 million this year compared to $77.2 million last year was primarily driven by higher asset impairment charges due to individual stores' earnings underperformance compared to our plan. The lease termination charge includes 22 stores for which we recorded a closing provision during the fourth quarter.

The decrease in LIFO charge to $800,000 for the fourth quarter compared to $44.1 million in last year's fourth quarter was driven by higher generic drug deflation as compared to last year. LIFO expense is booked quarterly, based on an annual estimate, and finalized in the fourth quarter.

This year, we saw front-end inflation increase slightly as compared to last year, while pharmacy inflation was significantly lower this year versus last year, driven by deflation in generic drugs. Lower interest of $132.5 million compared to $141.7 million last year resulted from refinancings earlier in the year.

Additionally, we recently refinanced approximately $343 million of our Tranche 3 term loan due in 2014 with a new $343 million Tranche 5 term loan due in March of 2018. Besides extending the tenure, we further lowered our annualized borrowing costs by $5.1 million.

Total gross margin dollars in the quarter were $25.7 million higher than last year's fourth quarter and 43 basis points as a percent to revenues. FIFO gross margin dollars were lower by $17.6 million or 24 basis points. Adjusted EBITDA gross profit, which excludes specific items, primarily LIFO and the wellness+ revenue deferral, the details of which are included in the fourth quarter '11 earnings supplemental information, which you can find on our website, was $10.7 million or 13 basis points lower than last year's fourth quarter.

Front-end gross profit was lower due to the tiered discount investments related to the wellness+ loyalty program. This was partially offset by higher pharmacy gross profit, despite continued pressure on third-party pharmacy reimbursement rates. Slightly higher product handling and distribution expenses were offset by lower front-end and pharmacy shrink.

Selling, general and administrative expenses for the quarter were lower by $11.5 million or 15 basis points as a percent to revenues, and that is as compared to last year. SG&A expenses not reflected in adjusted EBITDA were lower by $9.6 million. Lower depreciation and amortization expense was more than offset by a nonrecurring severance charge in the current year and the proceeds of a generic drug litigation settlement in the prior year.

Adjusted EBITDA SG&A dollars, which excludes specific items, again, the details of which are included in the fourth quarter earnings supplement, were lower by $21.1 million or 30 basis points as a percent to revenues. This reduction in dollars reflects the various cost savings that have been implemented over the past 12 months.

SG&A improvement was driven by better store labor control, lower medical insurance and advertising costs, partially offset by higher debit/credit card charges.

Turning to the balance sheet, FIFO inventory was $37 million lower than the fourth quarter of last year. This was impacted by store closings and our continued effort to improve working capital. As we have mentioned in the past, although there are still additional working capital opportunities, we have gotten the lion's share already.

Our cash flow statement results for the quarter show net cash from operating activities in the quarter as a use of $71.6 million as compared to a use of cash of $100 million in last year's fourth quarter. Lower accounts receivables, as well as the timing of merchandising purchases and accounts payable payments at the end of the quarter influenced the balance.

For the year, net cash provided by operating activities was a source of $395 million. Net cash used in investing activities for the quarter was $53.5 million versus $36 million last year, and also includes proceeds from script file sales and the proceeds from the sale of a property.

Year-to-date, net cash used in investing activities was $157 million. Capital expenditures were lower than projected due to fewer file buys completed by year-end.

During our fourth quarter, we relocated four stores, remodeled two and closed 17 stores. Our cash capital expenditures were $66 million, and for the full year, our cash capital expenditures was $186.5 million. We opened three new stores, relocated 28, remodeled 19, and again, closed 69.

Now let's discuss liquidity. At the end of the fourth quarter, we had over $1 billion of total availability, including $1.004 billion under the revolver -- under the credit facility, and about $2 million of invested cash. We had $28 million of a revolver borrowing outstanding under our $1.175 billion senior secured credit facility, with $143 million of outstanding letters of credit. Today, we have liquidity of $1.012 billion.

Total debt net of invested cash was lower by $144 million from last year's fourth quarter.

We generated free cash flow of $239 million for the year, which was higher than anticipated due to lower capital expenditures, a lower accounts receivable balance and the timing of accounts payable payments. At the end of March, we made an excess cash flow repayment of $39 million of the bank term loan, as required under our bank credit facility. The excess cash flow payment will be in lieu of scheduled amortization payments for the next 30 months.

