Rite Aid Corp (RAD) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. My name is Carmen, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rite Aid Fourth Quarter 2020 Earnings Conference Call. (Operator Instructions)

I would now like to turn the conference over to Byron Purcell, Head of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. We welcome you to our fiscal 2020 fourth quarter earnings conference Call. On the call with me today are Heyward Donigan, President and Chief Executive Officer; Jim Peters, Chief Operating Officer; Dan Robson, President of Elixir; and Matt Schroeder, Chief Financial Officer.

On today's call, Heyward will provide introductory comments and an update on our response to the COVID-19; Jim will provide an update on the retail business; Dan will provide an update on the Pharmacy Services business; Matt will provide an update on the fourth quarter results and COVID-19 financial impact, and then we will take questions.

As we mentioned in our release, we're providing slides related to the material we'll be discussing today. These slides are provided on our website, www.riteaid.com under the Investor Relations information tab. We will not be referring to them in our remarks, and hope you will find them helpful as they summarize some of the key points made on the call. Before we start, I'd like to remind you today, this conference call includes certain forward-looking statements. These forward-looking statements are presented 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 in other documents that we file or furnish to the Securities and Exchange Commission.

Also, we'll be using certain forward -- or using certain non-GAAP measures in our release in the accompanying slides. The definition of the non-GAAP measures, along with the reconciliation of the related GAAP measure, are described in our press release and slides.

With these remarks, I'd now like to turn it over to Heyward.

Thanks, Byron. And thanks, everyone, for joining us. And since this is the first time we'll be doing this call, all sitting in different states in our homes, bear with us. So we're going to discuss our results for Q4 and the year in just a few moments. But make no mistake, our top priority as a company right now is serving our communities, of course, our Rite Aid customers, our EnvisionRxOptions employer and health plan clients during this unprecedented COVID-19 crisis. And I must say, I have over 30 years of experience in the health care industry, including dealing with SARS and the swine flu, which I will never forget. But I don't think any of us in health care has experienced something like this. So it is new territory for all of us. And as a leader, I've never been more proud than I am right now of our Rite Aid team. Together, we're really working around the clock, making sure that we can continue to serve our communities.

And the importance of the supply chain has never been more evident, and our distribution center teams are doing a good job despite the great difficulty we have getting as many essential supplies as we would really like to have for our customers. Despite that, our teams are working really hard to ensure our shelves are stocked as quickly as those products are made available. Our retail store associates are working together to implement our enhanced cleaning and social distancing procedures as they are doing their just important everyday work. So it's really work on top of work.

And our pharmacy and RediClinic teams are doing the same, and they're also providing our customers with the medications, services and care they need during this challenging time. Our more than 6,400 Rite Aid pharmacists are proving their role on the front lines of health care is crucial. And this crisis has showcased their essential role in health care and as the cornerstone of our go-forward strategy. And our field leadership and corporate teams, including EnvisionRxOptions, Health Dialog and RediClinic are working tirelessly to help keep our associates safe and meet our customers' needs.

As a leadership team, we continue to take critical steps to protect the safety of our associates and customers. We have and will continue to ship masks for every front line associate, install plexiglass at every retail location and provide hero pay, hero bonus and pandemic pay programs. We're also working closely with the U.S. Department of Health and Human Services to expand testing sites at our stores beyond our pilot location in Philadelphia. And just last week, the Rite Aid Foundation announced a $5 million contribution to support the nation's health care providers and first responders; to support children, families and communities impacted by this outbreak to address the geographic pandemic hotspot, which is really where Rite Aid stores are located. We are deep in those communities. And also, to support Rite Aid's own associates as they continue to battle the COVID-19 pandemic themselves personally in many cases.

The additional steps we've taken are highlighted in today's press release, and we will continue to do more as we unite together in this ongoing battle against an invisible enemy. I'm really proud of the heroic and extraordinary efforts of our teams. And as the leader of the organization, my top priority is to take care of our associates as we stand ready to serve our communities at a time when they need us most.

So in turning to our results for Q4, I'm also equally proud of our team for continuing to deliver strong results that provide a foundation for achieving our new strategic objectives. As a reminder, our fourth quarter ended on February 29, which is before the COVID-19 crisis really began to have a financial impact. Later in today's call, Matt will provide an update about how COVID-19 has impacted our business and could impact it going forward. In terms of the quarter, we grew revenue across both segments and delivered our second consecutive quarter-over-quarter improvement in adjusted EBITDA. In our retail pharmacies, we increased same-store sales in both the pharmacy and front-end, while generating strong script count growth. For EnvisionRxOptions, which is soon to be renamed Elixir, we drove strong revenue growth by increasing our Medicare Part D membership and grew adjusted EBITDA through improvements in managing our pharmacy network. Overall, this was a strong quarter for execution that helps provide us with the important momentum heading forward.

This quarter 4 performance is an acceleration of the crucial work we've been doing throughout the fiscal year. As we planned for the future, we also moved with great urgency to turn this company around and begin growing again. So we built our new leadership team with top talent, a job that is still underway. We reduced expenses at Rite Aid Corporate by $55 million on an annual run rate basis. We extended 35% of our bond maturities out to 2025. We reduced our debt and reduced our leverage ratio by more than a full turn. We stabilized our retail business and handily beat our FY '20 pharmacy plan. And we beat our Elixir EBITDA plan while also controlling expenses.

As we've said during Analyst Day, all of this is important, very important, but it won't be enough to get our company thriving. As you know, we recently presented our vision for reintroducing Rite Aid in the communities we serve. We are committed to redefining our industry by launching a bold pharmacy-first strategy that we call RxEvolution. This strategy focuses on becoming the dominant mid-market PBM, unlocking the value of our pharmacists and revitalizing our retail and digital experience.

