Rite Aid Corp RAD
Q2 2012 Earnings Call Transcript
Transcript Call Date 09/22/2011

Operator: Good morning. My name is, Sandrel, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rite Aid Second Quarter Fiscal 2012 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.

Now, let’s turn the conference over to Matt Schroeder. Please go ahead

Matt Schroeder - Group VP, Strategy, IR and Treasurer: Thank you, Sandrel, and good morning, everyone. We welcome you to our second 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 second 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 in 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 the 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 second quarter results. I am pleased to report that our results for the quarter demonstrate that our continued company-wide focus of taking better care of and meeting the needs of our customers is paying off.

We have increased same-store sales for three consecutive quarters as initiatives such as wellness+, immunizations, and wellness store renovations help us become more relevant to today’s consumer.

In addition, we continue to run our business more efficiently and improve overall performance evidenced by the fact that our adjusted EBITDA has also increased for three consecutive quarters. While we’ll get more into the details of our second quarter results shortly, I want to start today by discussing some of the exciting new Rite Aid health and wellness initiatives we’re just rolling out that uniquely focus on meeting customers’ needs in a dynamic and ever changing healthcare environment and that we believe will help further Rite Aid’s top line growth as we move forward.

Just last week, Rite Aid, in collaboration with OptumHealth announced that we’re bringing the latest in quality, convenient online healthcare to Rite Aid customers in the greater Detroit area with the introduction of NowClinic online care services, which is now available inside select Rite Aid pharmacies. NowClinic offers Rite Aid customers real-time access to convenient medical care, information and resources from doctors and OptumHealth nurses. Rite Aid and OptumHealth are the first to provide a virtual clinic in retail pharmacy setting.

Earlier this month, we also joined the Diabetes Prevention and Control Alliance, and we’ll support patients enrolled in the Alliance’s program to help provide people with diabetes, better control their condition. In-store pharmacists in select Rite Aid locations will consult quarterly with enrolled patients to evaluate their success adhering to prescribed diabetes regiments and to review patients’ test results for blood pressure, blood glucose, and cholesterol.

This support is available now to program participants at select New York City Rite Aid stores in Brooklyn, Queens and the Bronx, and is coming to select stores in Washington DC in mid-October. And next week, we will also introduce in all Rite Aid stores our first wellness+ program extension called wellness+ diabetes, which will feature an exclusive collaboration with WebMD, a leading online, consumer health information destination to provide wellness+ diabetes members with a multifaceted, free program that offers resources, management lifestyle tools, and in-store savings to people living with diabetes and their caregivers.

In addition to these new health initiatives that demonstrate Rite Aid’s continuing commitment to support the total health and well being of our communities, we also have started the rollout over new wellness store format with 41 of the stores completed as if the end of the second quarter. As I mentioned on last quarter’s call, research shows that with baby boomers aging and the high cost of healthcare, people are increasingly focused on staying well and living longer.

More responsibility is being placed on consumer to make health decisions and they are actively seeking advice on how to make the right ones. Our new wellness format is all about empowering our customers in their pursuit of wellness. Customer are telling us, they like the look and feel of these stores, which offer expanded clinical pharmacy services, new health and wellness product offerings, and our unique on-site Wellness ambassadors who serve as a bridge 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 symptoms and needs. Our customers have responded very favorably to this unique service and approach, and while the wellness stores will continue to evolve based on our learning’s and customer feedback, the key elements of these renovations provide the foundation for our store renovation program in fiscal 2012.

During the quarter wellness+ continued to gain traction, as I said, was one of the key factors contributing to our second quarter and same-store sales growth. We now have 44 million members enrolled in wellness+. Wellness+ members accounted for 69% of front-end sales and 66% of script count during the quarter. We have continued to increase the amount of gold and silver members that we have in the program, which is important because these customers continue to be our most valuable customers.

Similar to last quarter, almost 90% of these members shop both sides of the store and almost 50% shop our stores every week, which means we’re getting good frequency. More importantly, gold and silver members continue to have significantly larger basket sizes than non-members, with silver’s members average basket size being 55% higher than gold members average basket size being 128% higher.

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

Our immunization program continued to be a top priority as we look to provide these vital services to more customers. By the time our flu immunization kicked off in August, we had trained over 11,000 certified immunizing pharmacists, giving us the ability to provide vaccination at every Rite Aid pharmacy. As of this week, we have given our 364,000 flu immunizations which is significantly higher than the same time last year and we are well on our way doubling the amount of flu shots we did last year, with the goal of 1.5 million.