Now let's turn to fiscal '12 guidance. We developed our plan based on current sales trends, a challenging reimbursement rate environment, higher unemployment and the impact of continued investments in our customer loyalty programs to grow sales, as well as an increase in our capital expenditures.

Fiscal '12 is a 53-week year, and our guidance reflects the extra week. The Company expects total sales to be between $25.7 billion and $26.1 billion, and expects adjusted EBITDA to be between $800 million and $900 million for fiscal '12.

Same-store sales are expected to be in a range of up 50 basis points to up 200 basis points over fiscal '11. Net loss for fiscal '12 is expected to be between $560 million and $370 million, or a loss per diluted share of $0.64 to $0.42. The net loss includes a loss on debt modification charge of $22 million as a result of the Tranche 3 term loan refinancing that was completed in March.

We have increased our LIFO provision for fiscal '12 to reflect an expected increase in front-end inflation in the coming year. As John mentioned, our plans include incremental investment in training, advertising and wellness+ discounts, and we expect overall gross margin to be lower, with continued improvement within our SG&A rate.

Our fiscal '12 capital expenditure plan was increased to $300 million, with $127 million allocated to remodels and other merchandising initiatives, and $75 million for file buys. We are planning to complete 20 relocations and remodel 500 stores. Some of the remodels will incorporate components of our new wellness and value formats.

We are not planning to complete any sale-leaseback transaction, and we expect to be free cash flow modestly positive for the year. We expect to close a total of 60 stores, of which the guidance includes a store lease closing provision to close 35 stores, with the balance of the stores closing on lease expiration.

Included in our net loss guidance is a wellness+ deferral provision range of $35 million to $45 million. Fiscal '12 deferral is incremental to the fiscal '11 charges, as customers will have a full 12 months to accrue points and earn the benefits for calendar '12. General accepted accounting principle requires us to defer a certain portion of the revenues generated by customers as they qualify for their tiered discount benefits.

Our bank credit facility has a fixed charge coverage ratio test which increases from 1.00 to 1.05 beginning in the fourth quarter of fiscal '12 the impact of which would limit our ability to access the last $150 million under the facility. Given our range of adjusted EBITDA guidance and planned capital expenditures, we may be restricted in the fourth quarter of fiscal '12. Based upon our liquidity position, we do not expect this restriction to have any impact on our business.

We would expect that our adjusted EBITDA first-quarter comparison to the prior year will be more difficult than the remaining three quarters due to the timing of our investment and our initiatives.

This completes my portion of the presentation. I would now like to open the line for questions. Leah?

(Operator Instructions) Matthew Fassler.

Thanks a lot and good morning to you. Two questions today. The first would be if you could disaggregate what you see some of the discrete sales drivers are for 2011. You ran through some of your initiatives. If you could sort of assign some impact to them or discuss them in order of anticipated impact.

The second question, if I may, would just relate to the reimbursement environment. If you could maybe talk about or try to quantify the puts and takes on pharmacy margin and how they have evolved through the year and will likely evolve through 2011. Thanks so much.

This is John. I think you are asking about sales drivers for fiscal 2012.

Correct.

For fiscal 2012, really a couple of big things here. Wellness+ I think has been a successful rollout for us, with, as we said, 36 million members. It has really helped build loyalty with our existing customers. And we think the next phase of wellness+ is really to help us acquire additional customers, as we make an effort here. And you will see us out in the market trying to educate noncustomers about the benefits of wellness+. So there is a fairly big push coming during the year on that effort. So we think that is a significant driver for overall sales, both in the front-end and in the pharmacy. And that is probably the single biggest sales initiative that we have.

In terms of order of magnitude, the 15-minute guarantee is probably not far behind that. It is already having, like we've said, a nice impact on script count and continues to make a difference for us. And the significance of that is really trying to educate noncustomers today really about all the improvements that we've made in our pharmacy over the last couple years.

We are also going to, as we said, make a significant investment in file buys, about $75 million. And then of course we're doing a number of things in-store that are very important to help us drive sales.

Matt, it's hard to give you an exact figure for each one of those. As you know, sales is always the hardest thing to quantify. But what I know is if we keep stirring the right things together and we get enough things working here in our favor, it is going to move this top line where we want it to go. And we feel like we are seeing that right now. So we continue to push really hard on these initiatives that we feel like are getting some traction.