As the COVID-19 crisis has unfolded, it's magnified the importance of our go-forward plans and the need for what we can and will offer in the communities we serve. Ironically, it has reinforced that pharmacists are among the most trusted and accessible health care professionals and that we can empower our pharmacists to drive consumer engagement to levels not seen before in health care. And it's reminded us that the retail products and services we offer are essential to the communities we serve. So we're hard at work, not only in serving the immediate needs of our communities, but also in staying on course with our clear vision for the future. It's really a testament to our team, which is working literally around the clock to serve the immense needs of our communities, while moving forward with our strategic plan.

So at this time, I'd like to introduce Jim Peters for additional updates on Q4 as well as our strategic plans. Jim?

Thank you, Heyward. I have been nothing short of inspired by the truly extraordinary efforts of our organization, our associates, especially our store and distribution center associates. Rite Aid, we know we're not the only ones battling this crisis right now, but I can assure you, we are all hands on deck to do our part and more to serve our associates and communities during this very challenging time. It almost seems trivial to be discussing financial results during a time like this, but like other life-sustaining businesses throughout the world, we also know the importance of managing and executing on the day-to-day business so that Rite Aid can continue serving our communities well beyond this crisis and for generations to come.

Fortunately, our team had already been executing against our new RxEvolution strategy as we entered fiscal Q4, which helped us deliver a strong quarter throughout key areas of our business. As you know, our pharmacy is at the heart of our new strategy, which is designed to fundamentally change Rite Aid's role in health care. As we reported at Analyst Day, consumers visit Rite Aid stores upwards of 25 to 30 times per year, and we believe there's a significant opportunity to leverage these interaction points to support consumers, health plans and health care providers as a true partner, a partner that helps guide and reinforce a more connected care journey. As we continue working to bring this vision to life, it's paramount that we continue building momentum with our pharmacy business to lay the foundation for Rite Aid's RxEvolution.

In the fourth quarter, we continued seeing strong script count and clinical service trends as we focused on providing an even higher level of care and engagement. We delivered 5% growth in same-store prescription count, adjusted to 30-day equivalents driven by strong execution, notably in growing immunizations and medication adherence through personalized interventions as well as prescription file buys and gaining access to new networks and markets where we have a strong market presence. This year, our pharmacists increased our number of flu shots by more than 300,000 over last year for a total of more than 2.6 million. We also significantly grew ancillary immunizations by more than 500,000 for the year, which pushed our total number of immunizations including flu to more than 4 million. And of course, we continue to engage more customers through medication therapy management services with our results exceeding both last year and our plan for FY '20. These positive results lay the groundwork as we build a more robust set of capabilities that support the connected care experience and whole-being health solutions that include prescriptions, products and services.

As Heyward mentioned earlier, revitalizing our retail and digital experience is key to providing the holistic connected experience that consumers want and expect. On the retail side in Q4, we delivered crucial front-end growth in a challenging environment, which is providing us with key go-forward momentum in another critical area of our business. Front-end comps were positive and when excluding cigarettes and tobacco, front-end same-store sales grew by 1.5%, with strong results in core categories such as upper respiratory, pain care and first aid. We also saw strong growth in owned brand penetration, which increased 148 basis points to 20.69% quarter-over-quarter.

Owned brands will continue to be a critical priority as we launch additional better-for-you items to complement our focus on whole-being health. Heading forward, we continue to overhaul and curate our entire merchandising selection to fully complement the elevated health and wellness experience that will differentiate Rite Aid from our competition. This new merchandising will be phased into all Rite Aid stores with our Store of the Future prototypes taking it to an even higher level as we prepare to officially launch our new brand in the fall. Speaking of our new brand, last month, we unveiled our new Rite Aid logo and brand identity, and we're excited to be working towards our formal launch this fall. As noted, we conducted extensive quantitative and qualitative research to develop a fresh and fun brand that resonates with the new target growth consumer, millennial and Gen X women who care for multigenerational households, including pets.

As we work toward delighting these consumers, we're taking rapid steps to significantly enhance our digital experience. Earlier this week, after months of research, development and testing, we soft-launched our new website and mobile app with an entirely new look and feel and an enhanced consumer experience. These new tools feature intuitive navigation, more transparent rewards and loyalty benefits, a more user-friendly online shopping cart, prescription reminders for digital pharmacy accounts and more. We will begin promoting this new site and app to consumers in just a few weeks, and both will undoubtedly play a key role in creating a more personalized experience that are seamlessly connected throughout all touch points.

This launch is, of course, not a once and done but rather an early step in a digital journey that positions us to leapfrog our competition and delivering an omnichannel experience never before seen in the retail pharmacy segment. In Q4, our digital sales grew by 28%, driven by digital refills, and we are focused on driving continued growth heading forward. And in light of the current environment, it's worthy to emphasize that we continue to strengthen our e-commerce capabilities to accelerate the growth we're already seeing.

We've made bold moves in line with our strategy to ramp up consumer experience in e-commerce, and COVID-19 accelerated the time line for building these capabilities. And solid execution on our strategy prior to COVID-19 positioned us well to fight through our unprecedented online demand spike. For example, we were already transitioning to a structure that treats e-commerce as a business, not a cost center. We had already recruited the leader, who now runs this e-commerce business and overall consumer experience, an entrepreneur and digital retail executive who reports directly to me. And while it's a given that we have been battling through unprecedented online order volumes, our people have responded well and with urgency and with strength.

We are a flatter and significantly more nimble company than when I came here just 6 months ago. And as a nimble company, we've, in short order, ramped up e-commerce fulfillment. We've added capacity in our e-commerce distribution centers, added workstations, hired additional people, increased technology bandwidth. We've grown what feels like years' worth in months and are working hard to bring down our backlog and making progress. And through all this, we've handled this demand and growth responsibly. In addition to associate safety measures, we've enacted quantity limits, reduced available assortments and transparently forewarned customers to the best of our ability of prolonged ship times. As I said earlier, our digital transformation will help fuel an elevated omnichannel experience, both in-store and online, which has taken on an even higher level of importance in light of the COVID-19 crisis. We have expanded self-checkout to 260 stores with plans for an additional 400 locations in FY '21. Our prescription delivery and drive-through capabilities continue to be meaningful options for our customers, especially during this crisis. We recently expanded our pilot with Instacart and continue to explore additional convenient delivery options for our consumers purchasing merchandise from our stores. In addition, we recently completed a successful pilot of pay-and-go to expedite prescription pickup, both in-store and at the drive-through. We are now in the process of expanding this service across our store footprint with an expected completion date of April 30. And we continue to pursue new capabilities for consumers to Buy Online, Pick Up in Store. All of this is leading to a heightened consumer experience throughout all stores, particularly in our Store of the Future. By the fall, all Rite Aid stores will feature improvements such as exterior cleanup, new signage, merchandising changes, refreshed end caps and where needed, gondola changes. And for our Store of the Future, we will revolutionize our offering through features like wellness rooms, which will deliver localized whole-being health solutions in a stigma-free environment.