In terms of our financial results in the second quarter, we saw continued improvements in overall sales trends with the total comp store sales increased at 2.2% for the quarter. Front-end and pharmacy comp store sales were positive in all three months of the quarter. Pharmacy sales results were driven by script count growth, even after taking into account the impact of 90-day scripts, and brand drug inflation.

Front-end sales results were driven by continued momentum from our wellness program, a strong summer seasonal performance and at the end of August by increased purchases due to customer anticipation of hurricane Irene. Same-store sales results versus September softened due to the negative impact of hurricane Irene on our results, once the hurricane actually hit early in September. We will be announcing September sales next Thursday.

Second quarter adjusted EBITDA increased $3 million to $184.3 million this year versus $181.2 million last year. Similar to last quarter and as expected, our continued investments in sales growth initiatives reduced second quarter front-end gross margin, but higher same-store sales and the cost control helped us grow adjusted EBITDA.

Pharmacy margin was down slightly about 14 basis points compared to prior year due to declining reimbursement rates. Adjusted EBITDA SG&A declined 46 basis points due in large part to another great effort from our store teams.

Net loss narrowed in the quarter due to reductions in depreciation expense, interest expense and a gain on debt repurchases in the quarter, compared to charges related to debt refinancing activities in the prior quarter.

Other key accomplishments during the quarter included a continued rollout of a new private brand architecture, we now have 1,800 items converted and we are on track to have 2,900 items in these brands this fiscal year. For the quarter, our private brand penetration increased to 17.2% from 16.2% last year.

We continue to acquire new customers through 8.4 million of prescription file purchases in the quarter and 16.5 million year-to-date. We also improved over in-stock conditions by making further process improvements to our ad forecasting.

Our Save-A-Lot Rite Aid stores still continue to show solid sales gains, however, margins in these stores have not been strong enough to take advantage of the sales increases. We still like the grocery concept and think it can work in certain of our stores. We have not been able to keep an economic model of SUPERVALU that makes sense for both parties and therefore, we will not be expanding the Save-A-Lot form t with them. We will continue to run these 10 stores as Save-A-Lot Rite Aid.

To sum all up, I’m very encouraged by the results so far from sales and marketing 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 cost and operate their stores efficiently. Frank?

Frank Vitrano - Sr. EVP, CFO and CAO: Thanks, John. Good morning everyone. As John mentioned, second quarter sales and earnings results reflect benefits of the various initiatives we’ve been working for the past 18 months. On the call this morning, I plan to walk through our second quarter financial results, discuss our liquidity position, certain balance sheet items, capital expenditure program, and finally, update our fiscal ‘12 guidance.

This morning we reported revenues for the quarter of $6.3 billion, which was a 1.8% increase to last year’s second quarter. This was the first increase in total sales in 13 quarters, reflecting the same store sales increases and fewer store closings. In the quarter, we closed seven stores and did not open any net new stores.

On a year-over-year basis, we operated 50 net fewer stores. Same stores sales increased 2.2% in the quarter, reflecting the positive impact of wellness+ and positive script count.

Front-end same store sales increased 2.5% and pharmacy sales were higher by 2%. Pharmacy scripts were positive 10 basis points. Pharmacy same store sales included an approximate 148 basis point negative impact from new generic drugs and were positively impacted by inflation on brand drugs as an increase in 90 day spreads.

Adjusted EBITDA in the quarter was $184.3 million or 2.9% of revenues, which was a $3.1 million or 1.7% increase than last year’s second quarter of $181.2 million or 2.9% of revenues. This is the third straight quarter of growth in adjusted EBITDA. The results were driven by favorable sales trend and lower SG&A dollars.

Net loss for the quarter improved to $92.3 million, a $0.11 loss per diluted share compared to last year’s second quarter net loss of $197 million, and $0.23 loss per diluted share. The net loss improvement was driven by higher adjusted EBITDA, lower lease termination and impairment charges of $11.2 million, lower depreciation and amortization expense of $17.8 million, lower interest expense of $8.9 million and a $4.9 million gain on debt repurchases versus a $44 million charge related to refinancing activities in the prior year.

Our LIFO charge of $20 million was flat to last year. Lower interest expense of $130.8 million compared to $139.7 million last year is due to lower borrowing rates resulting from the two most recent refinancing events.

