Rite Aid Corp RAD
Q1 2012 Earnings Call Transcript
Transcript Call Date 06/23/2011

Operator: Good morning. My name is Tabitha and I will be your conference operator today. At this time, I would like to welcome everyone to the Rite Aid First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you.

Mr. Schroeder, you may begin your conference.

Matt Schroeder - Group VP, Strategy and IR: Thank you, Tabitha, and good morning everyone. We welcome you to our first quarter conference call. On the call with me are John Standley, our President and Chief Executive officer; and Frank Vitrano, our Chief Financial and Chief Administrative Officer.

On today's call, John will give an overview of our first quarter results and discuss our business. Frank will discuss the key financial highlights and fiscal 2012 outlook, and then we will take questions.

As we mentioned on our release, we are providing slides related to the material we will be discussing today, including annual earnings and sales guidance on our website, www.riteaid.com under the Investor Relations Information tab for conference calls. This guidance is a point in time estimate made early in the fiscal year. The Company expressly disclaims any current intention to update it.

This conference call and the related slides will be available on the Company's website until the next earnings call unless the Company withdraws them earlier and should not be relied upon thereafter. We will not be referring to the slides directly in our remarks, but hope you'll find them helpful as they summarize some of the key points made on the call.

Before we start, I'd like to remind you that today's conference call includes certain forward-looking statements. These forward-looking statements are made in the context of certain risks and uncertainties that can cause actual results to differ. These risks and uncertainties are described in our press release in Item 1A of our most recent Annual Report on Form 10-K and other documents we file or furnish to the Securities and Exchange Commission. Also, we will be using a non-GAAP financial measure. The definition of the non-GAAP financial measure along with the reconciliations to related GAAP measure are described in our press release.

With these remarks, I'd now like to turn it over to John.

John T. Standley - President and CEO: Thank you, Matt, and thank you everyone for joining us this morning to review our fiscal 2012 first quarter results. Our results for the quarter show that our company-wide focus on taking better care of and meeting the needs of our customers is working. Our significant reductions in SG&A over the last few years have given us the flexibility to make the investments we need to connect with today's value-driven consumer.

We are making those investments through our wellness+ loyalty program, which continues to grow as a percentage of our business and in terms of total members enrolled. Combining wellness+ with our customer service initiatives like the 15 Minute Guarantee in the pharmacy and our focus on friendlier service on the front-end are the primary reasons we have grown our same store sales for two consecutive quarters.

During the first quarter, we saw continued improvements in overall sales trends, although same store front-end sales were a little negative in March and April, but were positive enough in May to get us back to even.

Same store script count and pharmacy sales were up for all three months of the quarter and drove the total store comp sales increase of 80 basis points. Same store front-end sales, script count, and pharmacy sales continued to grow in June. We will be announcing June sales next Thursday.

First quarter adjusted EBITDA increased $13.1 million to $262.9 million this year versus $249.8 million last year. Very similar to last quarter and as expected, our continued investments in sales growth initiatives reduced first quarter front-end gross margin, but our improved operating efficiency and higher same store revenues helped us grow adjusted EBITDA.

Pharmacy margin was flat due to strong generic penetration and generic purchasing improvements, which offset declining reimbursement rates. Distribution costs also continued to show improvement in the quarter as we benefited from synergies of (own) warehouse consolidation.

Adjusted EBITDA, SG&A declined 27 basis points due in large part to another great effort from our store teams. Liquidity remained strong with $1.2 billion of revolving credit and invested cash available at quarter end. Net loss narrowed in the quarter as we were able to offset the $22 million charge, resulting from the refinancing we completed early in the quarter.

During the quarter, wellness+ continued to gain traction as I said and was one of the key factors contributing to our first quarter of same store sales growth. As of today, we have close to 40 million members enrolled in wellness+. Wellness+ members accounted for 67% of front-end sales and 62% of script count during the quarter.

Almost, 90% of our gold and silver members are shopping both sides of the stores, which makes them our most valuable customers. Interestingly, almost 50% of our gold and silver members shop our stores every week, so we are getting good frequency.

In addition, members continue to have larger basket sizes than non-members, and among members, gold and silver members have higher basket sizes and frequency than bronze members.

In the pharmacy, we continue to see a much higher retention rate with members versus non-members and members are a very high percentage of our best patients. Our research tells us that wellness+ members are significantly more satisfied with Rite Aid than non-members, which is another good measure of how the program is working.

Our Save-A-Lot Rite Aid stores continue to show solid sales gains and we continue to have discussions with SUPERVALU about the future potential of the Save-A-Lot Rite Aid stores. We have now completed eight wellness store renovations as our remodel program begins to ramp up. They are in Harrisburg, Pittsburgh, southern New Jersey and one in Newport Beach, California with another one to open soon here in Harrisburg area.

Research shows that with baby boomers aging and the high cost of healthcare, people are increasingly focused on staying well and living longer. More responsibilities are being placed on consumers to make health decisions, and they are actively seeking advice on how to make the right ones. This new format is all about empowering our customers and to pursue with wellness.