Terrific. On the reimbursement front, any sense of the quantification of kind of the generic impact and reimbursement and how those pieces have moved around?

Basically, the easiest way to kind of look at it, I think, is moving from fiscal '11 to fiscal '12. Fiscal '11 was a year where from an all-in basis, I think our pharmacy margin was more stable than it was the year before. As I think we've talked about in the past, in the year before, we got into a year where we didn't have a lot of new generics, but the year prior to that had a significant number of new generics. And that really drove down rate in '10.

We got into '11 and the level of new generics is still fairly low, but was fairly consistent with the year before. So what happened there is reimbursement rates -- because there weren't a lot of new generics getting maxed, reimbursement rates continued to decline, but at a much slower rate.

And so what we think is going to happen as we get into fiscal '12 is that the first three quarters of the year are basically going to be similar to that. There are not huge amounts of new generics in the first three quarters. There weren't a lot in the prior year. So there is not a ton to get maxed during these first nine months. So we think reimbursement rate is still going to decline, still be challenging, but probably at a rate that was fairly consistent with fiscal '11.

The one exception to that, as we've mentioned, is we are just not sure what's going to happen in some states yet. We are king of waiting to see how that plays. As we get into the last half of the year, obviously, Lipitor comes in. And that will help us a little bit, I think, in the fourth quarter. But it is not in for a big piece of the year, and as you know, it will take a little bit of time for it to ramp up as a new generic. So we don't think the impact of that one item is hugely material to the fiscal year, although it will have some positive impact on the fourth quarter.

Got it. Thank you so much.

John Heinbockel.

So a couple of things. You talked about -- you rattled off some things you are investing in, training and markdowns and so forth. Can you walk through kind of the magnitude of maybe rank order each of those, and then a little more specificity on what you might invest in there?

Sure. Frank, do you want to --?

Sure. There's a couple of areas that we are doing some incremental investment. Certainly one is advertising. As we continue to promote wellness+ and the 15-minute guarantee, we've increased our allocation for advertising next year.

The second area, John, is in the area of continued immunization training. We have -- we had trained about half the staff last year. And basically what we're doing is looking to train the remaining group of pharmacists that we have out there, for them to be full immunizing pharmacists on a go-forward basis.

And then the last piece is store training. We made a conscious decision that we were going to increase the training dollars for our district leaders and for the stores, for us to be able to execute better at store level.

Those are kind of three of the -- on the expense side. And the other investment that we are continuing to make is on wellness+ -- continue there some incremental tier discounts that will be -- that are planned for next year that will, as we view it to be, keen investment to drive the top line.

Do you think the -- when you put those two together, the investments would be greater on the gross profit side than aggregating the three SG&A numbers?

Yes.

Okay. Within SG&A, is advertising bigger than store labor -- as an incremental point of pressure?

Pretty close.

It is pretty close, John.

Okay. Now, on the remodels, is that the cost per remodel, is that -- it looks it might be $250,000 or $300,000. Is that right, something like that?

It is probably closer to $200,000, kind of blended out.

And how do you think about -- two things -- one, the return on that? And then secondly, what is the bottleneck in terms of doing more than 500 if you wanted to? Is it people, is it capital, what is the bottleneck there?

A couple of things here. As we kind of ramp this thing back up, it will kind of go in stages. So the work initially has really been on what do we want to address in renovations. That is really where the work on this wellness format has been for the last several months, almost a year. And like we said, that will continue to evolve.

Based on previous experience, based on what we've seen early out of these stores, we expect to get a fairly good return on our investment from those renovations. They are reasonably significant and we think that is going to have an impact on those locations, and we think it will drive a very good return. So we are encouraged by that.

And so now as we go from, honestly, doing very few remodels and renovations, particularly the scope that we are looking at here, and starting to ramp our program back up, we will take it in stages. We will get through these 500 this year, and then we will continue to ramp that number up as we go forward, as we add people to the team and put our processes kind of back in place to get these kind of things done.

So capital is certainly a constraint, but honestly, I think 500 is what we can probably digest this year from a team perspective. But we would expect to ramp it up from there as we go forward.

