Rite Aid Corp, the No. 3 drugstore chain in the United States, reported a surprise quarterly profit after generic drug sales boosted margins, sending its shares up by a fifth to their highest in more than five years.
Like rivals Walgreen Co and CVS Caremark Corp, Rite Aid has benefited in the last year from a new wave of generic drugs that have replaced more costly blockbusters. The company's latest quarterly profit was its fourth in a row.
While stores earn less from selling generic medications, margins tend to improve as they are cheaper than drugs such as Lipitor, a cholesterol medication, and blood thinner Plavix - the patents on which have expired in the last two years.
Though this cycle is coming to an end, and the cost of generic drugs has begun to increase as the number of suppliers has fallen, Rite Aid raised its profit forecast for the fiscal year that ends in February 2014.
The company attributed the higher forecast to its better-than-expected performance in the first half of its fiscal year. It expects to earn 18 to 27 cents per share in fiscal 2014, compared with an earlier forecast of 4 to 19 cents.
"The cycle is negative for the next three quarters and that is simply because you had record generic conversions last year with Lipitor and Plavix," said John Ransom, analyst at Raymond James.
"But starting in the middle of next year, the cycle is pretty healthy again," he said, referring to the next wave of patents that will expire.
Rite Aid also expects to benefit from the remodeling of some of its 4,600 stores and various loyalty programs. Chief Executive John Standley said the Obama administration's new healthcare law could also be good for business.
"There are several million households in the areas where Rite Aid does business that will benefit from new or expanded health insurance coverage under the provisions of the Affordable Care Act," Standley said on a post-earnings conference call.
Rite Aid's gross margins rose to 28.93 percent in the second quarter ended August 31, from 27.45 percent a year earlier.
Net income was $32.8 million, or 3 cents per share. Analysts on average had forecast a loss of 4 cents per share.
This fiscal year, Rite Aid expects same-store sales to be reasonably flat. The company raised the lower end of its full-year revenue forecast to $25.1 billion from $24.9 billion, with the upper end unchanged at $25.3 billion.
Shares of Rite Aid jumped 20 percent to $4.47 in afternoon trading on the New York Stock Exchange.
(Additional reporting by Jessica Wohl in Chicago; Editing by Joyjeet Das, Kirti Pandey and Robin Paxton)