As I mentioned on last quarter's call, the stores have a new look with new decor package, lower shelving, wider aisles and brighter lighting. There are significant changes to our merchandising, including the addition of an expanded selection of organic foods, all natural personal care products and homeopathic medicines, just to name a few of the changes. The stores have additional resources to help customers obtain their wellness objectives, including expanded clinical pharmacy services and additional resource materials. The expanded clinical services include pharmacists that are diabetes care specialists, certified immunizers and medication therapy experts.

One of the most significant new elements of these stores is the wellness ambassador, who serves as a bride from the front-end of the store to the pharmacy. All wellness ambassadors are specially trained to provide customers with information on over-the-counter medications and vitamins and supplements and equipped with special iPad technology to assist customers in making decisions based on their individual (sentiments) and needs. They have been very well received by our customers.

While the wellness stores continue to evolve, the key elements of these renovations are the prototype of our store renovation program in fiscal 2012.

Other key accomplishments during the quarter include the continued rollout of our new private brand architecture. We now have over 1,200 items converted and we are on track to have 22 items in these brands this fiscal year. For the quarter, our private brand penetration increased to 15.6% from 15.3% last year. We acquired new customers through $8.1 million of prescription file purchases.

We continue to make progress improving our in-stock conditions by making process improvements to our ad forecasting and we trained an additional 4,300 immunizing pharmacists during the quarter as we prepared to have over 11,000 immunizing pharmacists available for flu season. It's too early to know what to expect from flu season with all our pharmacists trained as immunizers, we set a goal of 1.5 million shots this year.

Overall, I am pleased with progress we made in the quarter. In terms of fiscal 2012 it really is about the top line and we are off to a good start. I am very encouraged by the results so far from our sales initiatives on both the front-end and in the pharmacy.

Our associates are doing a really good job of executing these programs and taking care of our customers, while at the same time they continue to control costs and operate their stores efficiently. Frank?

Frank Vitrano - SEVP, CFO and CAO: Thanks, John and good morning everyone. As John mentioned first quarter sales and earning results reflect early benefits of the various initiatives we've been working on for the past 18 months.

On the call this morning, I plan to walk through our first quarter financial results, discuss our liquidity position, certain balance sheet items, our capital expenditure program, and finally confirm our fiscal '12 guidance.

This morning, we reported revenues for the quarter of $6.4 billion, which was essentially flat to last year's first quarter. The increase in same store sales was offset by a reduction in total store count. In the quarter, we closed 10 stores and did not open any net new stores. On a year-over-year basis, we operated 63 net fewer stores.

Same store sales increased 80 basis points in the quarter, reflecting the positive impact of wellness+ and positive script count. Front-end same store sales were flat and pharmacy sales were higher by 110 basis points and pharmacy scripts were positive 40 basis points.

Pharmacy same store sales included an approximate 145 basis point negative impact from new generic drugs. Adjusted EBITDA in the quarter was $262.9 million or 4.1% of revenues, which was a $13.1 million or 5% higher than last year's first quarter of $249.8 million or 3.9% of revenues. This is a second straight quarter of growth in adjusted EBITDA.

Results were driven by favorable sales trends and lower SG&A dollars. SG&A dollars were $36.7 million lower and 56 basis points as a percent to revenues.

Net loss improved for the quarter to $63.1 million or $0.07 loss per diluted share compared to last year's first quarter net loss of $73.7 million and $0.02 better than last year's $0.09 loss per diluted share.

Net loss improvement was driven by higher adjusted EBITDA, lower interest expense of $10.9 million and $4.7 million gain on sale of assets and lower income tax expense, partially offset by $22 million charge for loss on debt retirement and higher lease termination and impairment charges.

The loss on debt retirement charge was due to Tranche 3 refinancing that was completed earlier in the first quarter.

Our LIFO charge of $20 million was flat to last year. Lower interest of $130.8 million compared to $141.6 million last year, resulting from the most recent two refinancing events.

Total gross margin dollars in the quarter was $20.8 million lower than last year's first quarter and 31 basis points as a percent of sales. FIFO gross margin dollars was lower by a similar amount.

Adjusted EBITDA gross profit, which excludes specific items primarily LIFO and the wellness+ revenue deferral, the details of which are included in the first quarter fiscal '12 earnings supplemental information, which you can find on our website, was $5 million or 6 basis points as a percent of sales lower than last year's first quarter.

Front-end gross profit was lower due to the tier discount investments related to wellness+ loyalty program, partially offset by higher pharmacy growth profit dollars despite continued pressure on a third-party reimbursement rates.

Our distribution center expense trends continued to improve in the quarter.

Selling, general, and administrative expenses for the quarter were lower by $36.7 million or 56 basis points as a percent to revenue as compared to last year.

SG&A expenses not reflected in adjusted EBITDA were lower by $18.7 million due to lower depreciation and amortization expense and a gain from litigation proceeds.

Adjusted EBITDA, SG&A dollars which excludes specific items, again the details of which are included the first quarter fiscal '12 earnings supplemental information, was lower by $18 million or 27 basis points as a percent to revenues.