All right. And then finally, if you get a -- to get a good return on that, do you need -- it looks like you might need a -- what -- a 2%, 2.5% lift in overall comp. Or do you think you need more than that?

In the individual renos?

On the remodels, yes.

Yes, 3% -- 2%, 3%.

That will do for a good enough return?

Yes.

All right. And then one final thing. You talked about the reimbursement rate environment. Talk about the relationships with the PBMs. Because I think it has kind of gone back and forth. It's been a little tougher, been a little easier. Maybe it is -- I thought it might be a little tougher this year because they didn't have as much in the generic pipeline and they might lean on you. And I think some of them tried unsuccessfully. But where is that relationship now?

Is that like catch this grenade, John, or what is that? Obviously, our relationships with our PBM partners is very, very important to us. We want to be a great service provider to them and a key part of their networks. And so we are always in discussions about various features of our contracts and how we can make them work better for both parties. So we want to be a great partner and we are going to continue to find ways to bring value to our ultimate customers and to our PBM partners. So we are going to make it work. And as you know, as you've said, it is always a give-and-take.

All right. Thanks, guys.

And I'm not answering your question, but --

All right.

Bryan Hunt.

This is Kevin standing in for Bryan. John, Frank, could you talk about the impact the wave of generic drugs coming off-patent at the end of the year plays into your forecast -- maybe break it out for us or tell us what your expectations are?

Sure. We already got the question once here from Matt earlier. But I don't think we are going to specifically quantify it for you, Kevin. It's basically, like you said, going to show up in the fourth quarter. It is going to depend -- there are some factors involved in sort of how this thing plays. It is going to depend on reimbursement rates. It's going to depend on timing. So there's a number of things here that sort of play into how the new generics roll through this year.

We think the fourth quarter is going to be benefited, clearly, from a couple of these big ones that roll in. But until we get a little bit more clarity into how reimbursement rates are going to play and how some things are going to work, it is difficult to give you a precise number. But we have included in our guidance some benefit from those in the fourth quarter. It is not hugely material to the number for the year.

Got you. I know wellness+ is a big initiative for you coming up this year. What would you say is your maximum membership potential?

That's a great question. I don't know if I know the answer to that. I think what is going to happen is we are going to continue to engage and enroll people. And we are going to have some people who are kind of inactive that fall out of this thing.

So I'm not sure what the mature number is yet. But we are probably getting there, honestly; we are probably, I think -- we are going to continue, I'm sure, to enroll people this year, but I think we'll have some people drop out as well.

Got you. And kind of switching gears, could you maybe talk a little bit about some of the cost inflation you are seeing in the stores, whether you are able to pass that through to consumers and what you believe your competitors are doing on a pricing front?

Our objective is to remain competitively priced in the marketplace. So that is kind of how we are going to work our way through this.

In terms of on the cost side, we know we are going to see probably some continued increase in healthcare costs. We are obviously going to, as always, treat our associates fairly and we are going to have some wage increase there, which we have every year.

We know fuel is going to be a little bit higher. But I think the big side of this thing is really going to be over in the gross margin side, as it relates to increases in commodity costs and packaging costs and transportation costs, and the way those wind into our product costs. That's where I think it is really going to kind of show up.

As it related to last fiscal year, Frank, do you want to talk about kind of inflation for last year maybe for a second?

Yes. On the front-end side, we saw -- kind of our internal index, we were up about 100 basis points on the front-end side. Certainly on the pharmacy side, we saw a fairly significant decrease. Year-over-year, we probably saw about a 500 basis point decline in our overall LIFO index, with the driver there really being the generics. The branded drugs were up consistently with what they have been in the past, but the real driver here is we saw a fairly substantial decrease, again, on our internal indexes on a year-over-year basis, and all driven by the generics.

Now, having said all that, more recently, we are starting to see some cost increases come through. And again, we're just going to have to see how that kind of plays in the market a little bit to see how we proceed.

Got you. My apologies if you've already mentioned this, but can you talk maybe about the impact from the Easter holiday shift on your same-store sales, maybe in terms of basis points or what you guys are projecting?

I don't think we've given an exact number yet for the impact. I mean, I think the thing to do will be to look at a couple of months combined here, once they get through it, will be the easiest way to sort of see it.