Before I turn it over, I'm excited to continue our RxEvolution, and we will continue pushing forward to bring this vision to life. At the same time, our top priority is leading and supporting our teams so that we can keep our associates safe, healthy and ready to serve the customers in our communities. I'd like to sincerely thank our more than 50,000 Rite Aid associates for everything they do day in, day out. They continue to respond in heroic ways and are making sure that we can continue providing essential care services and products during this never-before-seen time.

Thank you. And now I'd like to turn it over to Dan Robson for an update on Elixir. Dan?

Thanks, Jim. I've served as President of EnvisionRxOptions and as Heyward mentioned, soon to be Elixir for 4 months now. Our future continues to look bright. But before we talk about our key initiatives, I think it's important to mention both the immediate and future challenges presented by COVID-19. In regards to our business continuity, the business -- the company quickly implemented our pandemic response plan, and I am proud to report that we encountered virtually no disruption to daily operations. The team has really stepped up. Moving forward, we will continue to keep a close eye on membership, especially our commercial employer business. We have yet to see a measurable downturn. That may change as clients are faced with economic decisions regarding the size of their workforce. As we all know, it's a challenging time for the country.

And now back to our key initiatives. With each passing week, we make solid progress towards our objectives. First and foremost, we continue to build out our leadership team. And after months of recruiting and vetting candidates, I am happy to report that our executive roster is all but complete. We have much work to do in the coming months, and a seasoned, forward-thinking leadership team will take us down the right path. As we talked about last month, integration with Elixir and between Elixir and Rite Aid is a major initiative for 2020. And we've completed a comprehensive analysis of existing organizational structures, and we are already taking steps to eliminate operational redundancy and unnecessary expense. Throughout 2020, we will close the operational gaps between the Elixir companies and achieve tighter alignment with our parent company, Rite Aid. We're moving full steam ahead with strategic investments in our technology infrastructure, product innovation as well as member experience. These initiatives will clarify our value proposition to target markets and allow us to launch a more cohesive, more focused go-to-market strategy as we roll into Q2. And finally, we are hard at work preparing to implement our new name brand Elixir.

We will run -- we run a complex business and a rollout like this takes time. Our plan is to complete this rollout in 2020. Now regarding fourth quarter performance. The Elixir team did a great job of delivering growth during a time of significant change. Fourth quarter results were strong with an adjusted EBITDA increasing by $12.6 million or 33.2% compared to the fourth quarter of the prior year. This increase was primarily driven by a continued focus on improving margin, including our significant efforts to optimize our network strategy. Revenue was favorable to prior year by $337.8 million or 23.1%. This increase in revenue was primarily due to an increase in Medicare Part D membership. Medicare Part D enrollment is up 39.2% year-over-year, with a total year-over-year increase of approximately 244,000 members. In summary, we now have over 860,000 Medicare Part D members, including over 450,000 choosers. Also at our Elixir pharmacy, specialty revenues are up 20.2% year-over-year, and mail order revenues are up 27.1% year-over-year.

Finally, the 2020 commercial selling season was strong, having closed over 300,000 new lives, of which approximately 3/4 are health plan lives. We've also secured renewals for many of our key clients. And even with some losses that we consider outliers, our membership retention rate is 90%. Our position as a strong, independent, mid-market PBM is resonating as an essential option in the marketplace for health plans, health systems, self-insured employers and unions. We have a strong pipeline for the 2021 commercial and 2022 health plan selling season. And at the same time, there may be clients in this pipeline who are inclined to stay with their incumbent PBM in this environment. However, if this happens, that will also mean that Elixir would have a higher retention rate.

Now with that, I'll turn it over to Matt for some comments on Q4 financial performance. Matt?

Thanks, Dan. On this morning's call, I will walk through our fourth quarter results, provide an update on the recent impacts of COVID-19 on our business and review our fiscal 2021 guidance. Revenues for the quarter were $5.7 billion, which were up approximately $348 million from the prior year's fourth quarter. Net loss for the quarter was $343.5 million or $6.43 per diluted share compared to $255.6 million or $4.83 per diluted share in last year's fourth quarter. The increase in our net loss is due mostly to higher income tax expense, partially offset by a $72.4 million LIFO credit in the current year compared to a LIFO charge of $4 million in the prior year. Income tax expense was negatively impacted by a $320.6 million charge relating to an increase in the valuation allowance against our net deferred tax asset. The increase to the valuation allowance was based on our most recent assessment that it is more likely than not that sufficient taxable income will not be generated to realize the benefit of the net deferred tax asset. Adjusted net loss in the current quarter was $19.9 million or $0.37 per diluted share versus adjusted net loss of $13.3 million or $0.25 per diluted share in the prior year quarter. The increase in our adjusted net loss was due primarily to a current year loss on the sale of our 2019 CMS receivable compared to a gain on sale of assets in the prior year fourth quarter. This was partially offset by an increase in adjusted EBITDA, which was $135.6 million in the current quarter compared to $134.1 million in the prior year quarter. Retail pharmacy segment revenue for the quarter was $4 billion, which was $22 million higher than last year's fourth quarter. Our increase in retail pharmacy segment revenue was driven by an increase in same-store sales, partially offset by a reduction in store count since the end of fiscal 2019. Same-store sales increased 160 basis points in the quarter. Front-end same-store sales were up 150 basis points, after excluding cigarette and tobacco sales, driven by strong results in core categories such as upper respiratory, pain care and first aid. Pharmacy same-store sales increased by 160 basis points, with same-store prescription count up 5% on a 30-day adjusted basis due to strong execution, ,notably in growing immunizations and medication adherence through personalized interventions as well as prescription file buys and gaining access to new networks and markets where we have strong market presence.