This reduction in dollars reflects the various cost saving initiatives, efficiency improvements and overhead reductions that have been implemented over the past 12 months.

Turning to the balance sheet, FIFO inventory was $38 million higher than the first quarter last year. Our cash flow results for the quarter show net cash from operating activities in the quarter as a source of $385 million as compared to a source of cash of $519 million in last year's first quarter.

Higher inventory as well as the timing of accounts payable payments at the end of the quarter influenced the balance.

Net cash used in investing activities for the quarter was $48.4 million versus $36.6 million last year and also includes proceeds from script file sales.

During our first quarter, we relocated six stores, remodeled three and closed 10 stores. Our cash capital expenditures was $56.8 million.

Now, let's discuss liquidity. At the end of the first quarter, we had $1.157 billion of total availability including $1.036 billion under the credit facility and $121 million of invested cash. We had nothing under the revolver and we had $139 million of outstanding letters of credit. Today, we have $1.147 billion of liquidity.

Total debt, net of investing cash, was lower by $18.2 million from last year's first quarter and $169 million lower in the year end.

Now, let's turn to fiscal '12 guidance. The Company confirms our fiscal '12 guidance, which is a 53-week year and our guidance reflects the extra week. The Company expects total sales to be between $25.7 billion and $26.1 billion, and expects adjusted EBITDA to be between $800 million and $900 million for fiscal '12.

Same store sales are expected to grow in a range of plus 50 basis points to plus 200 basis points over fiscal '11, which are not impacted by the 53rd-week.

Net loss for fiscal '12 is expected to be between $560 million and $370 million or a loss per diluted share of $0.64 to $0.42.

Our fiscal '12 capital expenditures are projected to be $300 million, with $127 million allocated to remodels and $75 million to file buys. We are planning to complete 20 relocations and remodel 500 stores. Remodels incorporate components of the various new formats. We are not planning to complete any sale leasebacks and we expect to be free cash flow positive for the year. We expect to close a total of 60 stores of which the guidance includes store lease closing provisions to close 35 and the remaining 25 closed upon lease expiration. Included in our net loss guidance is a wellness+ deferral provision range of $35 million to $45 million.

This completes my portion of the presentation. Now, I'd like to open the lines to questions.

Transcript Call Date 06/23/2011

Operator: Mark Wiltamuth, Morgan Stanley.

Justin Van Vleck - Morgan Stanley: This is Justin Van Vleck sitting in for Mark. Just wanted to talk about CapEx a little bit more if we could. I was wondering, could you remind us what maintenance CapEx is first off?

Frank Vitrano - SEVP, CFO and CAO: Maintenance CapEx is somewhere south of about $150 million to $175 million.

Justin Van Vleck - Morgan Stanley: How does that breakdown to, mainly, for the stores themselves versus other things, because there are per store maintenance CapEx that goes into that calculation?

Frank Vitrano - SEVP, CFO and CAO: Right. If you think about right now back office for us is about $50 million. You consider technology investments and distribution and other back office items. So about $100 million, $125 million would be allocated to the stores.

Justin Van Vleck - Morgan Stanley: Then I was wondering if you could maybe talk a little bit more about the pharmacy margin trends that you've been seeing. Walgreens has commented for a few quarters now that they been seeing positive pharmacy margin trends, and I guess, given what you are seeing, do you think the pharmacy margin trends that you're seeing will continue into 2012, do you think they'll get better, you think they'll get worse? I guess, just give us an update there.

John T. Standley - President and CEO: Our pharmacy margin, as I think, we said was kind of flat for the quarter. We continue to see reimbursement rate pressure from both managed care and government agencies, but we also continue to make good improvements on the purchasing side as well as see continued increase in generic penetration. So, that seem to kind of balance out this quarter. I expect to see continued reimbursement rate pressure through the rest of the year. However, as we get it late into the year, we'll start to see the benefit of some new generics roll in and it is our expectations that pharmacy margin will be better next year due to the impact of new generics.

Operator: Karru Martinson, Deutsche Bank.

Karru Martinson - Deutsche Bank: I was wondering could you walk us through the customer royalty card revenue deferral. You've taken about half of the expected charge here in the first quarter. How should we think of that and how does it flow through the numbers?

John T. Standley - President and CEO: How much time you've got?

Karru Martinson - Deutsche Bank: I have a lot of time.

John T. Standley - President and CEO: Frank, we'll let you answer that one. What's going to happen is that deferral is going to continue to build as we continue to grow membership and at some point in time when the membership number stabilize, we'd expect that deferral to stop building because what happens then is you basically kind of (max) down the amount of liability that you have. I'm not going to give a precise quarter-by-quarter breakdown, but it is a bit front-end loaded because we're still building up basically to what we think is going to be a mature membership base. Then once that happens, the liability will stay stable. So what you're going to have is smaller kind of movements either up or down in the charge that we take every quarter relative to that.

John T. Standley - President and CEO: But that charge that you take is to offset the discounts that you are giving?

John T. Standley - President and CEO: It will be earned in the future basically.

