Rite Aid Corporation

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rite Aid Corporation third quarter fiscal year 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again press the star one. Thank you, Myron Purcell, Vice President, Investor Relations, and Treasurer. You may begin your conference.

Thank you, Rob, and good morning, everyone. We welcome you to our fiscal 2023 third quarter earnings conference call. Hayward Donegan, President and Chief Executive Officer, and Matt Schroeder, Executive Vice President and Chief Financial Officer, will begin the call with prepared remarks. Andre Persaud, Executive Vice President and Chief Retail Officer, and Chris DuPaul, Chief Operating Officer of Elixir, We'll also join the call during the question and answer session. As we mentioned in our release, we are providing slides related to the material we'll be discussing today. These slides are provided on our website, investors.rideaid.com. While management will not be speaking directly to the slides, these slides are meant to facilitate your review of the company's results and are used as a reference document following the call. Before we start, I'd like to remind you that today's 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 SEC. Also, we will be using certain non-GAAP measures in our release and accompanying slides. The definition of our non-GAAP measures, along with the reconciliation to the related GAAP measure, are described in our press release and the slides. With that, let me turn the call over to Hayward.

Thanks, Byron. Hey, good morning, everyone, and I just want to thank you for joining us today, and welcome to our third quarter earnings call. The third quarter came in better than consensus on both revenue and adjusted EBITDA, despite the continued challenging macro conditions. There were some clear positives, but I'll give you there's also some challenges, and then for me, I want to share some key takeaways with you. I'll go into more detail on these combined with some discussion on some exciting new initiatives that I believe will set us up for success going forward. But first, a quick review of our third quarter results. Revenue for the quarter was $6.1 billion compared to $6.2 billion in the same quarter last year. The third quarter adjusted EBITDA was $121.9 million, compared to last year's adjusted EBITDA of 154.8 million. In our retail pharmacy business, total revenue decreased 0.5% from the prior year, driven by the expected reductions in COVID vaccines and COVID testing revenue, in addition to the store closures that we've discussed. Results on a same store basis are encouraging. with improved growth rates in all key categories in the third quarter year-over-year. Overall, same-store sales increased 7.5%, with pharmacy sales increasing 9.5%, and front-end sales, when excluding tobacco, grew 2.7%. Total same-store prescriptions increased 4.4%, And when excluding COVID immunizations, prescriptions increased 3.6%. Same store maintenance prescriptions increased 2.1%. And same store acute prescriptions increased 8%. We also improved our overall prescription market share by 20 basis points for same stores, bringing us to over 11% share in the markets in which we operate. This is a testament to the high performance of our front end and pharmacy teams, their customer relationships, and even in this challenging labor market. Demand for flu immunizations and COVID vaccines in the quarter were both weaker than we expected, consistent with trends in the overall industry. The demand for bivalent COVID vaccines has been less than we anticipated, and we expect that weakness will continue into the fourth quarter. However, due to one of the strongest flu seasons we've seen in decades, we expect a longer tail to the flu immunization demand and into the fourth quarter. We expect to finish the fiscal year administering approximately 5.2 million COVID vaccines and 2.7 million flu vaccines. Turning to the front end, We're pleased to post market share gains of 20 basis points in the third quarter. Front-end same-store sales were aided by good results in health, consumable, and the beauty categories, offset by underperformance in alcohol and general murder. Sleep for the quarter was 9 million worse than the prior year's third quarter. We expect shrink to be a continued headwind in the fourth quarter additionally we're seeing signs the consumer is remaining cautious particularly in demand for discretionary seasonal products which has driven increased markdowns however high demand for cough cold and flu products has resulted in higher out of stocks you've probably heard this in the news turning to our pharmacy services business in the third quarter Elixir reported revenues of $1.7 billion compared to $1.9 billion for last year's third quarter. This was primarily due to a planned decrease in Elixir insurance membership and a previously announced PBM client loss on 1-1-22, partly offset by a combination of higher drug spend and utilization. Elixir's third quarter adjusted EBITDA was $40.2 million versus last year's third quarter adjusted EBITDA of $28.9 million due to strong procurement economics as well as a reduction in SG&A expense. Procurement economics refers to contributions from an expanded set of solutions including plan design and administration, formulary and rebate management services network performance management and specialty and mail order pharmacy purchasing these services add economic to our value economic value to our clients and also to elixir as we look ahead to the fourth quarter we expect some of the negative trends that we experienced in our retail business in the third quarter to continue this includes lower pharmacy margins due to drug mix, weaker consumer demand for discretionary items, which will likely result in higher seasonal markdowns, as well as continued higher shrink expense. As a result, we're reducing our adjusted EBITDA guidance to $410 to $440 million for the year, down from $450 to $490 million previously reported. This guidance reduction is concentrated on the retail side of the business. The key takeaway is that while we're seeing good script and front-end sales growth in our retail business and strong operational results at Elixir, we remain challenged by retail margin pressures. We took pride in the way we mobilize to continue to serve our communities during COVID. Now that the pressures of the pandemic are easing, we're working to bring that same call to action, that same agility, and strong execution back to driving growth and performance in the core business. The core drivers of growth include script growth with a focus on adherence, smaller format store launches, digital engagement, growing our loyalty membership, and driving increased own brand penetration. We are also laser focused on the long-term growth of our PBM membership, with development of a strong pipeline for the 2024 selling season that is already underway. At the same time, we will continue to reduce costs and free up cash. We are focused on adherence with our courtesy refill program. 