Total gross margin dollars in the quarter were $10.3 million higher than last year’s second quarter and lower by 30 basis points as a percent of sales. FIFO gross margin dollars were 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 second quarter fiscal ‘12 earnings supplemental information, which you can find on our website, was slightly favorable to the prior year second quarter. Adjusted EBITDA gross margin was 46 basis points lower as a percent of revenues than last year’s second quarter.

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

Selling, general and administrative expenses for the quarter were lower by $23 million or 83 basis points as a percent of revenues as compared to last year. SG&A expenses not reflected in adjusted EBITDA were lower by $20.5 million, primarily due to lower depreciation and amortization expense.

Adjusted EBITDA, SG&A dollars, which excludes specific items, again the details of which are included in the second quarter supplemental earnings information, were lower by $2.5 million or 46 basis points as a percent of revenues. This reduction in dollars and rate reflects the various cost saving initiatives, efficiency improvements, and overhead reductions that have been implemented over the past 12 months as well as sales leverage from the same store sales increases. This was partially offset by $8 million increase in our self-insurance liability expense due to the decline in a risk-free interest rates over the past six months. These liabilities are present valued to reflect the payout patterns.

Turning to the balance sheet, FIFO inventory was $75 million higher than the second quarter of last year. The increase in inventory partially reflects initiatives to reduce out-of-stocks whereby we increase the minimum stock quantities on certain items as well as increase the amount of inventory for add items. We are still refining these inventory changes but believe these modifications will increase sales.

During the quarter, we’ve repurchased $50.5 million in face value of debt maturities coming due in 2013 and 2015. These repurchases resulted in a $4.9 million gain, as we were able to repurchase the bonds at a discount to par.

We will also have interest expense savings related to these repurchases going forward, as any borrowings under our revolver credit facility has a rate lower than the rate on the bonds that we repurchase. As we have said in the past, we plan to use our cash to both reinvest back into the business as well as reduce our debt.

Our cash flow statement results for the quarter show net cash from operating activities in the quarter as a use of $131 million as compared to a use of cash of $6 million in last year’s second quarter. Higher inventory, as well as the timing of accounts payable payments at year end influenced the balance.

Our days payable outstanding of 26.3 was consistent with last year. Net cash used in investing activities for the quarter was $49 million versus $37 million last year. During the quarter, we relocated five stores, remodeled 35 stores, and closed seven stores.

Our cash capital expenditures were $49.9 million. We completed and grand reopened 40 wellness stores as of the end of the second quarter. We expect to complete a total of 300 wellness remodels in fiscal 12. Although we are very early in the process, we are seeing improving sales results in the first group of the remodeled stores.

Now, let’s discuss liquidity. At the end of the second quarter, we had $965 million of liquidity. We had $73 million revolver borrowing under our outstanding $1.175 billion senior secured credit facility with $139 million outstanding in letters of credit.

Total debt, net of investment, cash was higher by $47 million from last year’s second quarter, but lower from year end by $28 million.

Now, let’s turn to fiscal ‘12 guidance. As we have previously stated, fiscal ‘12 was a 53-week year and our guidance reflects the extra week. The Company is updating its fiscal ‘12 guidance to reflect the results of year-to-date trends and prospects for the balance of the year. The Company expects total sales to be between $25.8 billion and $26.1 billion and expects adjusted EBITDA to be between $825 million and $900 million for fiscal ‘12. Same-store sales are expected to grow in a range of plus 75 basis points to plus 200 basis points. Net loss for fiscal ‘12 is expected to be between $495 million and $345 million or a loss per diluted share of $0.56 to $0.40.

Our fiscal ‘12 capital expenditures are projected to be $250 million with $92 million allocated to remodels and other merchandising efforts and $50 million for file buys. We’re planning to complete 20 relocations and remodel 300 stores. The remodels will primarily be the wellness format.

As John mentioned, we do not expect to complete any more Save-A-Lot format stores beyond the original 10. We expect to be free cash flow positive for the year and we expect to close a total of 60 stores, of which, the guidance includes a store lease closing provision for 20 with the remaining 40 stores closing 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 and now I’d like to open the lines to questions. Operator?

Transcript Call Date 09/22/2011

Operator: John Heinbockel, Guggenheim Securities.