Frank Vitrano - SEVP, CFO and CAO: That charge we are taking now is basically cash we've gotten in the door but we haven't been able to recognize the revenue on that yet.

Karru Martinson - Deutsche Bank: Alright. Then there has been, obviously, a lot of industry noise here on PBMs this past week. I wanted to get a sense of the status of your relationships, contract renewals and how you are looking at that.

John T. Standley - President and CEO: It is – there (indiscernible) gone up.

Karru Martinson - Deutsche Bank: Just a few minor headlines.

John T. Standley - President and CEO: Few minor headlines. No headlines here. We are always in discussions with our PBM partners all the time on different things. That hasn't really changed for us. I think it's been a fairly normal tempo of activity. I mean we are, as we've said before, still having a lot of discussions about how the generic wave is going to work with everybody, but I wouldn't say there is anything kind of unusual happening at the moment.

Karru Martinson - Deutsche Bank: Then just lastly, you guys have been very successful on taking SG&A out of the business for the past kind of two years or two, three years. How much more room is there to take SG&A out and should we kind of think of current levels as the run rate going forward?

John T. Standley - President and CEO: It's definitely getting tougher. That's why we are really focused on growing revenues here. That's really kind of the key to what will make this year work the best that it can. So we continue to really push to get everybody focused on taking care of customers and really growing the top line. I think, Frank, the SG&A is just going to continue to get tighter to get kind of year-over-year improvements as we go.

Frank Vitrano - SEVP, CFO and CAO: Absolutely. I mean, we, obviously, over the last nine quarters or so we've probably taken out $270 million or so of cost here. So there has been a lot of progress made, but as John alluded to, the key here is really driving the top line. There's still opportunities. The things that the team is working on in order to reduce our overall costs here, but it's becoming more and more difficult to find opportunities there.

Operator: Karen Eltrich, Goldman Sachs.

Karen Eltrich - Goldman Sachs: Actually following up on Karru's question with regards to Express Script. As you look at you store base, I mean we're not commenting necessarily what the outcome of that is but what percentage of your store base is kind of isolated from Walgreen and CVS where you can maybe get an opportunity to steal share?

John T. Standley - President and CEO: I'm not sure I can answer that question on top of my head to be honest with you. There are markets where we compete more or less with both of them. So, I'm not sure. I don't think I can tell you.

Karen Eltrich - Goldman Sachs: Fair enough. Also with regards to the wellness+, obviously very good momentum being maintained in terms of on growth, when do you see that starting to level off and also do you kind of attribute that to successful advertising and are you getting any signs that this is in fact new customers coming into the program versus converting existing?

John T. Standley - President and CEO: I think early on we definitely went through a heavy, heavy conversion period. I think the change in our same store sales momentum – and by the way early on, I think we changed out some customers as well. As we went through this program, what's little bit different about the way our program works is that we require that our store in order to get our ad discounts and we don't need store cards. So if you don't have the card or your phone number or other identification number that you gave us, we don't get ad discount. So early on we went through a very pretty big change out of customers where those people who didn't want to be involved with program, but wanted to get out prices, probably left us. People who I think – we know we converted our existing customers and I think we're in right now as what we call the acquisition phase of this thing where we're really out trying to explain to our non-customers what this thing looks like. We are on TV across the country right now with advertising that I think tries to reinforce the message about the value of gold membership or silver membership, and so that's kind of the phase that we're in at this thing right now. I think we'll always have some level of additional enrollment in this thing, but you can see the rate of enrollment has slowed down quite a bit from the early days and I think the pace that we are at now is probably kind of in that sort of material range, I would say. It could be up or down a little bit, but we are kind of at that pace I think it will sort of hang around for a while.

Karen Eltrich - Goldman Sachs: Final question with regards to store remodel. Can you maybe give a little bit more clarity in terms of what the buckets will be between wellness, value and Save-A-Lot?

John T. Standley - President and CEO: Probably just as time goes on – in terms of Save-A-Lot, we are still testing it. We are very encouraged again as we continue to have pretty good sales results there, but we are still working through the overall profitability of the store. We are also still having discussions with SUPERVALU about the mechanics, how it would work if we want to go forward. But if more time goes by, it's more likely that capital shifts from any kind of Save-A-Lot thing towards our wellness stores. So, we haven't given out that number, because we weren't sure with the timing on the Save-A-Lot would be and so we are still little hesitant to do that until we kind of button that down.

Operator: Emily Shanks, Barclays Capital.

Emily Shanks - Barclays Capital: I had a couple of questions around the balance sheet. Working capital management exceeded our expectations and that look likes you've got some nice accounts payable leverage during the quarter. Can you give us a little color around what was driving that or is that just a one-time item?

Frank Vitrano - SEVP, CFO and CAO: Emily, it's really just the timing of inventory and payable, there is nothing really...

John T. Standley - President and CEO: We're not changing any payment terms of anything like that.

Frank Vitrano - SEVP, CFO and CAO: Our payment terms are (not) vendor payment terms or anything like that.

John T. Standley - President and CEO: That (management going on) so.

Frank Vitrano - SEVP, CFO and CAO: Absolutely not. It's just the timing of it.