Total retail pharmacy gross profit dollars in the quarter were $83 million better than last year's fourth quarter, and gross margin was 193 basis points better as a percent of revenues. Retail pharmacy segment gross profit for the fourth quarter includes the LIFO credit I mentioned earlier, which resulted from deflation in generic drug costs, partially offset by brand drug inflation. Adjusted EBITDA gross profit was favorable to last year's fourth quarter by $1.5 million and 11 basis points worse than prior year as a percent of revenues. Our increase in adjusted EBITDA gross profit was driven by an improvement in pharmacy gross profit due to prescription growth, partially offset by lower reimbursement rates. The improvement in pharmacy gross profit was partially offset by lower front-end gross profit due to a decline in vendor promotional allowances. Retail Pharmacy Segment SG&A expense for the quarter was $5 million higher and flat as a percent of revenues to last year's fourth quarter. Our adjusted EBITDA SG&A was $12.6 million and 17 basis points worse than last year. The increase in adjusted EBITDA SG&A was driven primarily by reduced TSA fee income from Walgreens.

Our Pharmacy Services Segment, Elixir, had revenues of $1.8 billion, which was an increase of $338 million or 23% due to an increase in our Medicare Part D revenues as we continue to grow our membership. Adjusted EBITDA for the Pharmacy Services Segment of $50.4 million was $12.6 million better than last year's fourth quarter adjusted EBITDA. Pharmacy Services Segment adjusted EBITDA benefited from increased revenues and improvements in pharmacy network management, partially offset by increases in SG&A expense related to our growth in Medicare Part D lives.

Our cash flow statement for the quarter shows a source of cash from operating activities of $417 million in the current year quarter compared to a use of cash from operating activities of $216 million in the prior year quarter. The cash from operating activities in the quarter benefited from the sale of our calendar year 2019 Medicare Part D receivable from CMS and the result of initiatives to reduce front-end inventory. Our debt balance net of cash was approximately $2.8 billion at the end of our fourth quarter and our pro forma leverage ratio was 5.3x adjusted EBITDA, which takes into account the impact of proceeds from the sale of the remaining distribution center to Walgreens, which is expected to be completed subsequent to year-end.

As previously announced, during the quarter, we completed an exchange of $600 million of our 6.125% notes due April of 2023 to 7.5% second lien secured notes due July of 2025, which improves our debt maturity profile. Our liquidity of $2 billion at quarter end is very strong. And with no debt maturing until 2023, we have the flexibility and runway to execute our strategic initiatives.

Before discussing our guidance for fiscal 2021, let me spend a few minutes providing an update on how COVID-19 has impacted our business through the first several weeks of fiscal 2021. We saw a significant increase in revenues during the month of March, with same-store front-end sales increasing by 33%. These increases were impacted by demand for general cleaning products, sanitizers, wipes, paper products and OTC items. The demand has moderated in the first few weeks of April. Same-store script counts were 8.3% for the month of March, driven by the acceleration of 90-day fills of maintenance prescriptions. We view this as a timing item and expect this phenomenon to have a negative impact on script trends in April and May. There is also a risk that delay in elective medical procedures could have a negative short-term impact on acute prescription fills. The benefit that we've seen from increased sales has been largely offset by investments made related to COVID-19 that Heyward described earlier, including pay adjustments for store and distribution center hourly associates, bonuses for store managers and pharmacists, increased charges to clean stores and other expense increases related to our increased volume, such as supply cost and credit and debit card fees. Regarding supply chain, our current supply for the majority of our brand and generic drugs is good. However, we've seen increased demand for certain generic products, such as inhalers and hydroxychloroquine, and are closely monitoring the supply of these and other generic products. We've had issues in restocking for front-end products with heavy demand, similar to others in the industry. We are working diligently with our supplier partners to get back in stock.

At Elixir, we've seen an increase in mail order prescriptions and drug utilization, which has a favorable impact on the business. Offsetting this is the negative impact of higher utilization on our medical loss ratio at EnvisionInsurance, our Medicare Part D plan. So far, we have not seen any negative changes in total membership for our PBM clients. However, there is a risk that extended layoffs could negatively impact PBM membership and related gross margin, and we will continue to monitor this closely. Our cash and liquidity position is very strong. Current liquidity is $1.9 billion, with a slight decline from the $2 billion at year-end due to expected timing differences of receipts and payments. We've had no issue accessing our revolving credit facility and out of an abundance of caution, have drawn an additional $180 million on our revolving credit facility to hold in cash during these uncertain times. At this time, the company does not have enough information about the ultimate impact of COVID-19 on fiscal 2021 results to justify changing the fiscal 2021 guidance that we issued on March 16 during our Analyst Day presentation. It is important to note that the impacts of COVID-19 on our business are fluid and difficult to predict, and these estimates could materially change.

Factors that could cause our estimates for fiscal 2021 to materially change include a deterioration in front-end sales and prescriptions due to prolonged social distancing measures, a reduction in members at our Pharmacy Services Segment commercial clients and disruptions to our front-end or pharmaceutical supply chain. Our guidance assumptions for the Retail Pharmacy Segment reflect expectations for continued prescription count growth and continued reimbursement rate pressure, partially offset by generic drug cost savings and strong SG&A expense control. Our guidance for the Pharmacy Services segment assumes sustained improvements in pharmacy network management and benefits from SG&A reduction and other integration activities and expense reduction initiatives. Our guidance also assumes restructuring charges of approximately $60 million, which are not included in adjusted EBITDA. These charges include the estimated cost to relaunch the Rite Aid and Elixir brands as well as transitioning certain merchandise lines in the retail stores. We expect total revenues to be between $22.5 billion and $22.9 billion, including PBM revenues of $6.75 billion to $6.85 billion.