John Heinbockel - Guggenheim: Guys, a couple of things; I sort of want to drill down a little bit on the wellness+ remodels and where we are with the loyalty program. First on the remodels, I guess it’s too early for you to specify a comp lift, but I guess you are satisfied with the first four are giving you what you thought that you would get, is that fair?

John T. Standley - President and CEO: I think we’re getting there John. We still have some room for improvement but I think we’re out of the gate in pretty good shape. We’re going to continue to work with the merchandising and develop the concept which we’ve said all along and so I think we’re making good strides here.

John Heinbockel - Guggenheim: Where you are today in the 250 that you are spending, is that about – is it about the right amount and the 40 are about what you want or can you dial that back a little bit in terms of expenditure and maybe get a little bit better return or 250 is kind of where we are?

John T. Standley - President and CEO: I think 250 is probably where we are for now. I am sure as we go forward, we’ll continue to grind some cost out of it, but I think for what we’re looking at for this year, that’s going to be in that range.

John Heinbockel - Guggenheim: I know it’s really for ‘13, but you lost some remodels this year because of timing. Is it the thought that – if I think about the $50 million rolling over to next year and then what you were going to do next year anyway, could you end up doubling the number of remodels next year from this year and is that a number the organization could handle?

John T. Standley - President and CEO: I think we can do significantly more than we did this year. I don’t know if it will be quite double.

Frank Vitrano - Sr. EVP, CFO and CAO: I think John probably, a more realistic number might be like 500 or so John.

John Heinbockel - Guggenheim: Then on the – with the wellness ambassador, do you look at an ROI on that or not really because it’s someone who is there anyway and you were paying anyway, you’re just reallocating labor, so that really isn’t a good way to calculate ROI, on that person?

John T. Standley - President and CEO: Kind of looking it in the context of the total renovation. So, we’re looking at the results post-renovation including the cost of the wellness ambassador kind of steered in that’s how we’re sort of thinking about it.

John Heinbockel - Guggenheim: Finally on the -- because you talked about the gold customer so they must be spending about $25 average tickets. It sounds like, is there a lot of difference, yes, there is, before they qualify and after they qualify. I measured in both cases, it’s above the average, but is a lot more above that 128 after they qualify?

John T. Standley - President and CEO: They’re good customers getting to the gold and they continue to be good customers, once they’re gold and I’m not touching that 25, just so you know.

John Heinbockel - Guggenheim: Then one final thing, are we now at the point where SG&A dollars -- it will be difficult to reduce that year-over-year and I thought this might be the quarter when dollars would be up year-over-year, but we are beginning to get to a point where it’s difficult to keep that number declining?

John T. Standley - President and CEO: It’s gets tougher obviously, each quarter and each year. We’re continuing to remain optimistic that there are some things to work on to get some additional cost out of the system. But it is definitely tightening up for sure.

Operator: Mark Wiltamuth, Morgan Stanley.

Justin Van Vleck - Morgan Stanley: This is actually Justine send in for Mark. Just had a question, there has been some comments from one of your competitors on the marketplace this week about the profitability of generics throughout the cycle. I was wondering if you could comment, speak in generally about whether or not you see greater gross profit dollars for generic during the exclusivity period, if the drug has an exclusivity period than you do after that?

John T. Standley - President and CEO: It just depends on how -- what period of times you want to consider after and how you want to add up the numbers. I mean an exclusivity period can be significantly profitable when it comes off. In the exclusivity period, the cost tends to go down but also tends to get maxed. So, you have to -- it’s really a timing thing. So, the first few months I would say right after exclusivity can be more profitable, depending on the timing and when the drug gets maxed.

Justin Van Vleck - Morgan Stanley: So in general if you were to look at I mean on average I think most drugs have 180-day exclusivity period?

John T. Standley - President and CEO: It really depends on how it comes into market. Maybe new generics will come multisource right out of the gate, so it just depends on how it’s getting there, but.

Justin Van Vleck - Morgan Stanley: But if, generally speaking for the period do you see a step-up in profitability greater than after the drugs been maxed, just because most people have been under the impression that the exclusivity period was more profitable for retailers, but then as I said, one of your competitors has said that, that actually wasn’t true and that the period after the exclusivity period when the maxing started was actually more profitable on a gross profit dollars prescript basis because the cost essentially fell faster than the reimbursement from the maxing. So on average across all generic drugs is there anything you can give us just for a guidance perspective there?