1.2 million new customers have enrolled in our program since June. As a result, we're seeing a 1% increase in adherence scores for our Medicare Book of Business. The value we're seeing from these adherence initiatives reinforces the growth potential with our current customers. Also, we have a central fill facility that currently serves over 800 stores. This facility helps us dispense a higher volume of maintenance medications outside of stores, thus freeing up our in-store team for increased script growth and the delivery of enhanced clinical services. We're planning to expand our central fill capabilities to service the remainders of our stores in the coming year. We're introducing technology and innovation to streamline core non-dispensing tasks such as inventory management, automating customer prescription transfer requests, and taking non-pharmacist calls out of the stores. We're bolstering our centralized pharmacy teams to include additional clinical support for customers through our medication therapy management program, or MTM as we call it. So our in-store pharmacists will always be available to counsel and support our customers. That's crucial. But growing a centralized pharmacy team allows for additional touch points with our customers. And by growing our MTM program, we'll increase the number of medication interventions that focus on preventing or reducing drug-related risks, increasing customer knowledge about over-the-counter and prescribed medications, and supporting good habits to become or stay adherent to drug regimens. That's crucial to good health and preventing hospitalizations. And finally, this is all the first step of putting a pharmacist in your pocket. a virtual alternative to allowing customers to be able to access our pharmacy teams anywhere and anyhow. We're also upgrading our proprietary pharmacy workflow technology to streamline the user experience for pharmacists and increase operational efficiency. These enhancements include the expansion of remote quality assurance, remote data entry, and problem resolution and centralized support for other prescription filling functions. Additionally, we just launched our first two small format stores in Virginia. We believe these are a great way to expand and complement our footprint and better serve our communities. We have strong momentum in our digital business with sales up 65% year to date over last year and healthy margin contributions as well up over 50% in EBITDA from prior year. Our loyalty program also delivered strong results with 500,000 new members enrolled in the quarter. Rite Aid Rewards members spent 34% more on their front-end basket compared to non-members. We also had 300,000 members create digital accounts in the quarter. Our new own brand portfolio also continued to grow. We've talked about this before. We now are at 64% of our planned new own brand SKUs rolled out into the store year to date. The own brand sales comp growth was 8.1% in Q3 year over year and up 67 basis points in penetration. Not only are our own brands more affordable and higher margins, We believe this growth shows the promise of our new packaging and our new brands that are appealing to our target growth customer. Q3 once again demonstrated the ability of our Elixir business to generate increased EBITDA on a year-over-year basis, despite a significant decrease in lives going into the planned year. The performance was the result of consistent execution of our management plan put in place during Q1 of FY23 to increase our EBITDA margins through improved profitability and strict control over SG&A. We are on track to achieve our elixir guidance of $145 to $155 million for the year. Moving into Q4, we will cycle through significant membership losses on 1-1-23, resulting in a net decrease of 700,000 members. This change in lives is attributed to one large client loss that was previously disclosed and an expected reduction in Elixir Part D membership as a result of bidding above the benchmark in 23 of our 34 regions. We are aggressively working to adapt our cost structure to the lower life count, and we'll provide more details when we issue guidance for FY24. We are taking action to improve and accelerate our performance and business execution across Rite Aid. While we're gaining real traction on many of our strategic initiatives, we recognize that we have to do more and faster. That's why we've launched a new performance acceleration program. We've already mobilized and trained over 400 associates on this new approach to fast-tracking initiatives that will improve business discipline and drive outcomes that increase growth and profitability. We will approach these initiatives with a focus on prioritizing our limited capacity and capital and we will closely measure and track execution to build needed internal capabilities and processes. While it's still early days, we have already identified hundreds of opportunities and initiatives that will improve sales and script volume, expand our operating margins, and free up cash. We see real potential for this to drive performance through FY24 and beyond, and we will share further details and expectations during our next earnings call. To close, we're encouraged by our strong script growth, our increasing front-end sales comps, and solid ELIXIR results. We're focused on the acceleration of initiatives that will propel the growth of our business going forward. We're leveraging a new model to identify and manage initiatives positively impacting our operating results. We're committed to creating long-term value for our shareholders as we execute on our performance acceleration initiative and grow our modern pharmacy business. With that, I'll turn things over to Matt.