We expect same-store sales to be in a range of an increase of 1.5% to 2.5%. We expect net loss to be between $91 million and $119 million, and expect adjusted EBITDA to be between $500 million and $540 million. We expect adjusted net income per share to be between a loss of $0.22 and income of $0.19 per share. Our fiscal 2021 capital expenditures are expected to be $350 million and will be concentrated on investments in technology, our store re-branding initiatives and prescription file buys that will drive growth. There is a risk that restrictions on construction activity and closures of local governmental permitting offices could delay our plans to roll out new size to our stores and could impact a number of Store of the Future remodels that we performed in fiscal 2021. However, it's too early to update our guidance for capital expenditures.

This completes my portion of the presentation. And with that, we will now be opening the phone lines for your questions.

(Operator Instructions) Your first question will come from the line of Robert Jones with Goldman Sachs.

Matt, you just talked about some of the strength you saw in March in both front-end and scripts. But I was hoping you could share maybe a little bit more with us in the type of comps that you're observing in the more recent weeks, end of March into the first couple of weeks of April. I know you mentioned it moderating. But is there any more of a sense you can give us on the order of magnitude as far as what you saw in the way of a drop-off as it relates to consumers changing behavior in the recent weeks?

Yes, probably can't give you precise numbers, Bob. But what I would tell you is we are still seeing positive front-end comp trends, positive trends on the front-end. And on scripts, I think we are seeing, in the last couple of weeks, slightly negative trends as we see kind of the impact of that 90 -- accelerated 90-day fill kind of come back.

Well -- and also lower acute medications because people aren't really going to the doctor right now.

Yes.

No, that's helpful. And then I guess, as it relates to the comments you made around generic drug purchasing savings not offsetting the expected reimbursement declines. Could you give us any more detail here? Are you seeing higher-than-expected generic pricing than what you had previously anticipated? And I guess if that is the case, could you maybe help us think through what's causing that, how the disruptions in the system might be resulting in changing in the generic pricing market?

Yes, Bob, I should clarify that really, the comments around generic drug costs not completely offsetting reimbursement rate pressures are really in the context of when we initially set our guidance and just our expectation that we're going to have reimbursement rate reductions in fiscal '21 that are above and beyond the savings we would expect to get just in kind of general market conditions. I think it's too early to really determine whether or not anything with COVID-19 is going to have an impact on generic pricing.

Great. I guess just one last follow-up, if I could. Heyward, you mentioned the difference between acute and chronic. It's something that we've been getting questions on. I mean is there any more you can share there just as far as the trends you're seeing if you parse out folks getting chronic medications versus acute in both the pharmacy and also at the PBM?

Yes. Well, actually, this has been -- we've seen a huge uptake in the PBM in terms of mail orders, for sure. And we're seeing people, of course, stocking up on their 90-day medications because they don't really want to be going back to the pharmacies as much because they're just worried about exposures. So if they can get 90 days in one trip through a drive-through, that's awesome. And then people aren't -- doctors aren't open for business right now. There's been a 40%, I think, decline in primary care physician visits. And so people don't want to go to the emergency room right now. And so we are seeing what I believe is the temporary decline in acute care meds. I think this will pick up in earnest when markets start to open and telehealth really starts to see its full impact. So my view is this is potentially just temporary. So maintenance medications do make up the majority of the scripts that we sell.

Okay. Great.

And I would add to that. Bob, I would just add to what Heyward said and just give you just a data point. In March alone, we've seen about an 8.3% increase in 30-day comp-adjusted script count for those maintenance meds, led really by anti-asthmatics, cardiovascular, hyperglycemic medications. So that just gives a data point. We don't rely on that much because it's a short window of time, but at least directionally gives you a sense of the driver.

Your next question comes from the line of Glen Santangelo with Guggenheim.

I just want to follow up quickly on Bob's question regarding April. If I heard you correctly, it kind of sounds like that even in the current environment, your front-store sales are still trending positive. And I think it seems to suggest that scripts may be down a little bit, but that's due to an accelerated adoption of 90-day scripts, maybe kind of implying that the current foot traffic is not down materially year-over-year despite the social distancing guidelines. Is that a correct characterization?

Maybe -- this is Jim. Maybe I can take that one. So foot traffic, it's interesting the way we define it has changed, right? So online traffic, combined with in-store traffic, is different from just traditional in-store traffic. So we've seen trips reduced with -- because of social distancing, but we've seen basket size increase. So on the front-end, you see -- you've got the stockpiling effect early on. But as Matt indicated or implied earlier, while we're not seeing the hyper growth that we saw end of February, beginning of March, we're still at levels that are certainly outpacing year-over-year on the front-end.

Okay. And maybe if I could just ask Matt, a quick follow-up on the balance sheet. A fair amount of debt restructuring over the past handful of months. I'm kind of curious, is there more to go there? And how do you think about the changes in the yield curve in the credit markets and how that may impact any sort of balance sheet restructuring going forward?

Yes. Certainly, there's more work to do, Glen, and we still -- we've made a lot of progress on our 2023 maturities, but we still have a sizable bond maturity due in 2023, that's going to be top of mind for us as we move throughout the year. I think, obviously, with this disruption in the credit markets over the last month, I think we've kind of taken a pause in some of our activities, but certainly thinking hard about how we handle those '23 maturities. And I think as the market stabilize, we would want to try to handle that maturity sooner rather than later.

Could the lower rates be a benefit to you, obviously?

I think lower rates could. I think some of it depends quite honestly on what's the appetite for our credit versus like versus investment-grade credit. I think initially, in mid- to late March, the markets probably were relatively close for a credit profile like ours. But my guess is that's starting to change in recent weeks. We'll take a harder look at it once we kind of let things settle down here.

Your next question is from the line of Lisa Gill with JP Morgan.