John T. Standley - President and CEO: Again, what I would bet you is, the exclusivity period is a profitable period of us. After the exclusivity period ends and we go to a multisource environment, our cost tends to come down faster than the reimbursement rate decline. So, we tend to make some additional profitability. But after some period of time, some number of months usually it kind of turns the other way.

Justin Van Vleck - Morgan Stanley: So there is like three steps, there is the…

John T. Standley - President and CEO: Kind of it is -- I would that’s probably the best that I can – I’m trying to get you too sideways here, but that’s…

Justin Van Vleck - Morgan Stanley: No, that’s very helpful.

John T. Standley - President and CEO: We’re speaking in some broad generality.

Justin Van Vleck - Morgan Stanley: Yes, I know that just fluctuates quite a bit, and then just one other maintenance item. Could you disclose your GDR for the quarter?

John T. Standley - President and CEO: Did we throw it out there, I don’t know.

Justin Van Vleck - Morgan Stanley: You had just in the quarter’s past, but it hasn’t been in every quarter, I was just curious if you’ll be willing to give it?

Frank Vitrano - Sr. EVP, CFO and CAO: Yeah, we’re kind of in the high 75, 76 range.

Operator: Emily Shanks, Barclays Capital.

Emily Shanks - Barclays Capital: I was hoping that you could, Frank, just give us a little clarity around open market repurchases that you executed in specifically if you can give us by tranche and then secondarily specify the 2015 maturities were they (A or the nine handles), please?

Frank Vitrano - Sr. EVP, CFO and CAO: Sure. The $50 million is the lion share of what we repurchased was what came due in March of 15. So $40 million of the $50 million was primarily targeted for March 15.

Emily Shanks - Barclays Capital: Then just around the inventory per average store growth, thank you for the details on the slide. I’m just curious are you guys seeing any inflationary pressures in any of your categories?

John T. Standley - President and CEO: Emily, as we look at kind of the increases in inventory as I mentioned up earlier on the call, some of it is we made some constant decision well we’re going to put some inventory back into the building in order to increase sales but also a piece of that is clearly due to some price increases that we’ve seen. Also, we made some forward buy decisions on both the pharmacy side as well as the front-end which also contributed to the increase in the inventory there. If you look at it from a kind of an inflation standpoint, on the front-end side, looking at kind of our LIFO index, if you will, is kind of the metric for inflation for us, we’re seeing about 1% increase on the front-end.

Operator: Carla Casella, JPMorgan.

Carla Casella - JPMorgan: I have one question on wellness+ and then a couple of housekeeping. On wellness+, do you see a greater penetration of customers in markets where you have the number one or two market share in that market? Or is it actually helping you in some of the markets where you are number two, three or four?

John T. Standley - President and CEO: I think it’s helping us across the board. So it’s helped us all over the place. Some – it’s in markets where we are one or two, but it’s also helped in markets where we have lower shares also.

Carla Casella - JPMorgan: Then given your store closing program, where do you stand in terms of dark store rent? How much are you paying right now in dark store rent and how much could that go up by year end from the store closers?

Frank Vitrano - Sr. EVP, CFO and CAO: Right now, it’s at $93 million, $94 million for the year is the projection now, Carla.

Carla Casella - JPMorgan: It looks like you reduced your file buy forecast from 75 down to 50. Is that because the funds are being allocated into the wellness remodels or are there not as many files out there available?

Frank Vitrano - Sr. EVP, CFO and CAO: It seems that it’ll just take us a little longer to get these things closed. We still are very actively out there looking to acquire them, but it’s just taking us a little longer to close these things, which is why we pay at our back. We want to do as many of these as we can.

Carla Casella - JPMorgan: Did you say what the dollar amount of the file buys in the quarter was?

Frank Vitrano - Sr. EVP, CFO and CAO: About $8.5 million.

Carla Casella - JPMorgan: Then just one last. It sounds like you still have some appetite to buy back bonds in the market if you’ve got the free cash flow, is that correct?

Frank Vitrano - Sr. EVP, CFO and CAO: We would look to do that opportunistically.

Operator: Matthew Fassler, Goldman Sachs.

Matthew Fassler - Goldman Sachs: My first couple of questions relate to front-end gross margin, just as you think about input inflation and how you’ve been processing that and how the consumers’ have been receiving it.

John T. Standley - President and CEO: I’ll not comment again about inflation. It hasn’t been super-significant, right.