It is kind of -- it's going to fall a funny way for us, in that our April month is going to end on the Saturday before Easter. So Easter Sunday and the clearance period is actually going to fall into the May sales month.

So we're going to probably have to help you a little bit once we sort of get the numbers out there. I think if you looked at the change from where we were running to kind of where we were in March, that -- we think a large part of that impact is from Easter and the timing of the way Easter is selling through. But we will be able to quantify it more clearly once we get all the weeks on the table and we can kind of look at it.

Fair enough. Thank you for your time.

Karen Eltrich.

When you answered Matt's questions for improving costs, one thing you didn't cite was an improving environment. Are you still expecting a challenging environment? And in that same light, how was Valentine's Day seasonal sales for you?

Valentine seasonal sales were actually very, very good for us. We had a great Valentines holiday, sold through well, had very good sales, and so we were pleased with that.

I think the way that we are sort of thinking about next year is steady from a macroeconomic environment. We see some signs of improvement; we see some other things that don't look as good. So the way we are sort of thinking about it is it going to kind of stay the way it is now.

Great. And with regard to the remodels, do you have a sense of mix in terms of which -- how the different formats that you are formulating will compose of that? And at what point would you be willing -- or I guess what is the inflection point for rolling out Save-A-Lot?

That is a great question, and the answer to that is that is still sort of playing itself out a little bit. As we -- as I mentioned in my comments, we are still in some discussions with Supervalu about what the future of the Rite Aid Save-A-Lot combo store will be. And how those sort of play out would probably have some impact on the mix of stores for this fiscal year.

So right now, it isn't necessarily determined what that mix will look like?

Right now, we are not going to give a specific breakout of it because the mix could change a little bit. And once that settles down next quarter, we may give you some more guidance there.

Okay, great. And since no one else has said it yet, congrats on the quarter.

Thank you very much.

Edward Kelly.

Good morning. I would just like to come back to this topic of inflation for a minute. It sounds to me like you are suggesting that if the environment is rational, that you should be able to pass price increases through. Am I reading that correctly?

I think that is a good way to read it.

Okay. And we have seen price increases so far, so is the environment today rational?

It has been fairly rational so far.

Okay. And then as you think about passing price increases through, do you think about maintaining gross profit dollars, or do you think about maintaining gross margins on the front end?

What we really think about is being very competitive in the market place and maintaining our relative kind of market position. And that is the way we kind of look at it.

Okay, so it is more market dictated?

It is.

Okay.

Our goal is to really meet the needs of our customers and consumers in the marketplace today, and that is really how we think about our pricing.

Okay. And you mentioned potential reimbursement pressure on the Medicaid side. Can you just give us an update on where we stand with A&P right now?

I think right now we are waiting on some announcement on the formulation of specific rules. And once we see some of that, that will give some additional clarity, although I'm not sure it will be entire clarity into how it is going to work.

Any sense on timing of how this might play out this year?

There is no update. Robert is here with me, and he is telling me I don't have an update on timing.

Okay. And then just last question for you. I noticed -- I think you suggest that you were going to close 60 stores this year. How are you feeling about the portfolio currently and the potential for other market exits, further store closures? Just how are you thinking about where the portfolio is going here?

Obviously, as we've said before, we do have a group of underperforming stores here that we are continuing to work with. We have a number of different initiatives, obviously, that we've been working on to improve the performance in those stores.

But we are going to work with what we have. And so if we reach a conclusion at some point that there is some store hunk or chunk that isn't going where we want it to go or isn't going to get where we want to get it to, then we are going to have to deal with that appropriately.

Okay, great. Thank you.

Emily Shanks.

Good morning. I had a question about the actual fourth-quarter '11 EBITDA. Given that you did exceed the high end of your guidance, what was the biggest upside driver for you -- or surprise versus what you were expecting?

Sure. I think top line, we made good progress on the sales, and that really drove fourth quarter. Valentines, as somebody asked earlier, was very strong for us, and that really helped push us as well.

Okay. And as we look at the wellness+ data that you've given us, is there particular pockets of strength by geography, or is it pretty broad-based traction?

It is pretty broad-based.

Okay. And then my final question is around the script buys that you have planned, what have pricing trends been for that asset? I think if I recall correctly during the downturn, there were better opportunities, given some of the mom-and-pops were going out of business. Can you just give us a little flavor for what you are seeing there?