Matt, I just really want to start with your guidance for 2021 and the anticipation around how this all plays out. So in the current guidance, are you looking at what you're seeing currently and saying, okay, we think things are going to get better? Are you looking at this and saying, you lived through what happened back in '08 to 2010 with the economic downturn? Clearly, Rite Aid was in a completely different position than they are today from a liquidity standpoint. But are you making assumptions within that guidance that we do see more of a prolonged economic downturn and look at what the potential impact to your business could be. I just want to understand kind of some of the puts and takes. I know we talked about it on roughly a month ago at the Analyst Day. But I just want to better understand how you're thinking about an economic downturn.

Lisa, I think there is a lot of ways this could play out. So I think from the -- one thing I think we try to be careful about in our language around guidance is, given what we see and know today, there wasn't a reason for us to change the guidance. I still think there's a ton of uncertainty that could come from COVID-19. And I think we're being pretty careful to try to let investors know that there is that uncertainty out there. So I think in past recessionary environments, what I would tell you is that we would see some pressure on front-end comps, you'd see scripts stay relatively stable. On the PBM side, which we didn't have back in '08, I think there's the risk of loss of commercial membership somewhat offset by probably a potential for increases in Medicaid membership, and we do have a sizable amount of Medicaid lives. I think from a guidance standpoint, we've tried to take a snapshot of what's our best estimate of where things stand today. But again, I think there's just a ton of undefined risk here of COVID-19, and we tried to be pretty kind of candid about that in our release.

That's helpful. And then just in an unrelated question, you talked a little bit about telehealth and talked about the potential impacts from telehealth. Two things I just want to understand. One, is it a telehealth relationship with that -- you have with an outside vendor? And if so, can you share with us who that is? And then secondly, I think it may have been either Jim or Heyward that made the comment around potential future opportunities with telehealth and prescription volume. What have you seen thus far with people utilizing telehealth? Are they then in turn having a prescription filled at Rite Aid? Are they coming through the drive-through? Or are they having it delivered to their home in some way? I just want to understand how you think about the future trends of telemedicine as I believe that, that trend is here to stay.

Thanks, Lisa. This is Jim.

Yes, I'll let Jim comment on that. But I do want to just say that I think it's a bit early to know how telehealth is going to reflect out into the medications into the stores, even though there has been telehealth activity in the past. I think we're -- I think that's something that's about to hit us. Jim, you want to just talk about our overall strategy?

Yes, sure. Thanks. Lisa, yes, the telehealth, certainly, I also believe will take a significantly increased role as we move forward. And I think for all the obvious reasons, this COVID-19 crisis has pushed regulators and others to kind of expand their view of what pharmacists and nurse practitioners ought to be able to do through telehealth. It is too early to tell. All I could say is that we took all of our nurse practitioners, and we're early in sending them home as opposed to having them essentially be magnets for sick people coming into our stores. And as we did that, we very rapidly stood up our own RediClinic@Home line, which is telehealth. And we've done that with a current technology partner, which is Teladoc. We've had a technology relationship with InTouch, which was recently acquired by Teladoc. And so using that technology and others that we use to allow our own nurse practitioners to -- from the comforts of their own home and frankly, for patients, the comforts of their own homes, be able to connect. And we don't see any aberration as it relates to percent of those visits that result in scripts. But for us, it's early days for telehealth, and we only expect it to become a much stronger part of our offering.

Your next question is from the line of Elizabeth Anderson with Evercore.

I have 2 sort of minor questions. Can you talk about the PBM pharmacy network management improvement that you guys saw in the quarter?

Matt?

Yes, Elizabeth, this is Matt. I think what we've seen is we've just been able to do a better job of kind of managing the balance between the contractual commitments that we have to our clients and kind of how we manage rates on the retail side.

Okay. That's helpful. And one of the things we've been seeing is that pharmacists have been authorized to give COVID test. Is that something that you guys are sort of contemplating or working for on your end?

Well, we're heavy, heavy into this right now. We've been a part of the White House task force on this. Jim, you want to give an update?

Yes, absolutely. We're working directly and have been working directly with the White House and HHS on establishing testing sites. We view ourselves as a kind of pilot partner, a key pilot partner to the government as they attempt to roll out a scalable model of testing. So we were part of the initial testing sites. We had a location in Philadelphia. This week, we converted our original Philadelphia site and opened up an additional 3 sites in Pennsylvania using the new self-testing model. We have partnered with a number of vendors to provide end-to-end testing led by our pharmacists. And our goal as part of this second wave of government-driven testing is to stand up 25 of these sites in 8 states. And I think as importantly is all of what we have done, I would say that perhaps the most substantial, I think, movement that we've seen as a result of COVID is Rite Aid being squarely at the table in policy-shaping discussions that lead to things like expansion of our ability -- pharmacists' ability to test.

One thing I'll just add is that, we -- in some states, we actually do flu and stress tests. And in those states, we're actually able to prescribe as well. So we do see and are really trying to advocate for pharmacists to be able to continue to be an extension of service delivery, given their intense amount of consumer engagement. So we think that there's more services that we can provide in our retail pharmacy.

Your next question is from the line of George Hill with Deutsche Bank.

I guess my first is a little bit of a follow-up on Bob's question regarding the generic drug pricing comments. And I guess, is the -- is what we should read between the lines there is that most of the gross margin pressure that comes from reimbursement will not have offsets, so we should just think of that the reimbursement pressure flowing all the way to the gross margin line? Kind of a modeling question.

Yes, George, it's Matt. I think most is a strong word. I think we'll be able to offset some of the reimbursement rate pressure with generic drug savings. But certainly, we won't be able to offset all of it.

Okay. That's helpful. And then maybe just talking about business mix. I guess can you provide any color on the degree to which you guys over-indexed to Medicaid now? And I guess I would ask, at what point does that mix need to shift to put the guidance for the year at risk where I think most of us are expecting to see a sharp increase kind of as we go through the year as it relates to Medicaid enrollment versus commercial in the mix?