Emily Shanks - Barclays Capital: A follow-on to that would just be, I know Frank you had mentioned that you are still projecting to be free cash flow positive in fiscal year '12. What are the assumptions around working capital as it relates to that? Is that a source or..

Frank Vitrano - SEVP, CFO and CAO: I would tell you we have done a fair amount of work over the last two years in terms of reducing the inventory, unproductive inventory out of the system, and we are really getting to the tail end of that at this point. So there is really isn't a huge opportunity for us to take a lot of inventory out of the system here. So I wouldn't expect it to be a source for us. If it is, it will be a very small source.

Operator: Steven Valiquette, UBS.

Steven Valiquette - UBS: Just a follow-up on some of the Express Scripts stuff and Walgreens, trying to figure out what are the questions I want to ask in relation to this, but it's

John T. Standley - President and CEO: We are not going to help you much because we are not going to go near it.

Steven Valiquette - UBS: I guess the question I have is to the extent that some of the issues that were in dispute, they were made public. I am just trying to get a sense for – if one of your competitors is uncomfortable with some of those variables, are you perhaps more comfortable? Maybe just in general, are you generally comfortable with definitions of brand versus generic drugs? Are you comfortable with the level that you are being informed if there is adds or transfers to prescription drugs, the different networks and just some of those variables, trying to get a sense of whether..

John T. Standley - President and CEO: I am not going to (weight) into this thing, I am not doing it. We work very closely with our PBM partners everyday. We try and have a constructive dialogue and resolve issues if they come up and that's what we are going to continue to do and it's a constantly evolving process. So I am not going to (weigh) into specifics over the dispute.

Operator: Edward Kelly, Credit Suisse.

Edward Kelly - Credit Suisse: I'd like to ask you a question about reimbursement rates, sort of, in a different way, because you kind of mentioned that you're in a more normal environment in terms of negotiations for reimbursement rates, but yet at the same time you talk about how the pharmacy is still seeing pressure on the reimbursement rate side. As you think about your business, right, I mean you've got a 4% EBITDA margin, I can't imagine that you want to see continued pressure on reimbursement rates. So, how do we think about the outlook for that going forward, obviously you've got one of your competitors saying enough is enough with one account, but is this something that we should be expecting long-term and is there anyway to stop the bleeding there?

John T. Standley - President and CEO: Well, I think the reimbursement rates go down always. I mean since I had been rolling around here, which is a long time every year reimbursement rates decline. There is a couple of thing that impact them, obviously one is the maturing cost cycle of the drug, right, and obviously, mix impacts it as well. So, what our challenge is, is in these kind of – in contracts is to have the positive discussions, good discussions around what we think future costs are going to look like and what are acceptable reimbursement rates to us. We're really focused on our situation, what we think is appropriate for us and that's really the kinds of dialogs that we have with our PBM partners. But there is an expectation when we have these conversations that we are going to be able to find more ways to reduce costs and become more efficient and they are in the marketplace, on their side battling for business as well and we'll have to work together to kind of get the whole thing to flow. Not sure, if I am answering your question, but...

Edward Kelly - Credit Suisse: Well, if you look at 2012, I mean obviously the mix of generics is going up a lot, so it's probably fair to assume that there is going to be more pressure on reimbursements. Are you seeing that pressure in your negotiations today? I guess it sounds like how things are playing out is acceptable, is that fair?

John T. Standley - President and CEO: I would say that that's still a little bit of an unknown. We're still working through discussions that involve that period of time.

Edward Kelly - Credit Suisse: I'd like to ask you another question about your loyalty card. Can you give us some estimated cost in terms of what wellness+ is actually costing you? Let's say, this first year, I don't know if you can talk about dollars or a percentage of sales, I got to imagine that there is some investment.

John T. Standley - President and CEO: Sure. That's a significant investment.

Frank Vitrano - SEVP, CFO and CAO: I mean it really – a benchmark for you to look at is really what the revenue deferral is. So over the last two years, we will have put up a revenue deferral of almost $100 million, okay, and on a net basis, that should be a pretty good proxy for what the cost is going to be

Edward Kelly - Credit Suisse: As you think about the payback on this, when do you think you get to a point of breakeven? How long does that take?

John T. Standley - President and CEO: Well, I think it's starting now. I mean, obviously, the trick to this whole thing is to get the top line growing to – although, we're going obviously investing some rate here – to drive more footsteps in store and part of its actually sitting over in script count. One of the key components of this thing is the royalty aspect (before) you earn points for scripts and then you benefit from that with future front-end discounts. So, stirring all that together, we think when we kind of put this whole thing together that it was going to have kind of a return that sort of met our normal thresholds. So – and we pay for itself, our cash on cash return number, I don't know, 24 months or something kind of in that range and would show our real return over a period of time.

Edward Kelly - Credit Suisse: Has some of that included working with vendors to get done and then maybe fund some of the stuff that you're doing or even sort of shifting the way that you're promoting in the store?

