UPDATE 3-Rite Aid loss deeper than expected; shares slide

Thu Sep 23, 2010 2:58pm EDT

* Rite Aid hurt by weak pharmacy, seasonal-item sales

* EPS loss 18 cents v. Street view 16 cents

* Sales fall 2.5 pct to $6.16 bln; miss Street view

* Shares fall about 14 percent (Recasts, adds analyst comment, updates share prices)

By Emily Stephenson

CHICAGO, Sept 23 (Reuters) - Drug store operator Rite Aid Corp (RAD.N) posted disappointing quarterly results on weak sales of prescriptions and seasonal items, and cut its full-year forecast, sending its shares tumbling 14 percent.

Sales of drug-store items such as beauty supplies improved in Rite Aid's fiscal second quarter, but sales of seasonal items such as lawn chairs and pool toys were weak.

"Some of the core categories appear to be stabilizing and growing," Chief Executive John Standley said. "Where we're still fighting a little bit is really in our seasonal categories and general merchandise. Those are really the categories that we've got to get going here."

Rite Aid, the nation's third-largest drug store chain behind Walgreen Co (WAG.N) and CVS Caremark Corp (CVS.N), lowered its forecast for fiscal 2011 on Thursday to a loss of 46 cents to 67 cents per share, from a prior forecast for a loss of 41 cents to 65 cents a share.

Analysts had expected a loss of 50 cents per share.

Rite Aid reported a quarterly net loss of $197 million, or 23 cents a share, in its fiscal second quarter ended on Aug. 28, compared with a year-earlier loss of $116 million, or 14 cents a share.

Excluding items, the loss was 18 cents a share, which was deeper than the 16 cent-per-share loss analysts on average were expecting, according to Thomson Reuters I/B/E/S.

Revenue for the quarter fell 2.5 percent to $6.16 billion, slightly below analysts' average estimate of $6.19 billion.

COMPETITION HURTS

The U.S. retail sector has been hurt by the recession as consumers tighten their budgets, but drug stores have felt another hit as people cut back on doctor visits and fill fewer prescriptions.

Rite Aid's quarterly same-store sales fell 1.5 percent, with a 0.9 percent decline of front-end products and a 1.8 percent drop in pharmacy sales as more lower-priced generic drugs were introduced.

Rite Aid has not been able to boost sales as effectively as its larger rivals, said Morningstar analyst Matthew Coffina.

He said current initiatives, such as a new customer rewards program that has 22 million members and emphasizes training pharmacists to administer flu shots, were strategies other retailers were already using.

He said Rite Aid stores' sales per square foot are about 30 percent lower than its key rivals'.

"It's not really anything that's going to help them with their more fundamental problems," Coffina said, pointing to Rite Aid's debt load and cost-cutting efforts which he said may have impacted customer service at stores.

Coffina said a pilot partnership with Supervalu Inc (SVU.N) to add Save-A-Lot grocery stores to Rite Aid stores in South Carolina could boost store efficiency, but the 10-store test is too small to make a difference in the short term.

Rite Aid shares fell as low as 92.6 cents before trading down 15 cents, or 13.6 percent, at 95 cents on the New York Stock Exchange late Thursday afternoon.

As of Wednesday's close, they had risen 2.8 percent since June 23 when Rite Aid last reported results. Walgreen shares were up 5.9 percent and CVS fell 4.3 percent over the same period. (Reporting by Emily Stephenson; Editing by Martinne Geller, Maureen Bavdek, Dave Zimmerman and Richard Chang)

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