Frank Vitrano - Sr. EVP, CFO and CAO: Again, inflation rate right now is again, like we said, about 1%, not seeing significant increases. We’re still being told that there will be some price increases in the second half of the year, but we’re not expecting anything (short note).

Matthew Fassler - Goldman Sachs: As you think about deferred revenue associated with the wellness+ program, it looks like their guidance implies that their trajectory continues to decline from here. Are we seeing the biggest dollar numbers there at this point?

Frank Vitrano - Sr. EVP, CFO and CAO: Yes.

Matthew Fassler - Goldman Sachs: Then on store closing and impairment charges, just based on the second quarter number, which is well below where we were and your guidance for the year, just confirming this is slated to be a very much a backend loaded number?

John T. Standley - President and CEO: It is, Matt. Remember a lot of that too (pro rata) number is negative cash flow impairment number as opposed to that store closing charge and that impairment number will hit in the fourth quarter.

Operator: Edward Kelly, Credit Suisse.

Edward Kelly - Credit Suisse: I just want to ask the follow-up on this generics question because…

John T. Standley - President and CEO: You guys are really tangled up on this.

Edward Kelly - Credit Suisse: The debate has really been specifically around Lipitor. So the question that I would like to ask you is, is there anything about Lipitor that would make it different than drugs historically there had been an exclusivity or not? In other words, is there any reason that Lipitor would – profitability wise the curve would not look similar to past drugs that have launched?

John T. Standley - President and CEO: I mean the only thing that I can touch on there would just be whether – where right now our expectation of Ranbaxy is going to be in the market and come to market on time. So that’s kind of what our thinking is at this point. If that’s different than that could impact how it plays out.

Edward Kelly - Credit Suisse: Assuming that Ranbaxy is in the market, we should assume that the exclusivity period for you will be good as it always is and over time you will get (MACed) and profitability will go down. Is that fair?

John T. Standley - President and CEO: That’s fair. Cost will come down also but we will be MACed.

Edward Kelly - Credit Suisse: On the generic wave specifically, it’s obviously been highly anticipated. I know you are not going to quantify what the benefit is going to be, but you’ve probably seen numbers. Can you help us frame how we think about it? Do you think it will end up living up to expectations? It’s clearly been hyped up, right?

John T. Standley - President and CEO: I hope it does. I mean I think what we have tried to communicate to everybody is that the other piece of the puzzle for us is the reimbursement rates out at this time right. So, there is clearly going to be great cost savings here as these drugs come to generic. There is no question about that. I think expectations about what those cost savings are going to be are probably very real, based on past history what we’ve seen. The question that you had for us that we’re not answering because it’s a little bit dynamic is, where is that all going to shake out and the different parties that participate in the business, and that’s something that we’ve got to work our way through.

Edward Kelly - Credit Suisse: Is that because you don’t have great visibility on the reimbursement rates today on what they’ll end up being next year on these drugs?

John T. Standley - President and CEO: To some degree that’s true, and that’s true because in part we’re in discussions with people about how it will work.

Edward Kelly - Credit Suisse: Currently, how are things shaping up so far?

John T. Standley - President and CEO: Okay. Again, we’re working our way through it and I don’t think we’re in a position to say or we would. I’m not trying to be cute but it’s just -- we’re not there yet and when we were there we’ll say.

Edward Kelly - Credit Suisse: Second question for you is on the wellness program; can you help us assess the net impact of this program so far on EBITDA. Obviously, it’s helping sales. There is an investment into gross margin. When do we get to the point if we are not there yet where it’s neutral to EBITDA and then how does it ramp over time and what you have to do to get it to ramp?

John T. Standley - President and CEO: Well, it’s definitely ramping. There is no question about that, I mean, I kind of look at gross margin or gross profit dollars as kind of a way to think about this thing a little bit, and it’s impacting I think both the front end and the pharmacy, and so I kind of go to gross profit dollars. So, we’re digesting a lot of the markdowns and what not actually in our gross profit dollars today, the cost of this thing is in the gross profit dollars, and you can see that as the wellness deferral is going down, correspondingly, what’s running through gross profit is going up. So, we’re digesting the cost of this thing, and so it is a rate play. We’re giving some rate in margin. We’re driving top line results, but at the end of the day, and it’s a little tighter this quarter than it was last quarter, but at the end of the day we are driving some gross profit dollars down the P&L.