Yes. Let me comment on that. So this is for the PBM business. And our PBM business is a mixture of what we formerly called MedTrak and what we formerly called Envision, now all one PBM called Elixir. And I think we're very fortunate that we have a significant amount of our health plan business is in the Medicaid business as well as we have a significant Medicare advantage business along with our Medicare Part D business. And of course, commercial business, which is heavily indexed towards public sector and labor as well as small group business. And so we feel that we have as much of an opportunity for upside as we do have some risk on the commercial small group business just given the economy. So I don't know if that answers your question. But we do anticipate that the Medicaid rules will expand.

Well, Heyward, that's great color. I was actually thinking about it from the retail side, assuming that your margin per script in commercial was better than your margin per script in Medicaid. So thinking about the pharmacy (inaudible) who the payer is. Can you comment?

Sure. I'll let Matt answer that.

Yes. So we probably are already over-indexed a little bit to Medicaid compared to our competitors, George, just given the markets that we're in. And certainly, I think there is probably some risks that, that mix could further move over to the extent that you get people who are coming are getting laid off, no longer have access to commercial insurance and now are taking advantage of Medicare -- Medicaid expansion under ACA. I guess so I would say that while Medicaid scripts are less margin than commercial, that gap is maybe not as great as you would think on an overall basis.

Our next question is from the line of William Reuter with BofA Securities.

I was wondering if you were seeing any shortages in terms of pharmacists and staff there obviously interfacing a lot with people. And I was wondering if there were any challenges there in terms of keeping them healthy?

Well, actually, I couldn't be more amazed and proud of our pharmacy team. Our pharmacists have lower call-out rates right now than they've ever had. So these folks are there. They're on the ground, they're doing what they were trained to do and more importantly, what's the purpose and mission of what they want to do. We have had just an amazing response from our pharmacy team. They're the ones that are also involved with our clinical teams doing the testing. We have had not only no issues, we've just seen them show up like never before. Now I will say that in general, we are in New York City, we're in California, we're in Washington, and we're in Pennsylvania, we're in the nation's hotspots. And we have been impacted mostly on the tech and front-end side in terms of quarantines and call-outs, but we have not had to close any stores for anything other than cleaning. So it's been pretty remarkable.

That's great to hear. And then with regard to the Elixir, your commercial lives, you mentioned you've added 300,000 gross lives. It sounds like you're going to lose some. Do you know what you're expecting that number to be for the 2020 season?

Matt, do you want to comment?

Yes. I think for basically, for fiscal 2021, so for the season that's already been done, I think commercial is going to be -- when you take the lives that we've gotten versus the losses that we're cycling, commercial is probably relatively flat. And I would expect most of the growth in -- for calendar 2020, fiscal 2021 to be in Med D.

Your next question comes from the line of Karru Martinson with Jefferies.

Certainly very strong digital growth. And I was just wondering where -- what percentage are we digital today? And given the store base, how do you feel that digital can grow in the near, call it, 6 to 12 months?

Jim, why don't you take that?

Yes. Thanks, Karru. We started from a position of almost having virtually no digital e-commerce business on a relative basis to our revenues. So it's really inconsequential to even give a figure for that. But I could tell you that we've never focused on it either until recently. Over the past 6 months, it's become a high point of our strategy. And we believe that because of our footprint, we're not rate limited by any means by the existing footprint because, of course, e-commerce can deliver product and in some case, service, we believe, in the future, to people regardless of whether they're in our core geographic footprint. What I can tell you is that our revenue has grown substantially over last year. And again, our efforts to focus on growing that business are only quite recent. So we view it as a core part of our strategy. We think it will be a very good growth engine over time. And we actually think we're very well positioned to do things in a way that will measure ourselves based on best-in-class e-commerce vendors, not just those in retail pharmacy.

And then when you talked about the reset of the online mobile app and everything else and the focus on the rewards members, it's been a while since I've heard of an update of where we stand on rewards members and how their spending is relative to the rest of the customer base.

Sure. We've been not only looking hard at our rewards program, but trying to solve for one of the challenges that we recognized several months ago, which is because we're a -- a lot of people weren't aware of the real benefit they're getting from being in our rewards program. So we offer 20% plus for many of our wellness+ members. And historically, many of those members we learned weren't even aware that they were getting that benefit. Conversely, they were very aware when they see kind of in a high-low promotional pricing strategy that we've historically had, aware of those products that are priced higher, sometimes on shelves to balance the great discounts that we actually give through the wellness+. So in any case, we're doing a very good job maintaining our gold and silver members. Our challenge is really to drive new households. And that's kind of where we focus like a laser, and we've actually hired someone who's got strong experience working with other best-in-class loyalty programs on the retail side about 4 months ago, and we're making very strong progress there.

Okay. And just lastly. When we look back at, I know it's from the Analyst Day, you talked about addressing the 2023, hopefully, in the next 12 to 18 months. How should we square that with the handle sooner rather than later with the markets reopening comments?

I think I would square with -- if market conditions are right, Karru, I'd like to be closer to that 12 months and 18 months.

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

And along Karru's line of questioning, when you look at the surge in same-store sales in the front-end, you've seen over the last 6 weeks, let's call it, how many opportunities did you have to sign up new customers? And how many of those customers were unique?

Yes. I'll answer that. We -- it's interesting. When we look at our online, we actually took measures as appropriately to ensure that we kept backlog under control, at least as defined by the market under control metrics that are -- have come to be realized through COVID-19. And so one of those measures in controlling our online was to actually to focus on providing online order opportunities and restricting those opportunities to wellness+ members. So it's kind of one way that we're able to ensure that, number one, we can provide level of personalization to our growing base of customers and also, frankly, restrict the orders until we got the backlog down to reasonable levels. We did see a large influx of Bronze shoppers throughout this period, and those trends continue to hold up.

And how do you plan on like capturing that unique data and those unique customers that you -- that have experienced Rite Aid over the last 6 weeks? I mean what's the plan to go back after them?

