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Why Are Rite Aid’s Margins Deteriorating?

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Sep. 25 2018, Updated 9:02 a.m. ET

Rite Aid to report a loss once again

Rite Aid Corporation (RAD) is expected to post an adjusted loss of 1 cent per share when it reports its second-quarter 2019 results on September 27. The company reported the same loss in the previous quarter as well as the same quarter last year.

Management doesn’t expect to generate profits this year. It, in fact, lowered its overall fiscal 2019 net income and EPS expectations in August, citing lower expected drug efficiencies. The company has projected a net loss of $125 million–$170 million or a loss per share of up to $0.04 for the year.

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RAD’s margins have deteriorated over the years

Rite Aid has seen continuous deterioration in its profitability over the last couple of years, mainly due to lower reimbursement rates and a falling script count. The company’s adjusted EBITDA margin slipped to 2.6% of sales in fiscal 2018, compared to 4.4% in fiscal 2014.

However, the company recorded a slight improvement in its margins during the first quarter of 2019. Its adjusted EBITDA margin stood at 2.7% of sales, 23 basis points better than the corresponding quarter last year. This improvement was driven by higher gross profit at the company’s Retail Pharmacy segment, which improved due to better reimbursement rates and lower drug costs.

For fiscal 2019 as a whole, management has projected that EBITDA will range between $540 million and $590 million. At the mid-point, this range would translate to an EBITDA margin of 2.6%, which is similar to what Rite Aid generated last year.

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