RAD way overdone. HUGE short ratio of over 13. Look for a bounce on Monday.
Rite Aid 4th-Qtr Profit to Be Far Below Estimates (Update5) (Adds more analyst comment and background.)
Camp Hill, Pennsylvania, March 12 (Bloomberg) -- Shares of Rite Aid Corp., the No. 3 U.S. drugstore chain, had their biggest drop ever, after the company said costs from expansion will cause fiscal fourth-quarter earnings to miss analysts' estimates.
Earnings will be about 30 cents to 32 cents a share for the quarter ended Feb. 27, Rite Aid said. It was expected to earn 52 cents, the average estimate of analysts polled by First Call Corp. A year ago, it earned 44 cents a share.
Rite Aid has acquired several smaller chains in recent years to keep pace with the expansion of its bigger rivals, Walgreen Co. and CVS Corp. But analysts say the company expanded too fast, opening 78 more stores than it had planned, raising advertising and other operating costs. ''They overextended their boundaries,'' said Scotty George, chief investment strategist at Corinthian Partners LP.
Shares of Rite Aid fell 14 7/16 to 22 9/16, and earlier touched 21, a decline of 43 percent. Trading totaled 46.9 million, making Rite Aid the second-most active in U.S. markets.
Analysts said Rite Aid executives offered little elaboration today on the profit warning. That prompted much of the heavy selling of the stock. ''The market hates a vacuum,'' said Philip Muldoon, a McDonald & Co. analyst who lowered his rating on Rite Aid to ''hold'' from ''buy.''
Breakdown of Charges
The company broke out the shortfall to include about 7 cents from costs associated with opening and relocating 578 stores, more than the 500-store target set early last year. That includes higher-than-expected advertising costs of 2 cents a share. ''In the short term, this was a bad mistake,'' said Chairman and Chief Executive Martin Grass during the call. ''In the longer term, it should produce positive results similar to the same kind of store openings in the last few years.''
Costs of liquidating excess inventory in 208 shut-down stores were also higher than expected, by 4 cents a share, and further price markdowns to clear out seasonal goods in stores in the eastern and southeastern U.S. hurt earnings by 2 cents a share. The 208 store closings were in the third and fourth quarters, Rite Aid said.
Costs of keeping an older distribution site in Pennsylvania open while it set up a new, modern distribution center in Maryland cost it another 3 cents a share, the company said.
In addition, the PCS Health Systems in January occurred five weeks ahead of schedule, costing 2 cents a share in earnings, the company said.
PCS, a provider of prescription-drug benefit programs for employer health plans, was purchased for $1.5 billion.
The remainder of the shortfall was attributed to other ''unanticipated costs.''
Expansion Spree
Rite Aid's expansion spree has included the acquisition of 1,300 stores through its 1996 purchase of Thrifty Payless Holdings Inc. and its 1997 purchases of the K&B Inc. and Harco Inc. chains. Rite Aid also recently entered an alliance with General Nutrition Cos., a chain specializing in nutritional supplements, to beef up sales of vitamins and begin selling those products on the Internet.
The company's strategy is designed to keep pace with growing demand for prescription drugs as the U.S. population ages, analysts said. U.S. retail sales of prescriptions, which last year exceeded $89 billion, are expected to grow substantially this year.
Rite Aid has stores in more than 30 states, with strong positions in California, Pennsylvania and the Middle Atlantic states.
Merrill Lynch analyst Mark Husson said Rite Aid's ''fundamentals'' remain strong, noting an increase in sales at stores open at least a year of 9.8 percent. He rates the shares a ''buy.''
Growth too Fast
While the acquisitions aimed to give it the purchasing, distribution and sales to compete against industry leader Walgreen, the retailer may face a cash crunch if today's profit warning scares off investors, analysts said.
The PCS acquisition, for one, was financed largely with short-term debt, and Rite Aid planned to use proceeds of a public offering of more shares to repay that commercial-paper debt. ''They have huge commercial paper exposure -- the bulk of a billion dollars,'' said Thomas Buynak, director at Society Asset Management. ''They're at risk if their commercial paper rating gets downgraded enough that they could lose access to the commercial paper market. Then you'd have a full-blown liquidity crisis.''
In addition, scrutiny about Grass and his family's stakes in suppliers and real estate interests with which Rite Aid does business, stemming from stories published in the Wall Street Journal in recent months, have heightened investor concern. ''There is too much going on'' with Rite Aid for the company to offer ''a surprise like this'' today, McDonald's Muldoon said.
CEO Grass said on the call that the planned stock offering is still on track. ''It's in process with normal due course. We have not been asked to do anything out of the ordinary,'' he said.
Besides, ''the PCS acquisition . . . works equally well whether financed with debt or equity,'' Grass said. ''Obviously, our druthers are to use equity at the appropriate time.''
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