Well, I mean, look, I think the step 1 is actually enrolling them, providing enough value and clarity around our loyalty program to have them want to enroll in our loyalty program. And as I said earlier, we've already designed changes in our program. And actually, we'll be launching a refresh program next year. But we're not just kind of turning on that light switch next year. We've already begun to change it. So the Bronze are already wellness+ shoppers, who shop relatively infrequently. So this was really an opportunity to reengage them in ways that we probably wouldn't have absent kind of the spike that we've seen with COVID.

And then my last question is that, if we go to the kind of the original hotspot in Washington State, can you talk about to any degree what's going on with sales there relative to the rest of your geographies? And that's it for me.

Yes. We're actively watching Washington State because we consider them to be on the front of this. And that's probably why you're asking the question, is that we see them as a leading indicator of what our life is going to be like in New York and California and Pennsylvania when this starts to ebb. Matt, you want to comment on some of those metrics?

Yes. Bryan, I would say that in Washington State, probably over the last week or so, while we're still seeing decent front-end comps there, we've probably seen a bit of a -- little bit more of a slowdown in Washington compared to the activity that we're seeing in some of the other hotspots, not unsurprisingly.

We've also...

So that is the way for us to think about life after the peak of COVID.

As Matt and Heyward said, we do view that as kind of a leading indicator to some degree. As a result, I mentioned earlier in my remarks that we expanded our work with Instacart, and that expansion actually started in the Pacific Northwest with Washington in the crosshairs. And we've already seen substantial pickup as a result of store to home delivery.

We have time for one last question. And your last question will come from the line of Carla Casella with JP Morgan.

Just a couple of follow-ups. You commented on adding some people to the stores under COVID and some bonus payments. Can you quantify any of the added employee labor that we'll see in 2021? And if this is something that's permanent. Are these permanent hires? Or are they 6 months, 3 months temporary? How you're looking at that?

Well, the first thing I would say is that the hiring is really to shore up the store so we can keep them open, and we will rightsize that as this passes on a market-by-market basis. It's also to keep our distribution centers highly functional. We don't anticipate that we will -- we'll keep our hiring tied to our volumes when this passes, when the peak issues pass. And then, Matt, you can comment on the pay and the timing of the pay.

Right. So we -- really, there's 2 elements to pay. One is we had a temporary increase in our wage rates for store and distribution center hourly associates that is going to -- at this point, we would expect to extend through sometime into May. We also had a onetime bonus for pharmacists and store managers. Those costs, along with some of the other incremental costs I mentioned on the call, we expect to pretty much offset the sales benefit that we saw in March. So I think those are going to largely offset each other, at least from what we see to this point. Obviously, things could change is depending on how things with COVID-19 develop.

Okay. Great. And then did you say how much you spent on TSA in the quarter? And then how we should think about TSA for '21? Now that I think you've completed some -- all the distribution center transfers to Walgreens?

So I think what we referenced was that we had a $12 million increase in retail SG&A, and pretty much all of that was due to TSA in the fourth quarter of '20. Fiscal '21, there will be very limited TSA income, in the order of magnitude of maybe $1 million.

Okay. Just on the one other clarification. The Pharmacy Services business was a lot stronger in the quarter, and you mentioned adding a bunch of lives. Is that something that's choppy? Or do you actually see an increase in the quarter you've added and then it tails off? Or is that a good run rate under the new useful lives -- or covered lives? Sorry.

Yes. I don't know if I want to -- I think you can probably look to some of the PBM revenue guidance for '21 to get an idea of kind of what we think for the overall revenue increase in the PBM business. I would tell you, Carla, that the Med D business, you basically have a pretty decent idea where you're going to be on January 1, and that's where a lot of that growth came in. I mean, obviously, utilization, particularly as it moves into some of the mail order business, is going to have an impact. But you -- in Med D, you do a bid, you get your lives in for January 1, and then the number stays relatively constant throughout the year.

Okay. Great. And then just one clarification on some language. You talked about the prolonged acute prescription decline. And you did clarify a bit that just COVID and people stocking up. But do you think there's any risk that you're losing market shares to pharmacies that have -- either are further along online distribution or other online distribution?

Yes. Matt. I'll start and let Hayward and Jim help me out. But I -- the comments around that were really more around kind of what we think is going to happen in the marketplace as opposed to us thinking we're losing share.

Yes. If anything, we anticipate picking up share, both, and we have seen actually share -- we picked up share on front-end. And so Jim, you can talk about pharmacy.

Yes. Same -- I would echo Matt's comments. We were not at all implying a thing about share as much as we were just trying to outline the potential risk. Doctors' offices remaining closed, elective surgeries and procedures continuing beyond a reasonable time period of being continued. So it was more just out of abundance of caution that we wanted to, at least, highlight that as a potential, but certainly no implication about share.

And at this time, I will turn the call back over to Heyward for any closing remarks.

Thank you. Thanks, everyone, for your questions. Before we end the call, I just wanted to thank our team. Since the COVID-19 crisis began, we've been hearing incredible stories about our frontline associates showing care and concern for our customers and clients. And we heard these inspiring stories from all areas of our business, whether it's Rite Aid, Elixir, RediClinic or Health Dialog, all of those companies.

I'd like to share one of these stories with you before we end the call. Last week, we mailed care packages to all of our associates, which included hand sanitizer, Vitamin C support, the coveted paper products as well as a note of thanks and encouragement to each associate. And we distribute them to the stores to distribute to their associates. And as you know, hand sanitizer is really hard to come by these days. At one of our stores in Pelham, New Hampshire, there was a customer who was looking for hand sanitizer, but the store was out of stock in that moment as they fly right off the shelves. In an incredible act of kindness, [Ursula Romana,] one of our store associates, took the sanitizer from her care kit and gave it to the customer who promptly contacted our customer support team to let us know. Acts of kindness like this are happening throughout the world, not just at Rite Aid as our first responders and frontline workers support our communities. And in these tough times, I really encourage all of us to recognize and celebrate those acts of kindness as we face these unprecedented challenges together.

So that concludes today's call. Thanks for joining us, and we'll talk again in June when we report our Q1 results.

Thank you. Thank you again for joining today's call. You may now disconnect.