Emily, continue to have groups of small independents that are looking to kind of hang up the spikes here. And we've actually added some more resources to our file acquisition team in order to kind of source those folks out. From a pricing standpoint, we probably have seen a -- I would say maybe a slight uptick in pricing, but nothing of anything significant.

Okay. And I know this is always the elusive question -- but in terms of the range of valuation, is sort of the $5 to $20 fair, or (multiple speakers)?

Probably more like $10 to $20.

$10 to $20. Okay, great. Thanks and good luck.

Mark Wiltamuth.

Two questions. First on the remodels, what is the average age of your stores since you've last touched them? Do you have a number for us?

About 8.5 years.

And what do you think is a number you would strive for over time? Or do you have a number of stores you think you would like to get to remodel?

Ideally, what we'd like to be able to do is basically have the chain new or remodeled within a five-year period of time.

Okay. And then if we look at your prescription -- your same-store prescription volume number was down 1.2%. Were there any drug categories behind this or regions of the country where you are having problems? What was behind the same-store volume decline?

Well, I think that number there is for the full year, right?

Right.

Yes, for the full year. So I think the first thing is flu, all-in total was actually down year-over-year. Although we picked up, obviously, in the fourth quarter, in total, flu was down. I think we had the H1N1 scare the year before. And so even though we had a nice flu season here in the fourth quarter, it did not equal the total flu for last year in the pharmacy.

And so that, in and of itself, is the single biggest factor. And then we do have some geographic areas that just generally underperformed that we talked about before.

Okay. Lastly, on the Lipitor, Ranbaxy has had some trouble getting approvals on doing the generic Lipitor. If they don't come through, does that change the economics at all, if we just have Pfizer and Watson as the only producers of generic Lipitor?

I don't think it has a dramatic impact, but we'd have to see how that kind of plays a little bit.

Okay. Thank you very much.

Carla Casella.

One housekeeping and then a couple other questions. How much was your dark store rent for the year? And where do you see that for 2011 -- or I'm sorry -- for the current year?

For last year, it was just over 100, and I think for this year, it is like $92 million, $93 million.

Okay. And then in terms of the asset sales that you made in the quarter, did you -- I might have missed it -- did you say which assets were sold?

It was actually a vacant property that we had, and opportunistically got a good price for it.

Okay. And then do you have others like that that are for sale?

No, this one, someone came along and made us an offer we couldn't refuse.

Okay. And then when we look at the prescriptions, have you said what percentage of your prescriptions are generic today? And then the average -- can you give us some ballpark of the average price per script of a branded versus a generic, and the margins on a branded versus generic? Our numbers are pretty stale on those.

They are not as stale as you think. They're probably not far off. We're 75% or so generic today. Your average brand script is $160, more or less. And your average generic is probably $20, $25. Gross profit dollars are 50% higher on a generic than they are on a brand.

Okay. And so that (multiple speakers) -- I'm worried that the gross profit could narrow between brand and generic. Are you seeing any of that?

No. I mean, obviously, our pharmacy margin this year to last year is pretty flat.

Okay.

In total, if you looked at it.

On the customer loyalty front, the deferred revenue add-back to EBITDA, is that add-back a net number? I guess we are trying to figure out when the deferred revenue would flow through the income statement.

So the deferred revenue is what it looks like. It is a reduction in sales. And it probably doesn't flow back through the statement unless we have a decline in the number of members and the amount of discounts that they are earning.

So basically what is happening is we are accumulating that deferral now and then it will sort of -- net, sort of sit there on the books until such time as we ramp this thing back down.

And basically as the cash discounts will go through -- will run through the P&L.

Right.

So we will continue to see that deferred revenue add-back grow?

Yes, right now, we're looking to add -- we put it in the guidance $35 million to $45 million that we would, in effect, kind of defer. And then it would basically stay at that level, because the expectation would be is that would be kind of the annualized discount that we would be providing to the wellness customers.

So to say just a slightly different way, we would think in fiscal 2013 that deferral would be fairly small; should be fairly mature at that point.

Right.

Okay, and then one last question on the financing side. I guess your next maturity is not for a while, but you've got the term loan, too. It is pretty cheap. At what point do you think you would want to look to extend that or address that maturity? Is it a year ahead of time? Is it sooner?