John T. Standley - President and CEO: I mean one of the key features of this thing are the +UPs. I don't know if you're familiar with – how familiar are with that program, but our +UP program was really a new way to bring value to market and our vendor partners have been very supportive of the efforts and have invested with us to make that program work.

Edward Kelly - Credit Suisse: Then just last question for you on inflation within the front-end of the store. What level of product cost inflation are you seeing today and are you successfully passing that through?

John T. Standley - President and CEO: Yeah, in terms of what we've seen so far, Ed, it's running somewhere south of 1%. We're reading same headlines you are about there is things to come. The key for us as we think about passing along as one is where we need to maintain our competitive position, but we're also looking to passing along where we can.

Edward Kelly - Credit Suisse: Now your competitor is pretty much taking the same stance do you think?

John T. Standley - President and CEO: I think our sense is that we're going to – what we're going to do is maintain our positioning in the marketplace. So, I think that kind of answers your question.

Operator: John Heinbockel, Guggenheim.

John Heinbockel - Guggenheim: Couple of things. What do you think the natural inflation is in operating costs at this point when you look across labor, utilities, rent, et cetera, what do you think there is right now?

Frank Vitrano - SEVP, CFO and CAO: Kind of all in 2%, 3% range, kind of, all blended together something in that range.

John Heinbockel - Guggenheim: You have some ability, is it waning, but some ability to reduce that. So I guess what I start to think about what's a minimum comp to get expense leverage going forward. I guess it sounds like it's maybe 1 to 1.5 or something like that. Do you think that's fair or…

Frank Vitrano - SEVP, CFO and CAO: Maybe 1.

John T. Standley - President and CEO: Yeah. I would say 1. Maybe a tad less than that, but depends on how much margin it takes to get that comp.

John Heinbockel - Guggenheim: Secondly, when you think about the wellness+ remodels, as you know today, how will they compare to kind of your past – the metrics compare to your past remodel efforts when you think about capital investment, SG&A? I guess it might run a little higher gross ROIC. How does that compare?

John T. Standley - President and CEO: These stores here, the remodels I think are a little bit more significant in terms of scope and some of the things we've done in the past. We've had some different variations where we did sort of pain powders, and maybe there was a pain powder with a reset, and that kind of thing, but whereas we are tackling a lot of these RA1s and addressing some issues in those stores, their cost can actually be a little bit more – the stores actually probably look more dramatically different after one of these renovations and they have probably over earlier forms of renovation that we did. So I think it's more truly impactful to the store. So the capital cost is, as I've said, a tad bit higher, so we are probably looking for (touch) more sales. I don't know, Frank, you want to talk about our return invested capital.

Frank Vitrano - SEVP, CFO and CAO: I mean, right now the costs of this – the ones that we are doing right now is about $250,000 with wellness and we are looking at a 3% comp and to be able to get about a 20% return on investment.

John Heinbockel - Guggenheim: I imagine the SG&A is higher and the gross is higher?

Frank Vitrano - SEVP, CFO and CAO: The gross is really not significantly different. In terms of from expense standpoint, really the incremental expense here is, John talked about the Wellness Ambassador position that we are adding, that's really kind of the net incremental expense to this thing.

John Heinbockel - Guggenheim: Thirdly, if you look at – what's your best guess on how (macking) plays out in the 2012 generic cycle compared to prior ones, because this is so well known and telegraphed, it doesn't happen quicker than in past or not?

John T. Standley - President and CEO: We'll (certainly) answer to that. I mean, obviously, as I was mentioning earlier, someone was asking, I think, it was Ed, Kelly or somebody was asking earlier about this. As I have said, I think there is still a great deal of uncertainty around how mechanically it's going to work as we go through the wave for us. We are in some discussions with our partners about – PBM partners about how that's going to work. So in terms of what expectations are in the marketplace from an employer perspective and what not, I am sure there is expectations out there, John, and yes, we are going to save money but remember they get – an employer gets significant savings just by virtue of these things going to be generic. There is a huge reduction in costs just getting there. So then it really I think sort of gets into the mechanics of how the (macking) works once we sort of get there. It's going to depend a little bit on how quickly other players come to market. We are still a little bit of an unknown on some of these things. So I think there is still a large number of questions to sort of answer before we can give you an answer.

John Heinbockel - Guggenheim: Then one last thing. When you look at impact of gas prices on the business in terms of your – two parts to that. In terms of your consumer, do you look at that as kind of a wash? Then really I guess the supermarkets have done a good job tying loyalty into gas programs with gas stations. Drug generally hasn't done that to this point. Is there an opportunity to do that? Or not really because it dilutes the message of wellness.

John T. Standley - President and CEO: Well, we've done it in the past. We had Fill Up and Fuel Up program a couple of years ago and it was actually a pretty good program for us. I think one of our competitors is out with a temporary program and kind of messing with it. We're pretty focused on what we're doing. What we're doing seems to be working. So we're going to stick with what we're doing here. We kind of like where we're going and that's really our focus, that's our program.

John Heinbockel - Guggenheim: Do you think it's neutral, but (don't help you, don't hurt) you in terms of convenience versus people having most money in their pocket?