Edward Kelly - Credit Suisse: So your net assessment is that it’s been positive to-date, positive at this point?

John T. Standley - President and CEO: It’s positive in current results I’d say. There were some initial investments that we need to make a return on over time. Is that okay Frank?

Frank Vitrano - Sr. EVP, CFO and CAO: Yeah.

Edward Kelly - Credit Suisse: Okay. Then just last question for you; can you comment on the implications for the industry of the Express Scripts-Medco merger as you see it at this point, (assuming) it goes through? Does this consolidation just solidify continued pressure on reimbursed rates over time?

John T. Standley - President and CEO: It’s certainly not going to help. Obviously, it gives someone a fair amount of buying power in the marketplace, so it is what it is.

Operator: Bryan Hunt, Wells Fargo Securities.

Bryan Hunt - Wells Fargo Securities: I will not ask about lifecycle but generic. Could you frame up just your investments in a wellness store and what types of sales lifts you need to hit your return targets?

Frank Vitrano - Sr. EVP, CFO and CAO: Bryan, we’re looking to invest about $250,000 per store, and what’s included in that, there are some investments back in the pharmacy, we put in the new consultation room, possibly might be some enlargement to the waiting area as well as all the work that we do on the front end in terms of resetting the store and what not. So, there are also some signage that’s included in that and that’s what kind of tallies up to that $250,000 per. The way that we’ve kind of laid this out here, Bryan, is that we would have looked to get basically a 3% total store comp, okay, in order for us to get a 20% return on our money.

John T. Standley - President and CEO: Now, obviously, some piece of this is – there is some deferred CapEx that’s kind of baked into these numbers. I think we haven’t spent a lot of dollars as you well know in the stores for a period of time, but that’s kind of factored into our thinking here.

Bryan Hunt - Wells Fargo Securities: If you think about a longer term goal, where would you like to be in terms of the number of stores that you – or a percent of stores that are remodeled or new over a, you know, five, seven, 10 year period?

Frank Vitrano - Sr. EVP, CFO and CAO: Ideally, we’d like to be in a position where we’re new or remodeled in five years, okay, get a 100% change. Is that realistic? Probably no, but if over the next two, three, four years, we can incrementally increase our CapEx investment by $50 million or $100 million a year, I think we probably could get to the 78% to 80% of the chain in the next couple of years.

Bryan Hunt - Wells Fargo Securities: Thinking about that goal in the CapEx you just mentioned, what’s the potential windfall from the generic wave? When you think about that, is your primary target of that excess cash flow remodels or is it debt reduction or how would you weigh the use of cash?

Frank Vitrano - Sr. EVP, CFO and CAO: For us, that’s kind of an ongoing discussion. Obviously, we’d like to do both, okay, and there will be some balance between reinvesting back into stores which we obviously know we need to do, but we also need to start getting down this $6.2 billion worth of debt that we have out there. It’s not going to be something that we’re going to make huge strides on, but we certainly start paying down some of that, so it will be a give and take there, Bryan.

Bryan Hunt - Wells Fargo Securities: My last two questions. When you look at same-store sales, was there any geographic disparity when you look at how same-store sales played out over the quarter?

John T. Standley - President and CEO: I’d tell you just generally and overall same-store sales just gotten a lot better across the whole chain. Clearly there is always some markets that are outperforming other markets in any given week, sometimes there’s weather, this that the other thing. But just in general everything gotten better.

Bryan Hunt - Wells Fargo Securities: Lastly when you think about the promotional environment, it seems like more retailers, not specifically speaking to the pharma area just retailers in general, it seems like there has been a push towards multi-promotion as consumer spending has kind of softened here. Are you seeing that increased level of promotions across your core competitive set or could you just talk about the environment in general?

John T. Standley - President and CEO: I think it is still a pretty promotional environment and I would say it’s probably up slightly maybe over the last couple of months in terms of activity.

Operator: Karru Martinson, Deutsche Bank.

Karru Martinson - Deutsche Bank: Given that you guys have always been somewhat conservative with your guidance, what are you seeing in the second half of the year that gives you the confidence on the tightening here?