That is one that obviously the rate is very attractive for us, and quite candidly, we would like to keep it in there for as long as we can.

Matt and I are always kind of talking to people, looking at opportunities here. So certainly, a year in advance we would have to deal with it. But unless there was something that was attractive, we probably wouldn't touch it until then.

Okay. Sorry -- I lied -- I forgot to ask -- did you give the foot traffic versus basket size?

We didn't. For the fourth quarter, our growth was primarily in basket size. We were down slightly in foot traffic on the front end.

Okay. Thanks.

I think will take one last question.

Mary Gilbert.

Good morning. Can you give us an update on free cash flow guidance for this year? So, for example, if we are looking at working capital away from dark rent, it sounds like you don't expect to make further improvement, that you've made most of the improvements. Or could it still be a source of cash, especially with the decline -- some decline in the store base?

Primarily, our free cash will -- will be mostly impacted by the increase in our capital expenditures here. So although we do think that there is an opportunity for us to still wring some additional working capital out, it is certainly not going to be to the same degree that we've seen in the past. So in terms of free cash flow, it would be something that would be less than $50 million.

Okay, so close to neutral?

Yes.

Okay, all right. And then on Save-A-Lot, can you give us updated comp sales trends at the Save-A-Lot stores, and also on the stores with the Rite Aid Value walls?

Sure. Basically, as we kind of came around the grand opening period, they've all slowed down a bit. The Save-A-Lot stores for the quarter comped up 83%, or something like that. The Value stores were like 2% or 3%, kind of in that range.

Okay, all right. Are there any changes that you're going to make to the Value store, or do you think -- it looks like the returns are much higher with the Save-A-Lot.

The Value stores actually have a significantly lower capital investment. So even if the sales come out in the 2% to 3% range, we are actually making a fairly huge return on a very modest investment in those stores.

Honestly, those sales have kind of see-sawed a little bit, and I'm thinking they are going to probably settle down somewhere north of that range, probably between 10% and 2% or 3% is probably where I think we get to, once we get that kind of promotional and pricing mix sort of settled down to the right place in those stores. So those actually have a nice little return on them.

Obviously, the Save-A-Lots are very dramatic. So, as we've said earlier, we really need to sort of figure out with Supervalu what the future of the Save-A-Lot idea is before we can really kind of give you a little bit more clarity on capital allocation for fiscal '12.

Is that baked into the CapEx of $300 million, or no?

It is. Basically -- what we are basically telling you is right now, we have enough stores identified to do where we can knock out 500 kind of Wellness stores and Value formats. If we get to a place that makes sense with Supervalu for both of us, we will probably shift the mix a little bit to do some Save-A-Lots.

Okay. And then can you give us an update on the composition of your store base as to the number of stores that you are considering underperforming? And I'm assuming those stores have an EBITDA -- are EBITDA negative. Can you give us that update?

There is, again, a couple hundred stores out there that we look at on a pretty regular basis that are EBITDA negative. They are stores that kind of roll in and roll out, but those are ones that Brian Fiala and his team are looking at on a fairly constant basis.

Okay. All right, that's helpful. And then the remodels, what stores are being targeted for the remodels? What sort of geographic areas? I mean, I'm imagining that it is dispersed somewhat, but is there going to be a lot on the East Coast? Can you give us a little more granularity on what stores will be touched?

Sure. Basically, first of all, it kind of goes back to our segmentation strategy initially -- and this goes back to your last question, too. Basically, if you remember, we have 2500 or plus stores that are really kind of higher volume, taller EBITDA margin, kind of really, really good stores. So the Wellness stores are really kind of zeroing in on those high performers, and it will be primarily -- Wellness stores will be primarily comprised of that group.

The other batch of stores are the ones that are maybe more suited towards Value stores or could actually be Save-A-Lots or that we're working on to try and migrate up to this other group of stores.

We are going to go into some -- concentrate in certain specific markets. I don't think we are ready to throw those out today. But there are going to be six or seven or eight kind of key markets that we sort of zero in on initially to focus the remodels in.

Okay, great. Thank you.

You're very welcome. And I think that concludes today's conference call. Thank you all very much for joining us. We appreciate your interest and support. Thank you.

This does conclude today's conference call. You may now disconnect.