Frank Vitrano - SEVP, CFO and CAO: I think that's probably right so far. I think (indiscernible) is probably not going to be great for any of us, but…

Operator: Mary Gilbert, Imperial Capital.

Mary Gilbert - Imperial Capital: Just wanted to follow up on the generic mix and the gross profit. So, if we look at your portfolio of generics versus branded, is it still from a gross profit dollar standpoint 50% higher for generic the mix of the portfolio today even with –

Frank Vitrano - SEVP, CFO and CAO: Yeah.

Mary Gilbert - Imperial Capital: Okay. So even with all of the reimbursement rate pressure?

Frank Vitrano - SEVP, CFO and CAO: Then, again, part of reason why is reimbursement rates are coming down but we're also working hard to get cost down.

Mary Gilbert - Imperial Capital: Also, on dark rent, where is that currently running? How should we look at it for the full year given the stores that are going to be closing?

Frank Vitrano - SEVP, CFO and CAO: Mary, right now, we are projecting about dark rent this year will be about $95 million

Mary Gilbert - Imperial Capital: $95 million okay super. The other thing is if we look at the results in the first quarter and the trends that we have been seeing in terms of comp sales I mean it looks like your running at a nice rate to exceed guidance. Are there any concerns that you have or are there other things that were just not considering that would suggest that the guidance is more in-line or is it that you are being conservative and the trends are definitely favorable in suggesting that guidance could be exceeded?

Frank Vitrano - SEVP, CFO and CAO: Mary, when we gave out guidance, the spread was between $800 million and $900 million and the driver to that was sales. Okay, so we have a sales range here of 50 basis points to up 200 basis points. For the first quarter we were up 80 basis points or so. So, we are pretty comfortable with the guidance range that we have here-to-date.

Mary Gilbert - Imperial Capital: Also can you give us an idea and I know it's very early, but what are the sales list that you are seeing in the wellness stores and then also if we can get an update on the Save-A-Lot and the value stores?

John T. Standley - President and CEO: Sure the in the wellness stores, the list in the front-end has been probably 100 to 200 basis points better than the chain, but remember we're just a few weeks into those stores. So those numbers are going to change a lot over time, so I wouldn't run too far with that yet. In the Save-A-Lot stores for the quarter on the front-end, we were up about 68% – almost said basis points, about 68% year-over-year for the quarter. The value stores slowed down a little bit in the quarter. We have introduced some new stores into the mix that have probably pulled down the number a little bit, so I think we were up 140 bps or something on the value stores. They were a little bit slower.

Mary Gilbert - Imperial Capital: How many value stores do we have currently?

John T. Standley - President and CEO: 51.

Mary Gilbert - Imperial Capital: 51. So on the Save-A-Lot, you're talking about the fact that your negotiations with SUPERVALU, looking at the profitability of those stores, it looks like the top line traction continues to be very, very good. How does the bottom-line look for those stores?

John T. Standley - President and CEO: Not quite as good and really part of it is, it's obviously a significant change for our stores to go from no perishables to a lot of perishables, as perishables are big part of the mix in these stores and that's where we have a learning curve. I think we're making some good progress with it, but I think we have to convince ourselves that that's a business that that we can successfully execute and take good care of before we get too far down the line with this thing. So we again remain very encouraged by the early results, but we got some work to do, SUPERVALU has been a great partner. They worked with us very closely. They're really helping us work through it and sort it out and we continue to work with them to see if it's something that we all want to go forward with.

Mary Gilbert - Imperial Capital: So you're not getting the banks (the buck) on the bottom line on those?

John T. Standley - President and CEO: Not yet.

Mary Gilbert - Imperial Capital: What about the value stores?

John T. Standley - President and CEO: Value stores actually have done pretty well from a profitability perspective. They know there were some margin investment there, but they are also very efficient stores to run and the other thing is the capital invested in those is significantly less. So it only takes a couple of percentage points of comp store sales gain in those stores to actually make a good decent return on what we're doing there. So, although the sales softened a little bit here over the last quarter; that one there probably have some legs on it.

Operator: (Joe Staf), Susquehanna.

Joe Staf - Susquehanna: Could you give just a view about a little bit with respect to the remodeling program? You've got a significant step up in investment this year. So, you've outlined that you are going to do roughly 500 stores, you haven't done many yet. How do we think about the timing of when you start deploying that capital? When it starts affecting in terms of the payback either your same store comps? What you expect to be the effect? I mean you're under investing your stores for some period of time and so the natural thought is that once you (implement) this, you'll probably get a pretty large initial return on investment. Can you help to put some borders around that discussion?

John T. Standley - President and CEO: Sure. So, as you've said, we were – obviously, the first few are really about trying to get the concept down and the various elements sort of figured out, so they take a while to get done. Now we do them fairly quickly and they will ramp up fairly significantly as we move across the fiscal year and we'll be doing significant number every week as we sort of get into the deep part of getting this done. So, there is a fairly significant ramp up as we move to the fiscal year. A lot of the impact because of the way it works, because the way it will ramp up, a lot of the impact falls into next fiscal year in terms of timing. Again, Frank, have talked about it a couple of times during the call, but you want to talk about the investment for capital return…

Frank Vitrano - SEVP, CFO and CAO: Again, we are going to spend about $250,000 for sure, but one thing I recognize is, a piece of that – you mentioned the fact that we haven't invested in the stores for some period of time, a piece of that is related to CapEx. So a piece of the $250,000 that we are spending is really just trying to get the store backup to speed incremental to some of the new merchandising concepts that we've added on this.

