Rite Aid fiscal 1Q forecast tops expectations

Rite Aid jumped in Friday trading after the drugstore chain issued a better-than-expect forecast for first-quarter earnings and started what one analyst described as a "much anticipated" debt refinancing.

THE SPARK: The Camp Hill, Pa., company said it expects fiscal first quarter earnings to range between $75 million and $90 million, or 8 cents and 9 cents per share. The company will report results June 20.

Analysts surveyed by FactSet expect, on average, earnings of 4 cents for share.

Rite Aid also said it started a debt refinancing that will lower its interest expense. The refinancing involves a cash tender offer for $500 million in 7.5 percent senior secured notes due in 2017.

THE BIG PICTURE: Rite Aid is the nation's third-largest drugstore chain, trailing only Walgreen Co. and CVS Caremark Corp. Rite Aid runs about 4,600 stores in 31 states and the District of Columbia.

The company has been working to clean up its performance by closing hundreds of under-performing stores in recent years and installing a new wellness format in others. These stores have more organic food and natural personal care products and employees who can help customers find vitamins and nutritional supplements.

Rite Aid reported its second-straight quarterly profit in April and first annual gain in six years, as an increase in generic drug use by customers helped its bottom line. Generic equivalents to brand-name drugs come with a wider margin between the price drugstores pay to buy them and the reimbursement they receive for doling them out.

But the cheaper drugs also can hurt revenue. Rite Aid said Thursday that sales from stores open at least a year fell 1.5 percent in the five-week period that ended June 1, largely due to generic drugs.

Total sales for the fiscal first quarter fell nearly 3 percent to $6.26 billion.

THE ANALYSIS: Credit Suisse analyst Edward J. Kelly said in a research note the drugstore chain's momentum continues to accelerate. He raised his price target on the shares to $3.50 from $3.

"While there is still significant wood to chop in the turnaround, company specific initiatives seem to be gaining at least some traction," Kelly wrote.

He added that industry-catalysts remain. Those include generic drugs and the health care overhaul, which will expand health insurance and prescription drug coverage to millions of people starting mostly next year.

SHARE ACTION: Rite Aid Corp. hit its highest price in more than five years when it reached $3.08 Friday. Shares then slipped to $3.05 in afternoon trading, but that was still up 15 cents, or 5 percent, over Thursday's close. Meanwhile, the Standard & Poor's 500 index climbed 1 percent.