Joe Staf - Susquehanna: With respect to the wellness program, can you talk a little bit I guess about sort of the evolution of the buying pattern of members that have been on this for roughly the duration over a year. Have they become more and more profitable per customer? Can you give us a little background here?

Matt Schroeder - Group VP, Strategy and IR: In terms of the progression what basically happens is a gold customer buys just much more frequently. I'm not sure it accelerated per se, maybe to some degree, but what happens is if you come into this program and as you start to engage with it and you start to make progress towards your goal, it definitely does seem to incent your behavior a little bit. So, if you're silver and trying to get to gold, your purchases can pick up and you can see some acceleration there. One of the things that we have in the marketplace right now is a statement that shows kind of what your cumulative point total rate, what your spending rate is, and helps you see how you're tracking to get to gold and silver which I think also encourages behavior with the card. So, we do see those kind of behaviors inside of this thing. More globally, as we talked about earlier, people who are tracking towards gold and silver just shop with us a lot more frequently like every two weeks is kind of the tempo and versus lower level members or non-members, we don't know, but lower level members shop with us much less frequently. So, when you look at total profitability, when you look at a gold member versus a base level member, I think we call them bronze or a (plus) member, they are three to four times more profitable in terms of what it means to us to have those customers, even with the loyalty investment that we're making.

Joe Staf - Susquehanna: Final question. Your private label proportion, it's been about 16% I guess for the last couple of quarters. I mean is it fair to assume that that proportion is going to go up or would you think it's somewhat capped here?

John T. Standley - President and CEO: We expect private label to continue to grow. We continue to invest in private label. We've got redesign of our brand architecture that's rolling out during this year, we've got a lot of new packaging in the store. We've done a lot to reposition it from the pricing and promotional perspective, and so I think it's going to continue to gain traction (grow) as we go forward.

Operator: Bryan Hunt, Wells Fargo Securities.

Bryan Hunt - Wells Fargo Securities: I was wondering if you all could talk about just competitive activity, especially with regards to circulars. Are you seeing in light of the pressure on the consumer, the consumer consistently seeking out value, a greater number of items or increased sharpness of promotions within circulars from your competitors?

John T. Standley - President and CEO: Definitely, I mean it seems like it's a very competitive marketplace out there from a circular perspective from where I sit. We continue to see hot promotions on consumable type products on the front page, people trying to drive foot traffic, and so it looks like folks are making some investments to drive toward sale, I'd say.

Bryan Hunt - Wells Fargo Securities: Has that level of investment accelerated recently or would you say it's remained at a steady state?

John T. Standley - President and CEO: I think it's gradually ramping up that's my sense.

Bryan Hunt - Wells Fargo Securities: Then my next question. Going deeper into wellness+, when you look at the distribution of your members across the various levels, silver, gold, platinum, how does that distribution stand relative to what you've modeled out? As the consumer becomes more educated about the program, have you seen a greater shift or acceleration towards those upper level savings programs (at what) levels?

John T. Standley - President and CEO: I would tell you versus what we sort of modeled out when we started this thing, we've probably seen a greater penetration towards gold and silver than what we initially expected. I think it's going to continue to grow as people do gain awareness about the program and it is truly a great value, if you just think about the 20% discount every day, that's a pretty big deal and combined with + UPs in our (ad) crisis, I mean there is a lot of value in this program. So, I think it's going to continue to grow over time, but it's definitely – probably, definitely exceeded our expectations out of the gate and that's a good thing.

Bryan Hunt - Wells Fargo Securities: Then lastly with regards to wellness+, I mean it's now as you said John about acquiring new customers from competitors. One, who do you think you're going to take customers from to grow your wellness+, and two, may be what do you think the cost is of acquiring those customers?

John T. Standley - President and CEO: Well, I think the cost is in the loyalty discount that we have. I mean you're seeing the deferral that's what kind of shows up and then it flows its way through our gross margin (probably) as we actually give those discounts in the future. So that's what the cost if it is and I think we dimensionalized that a little bit on the call today already. In terms of where it comes from, I think it comes from all over the place and then I think our 20% discount makes us very competitive from the price perspective with a lot of different channels. So, I think what it does is it makes you much more comfortable that you can run to your local Rite Aid and get what you need and (then) some and not to worry about, am I paying a premium for convenience, because it's really gone in this particular instance. So I think it allows us to reach across a broad number of channels to get customers.

Bryan Hunt - Wells Fargo Securities: I appreciate your time this morning.

John T. Standley - President and CEO: Thank you very much. We appreciate everybody joining the call this morning. We'll talk to you next quarter.

Operator: This concludes today's conference call. You may now disconnect.