John T. Standley - President and CEO: Current trends. If you kind of look at the current trajectory over the last -- certainly the first two quarters here, we’ve exceeded the prior year numbers. So that’s certainly factored into it. We certainly recognize there was a 53-week that’s kind of baked into our numbers here, but I mean the things that we’re thinking about in terms of factoring into these numbers is, same-store sales trends for the third and the fourth quarter where reimbursement rates are going to shake out here in the second half of the year. Obviously, the timing of Lipitor and the couple of other ones that are going to come in the back half of the year and the investments that we’re making in wellness+. I mean those are probably some of the key factors that are driving the guidance here.

Karru Martinson - Deutsche Bank: With the September comp weakness, just want to get the sense of the magnitude that was kind of pulled forward with Hurricane Irene in terms of what our expectations should be?

John T. Standley - President and CEO: Well for the quarter, for the second quarter probably impacted us about 50 basis points -- because it was a 150 basis points impact in August.

Karru Martinson - Deutsche Bank: In terms of when you’re out in the market looking at (script vial) buys is the valuation still pointing to $10 to $20 per script valuation under your credit agreement?

John T. Standley - President and CEO: It’s still pretty much in that range, maybe it’s inching up a little bit, but still pretty much in that range.

Operator: Karen Eltrich, Goldman Sachs.

Karen Eltrich - Goldman Sachs: For wellness+ what evidence are you seeing that you’re gaining new customers with the program if you look at enrollment continuing to grow? Then within the program, you mentioned that you’re successful in retaining your pharmacy customers, what about converting that front-end customer towards pharmacy?

John T. Standley - President and CEO: I’d say that’s a bit more gradual of a process. Yeah, I think the initial results from this thing showed that we’ve really slowed down defection or loss of customer in the pharmacy, but in terms of acquisition it’s not been a huge factor. I think we’re starting to get a little bit of that, but I think it’s still an opportunity for us and obviously, the longer this goes, the more information and history, we get to work with to try and really make investments to move customers around inside the store and that’s kind of where we’re at this point I think.

Karen Eltrich - Goldman Sachs: What about in terms of attracting a general new customer to the program overall?

John T. Standley - President and CEO: I think the enrollment I think is in fact a good indicator to look at, that we continue to attract new customers with the program and we watch their behavior as they come in and it seems like the number of gold customers is growing. So I think that’s a good sign.

Karen Eltrich - Goldman Sachs: One quick final question. Could you give us private label penetration this year for this quarter and how it compares to last year?

John T. Standley - President and CEO: I think was 17.2 versus 16.2.

Operator: (Matt Galati, UBS).

Matt Galati - UBS: This is Matt Galati on behalf Steve Valiquette. Just a little bit more clarification on the hurricane Irene impacts, so the benefit to August is essentially a pull forward of revenue from September and we should think that September revenue is really going to be no different than that benefit from August?

John T. Standley - President and CEO: Right. So August picked up, 150 basis point, as Frank said. We gave a lot of that back, all of it in the first week of September.

Matt Galati - UBS: Then secondly I was wondering if there has been evidence of any customer increase related to a competitor’s ongoing negotiation or contract dispute with the PBM?

John T. Standley - President and CEO: Say I again, sorry I didn’t get that.

Matt Galati - UBS: Has there been any increase in enquiries from customers associated with competitor’s negotiation with the PBM?

John T. Standley - President and CEO: No.

Operator: John Ransom, Raymond James & Associates, Inc.

John Ransom - Raymond James & Associates, Inc.: You mentioned your pharmacy gross margins were down, I think, 14 basis points. Two questions on that. Is there any difference between what your branded margins were hit versus what your generic margins were hit? Then secondly, I know July 1 was a Medicaid reset for a lot of states, for most states stimulus money ran out. Did you see any increased pressure for Medicaid in the two months of the quarter that would have been in effect?

John T. Standley - President and CEO: In terms of the branded generic, I think it’s a little bit on both sides, honestly, and in terms of the impact since July 1st, I guess we’re going to double check here, but I don’t think it’s been huge.

John Ransom - Raymond James & Associates, Inc.: In terms of your pharmacy reimbursement, is it just instead of paying you AWP minus X they are paying you AWP minus more than X or are you seeing more structural changes towards cost-plus or (indiscernible)?

John T. Standley - President and CEO: Well, in terms of its overall impact, it’s certainly reductions of AWP payments. There are some states that are doing some structural changes, so that’s stored into the numbers as well, but it isn’t probably material this point what’s going on in other parts of the business.

Operator: Mary Gilbert, Imperial Capital.

Mary Gilbert - Imperial Capital: On the wellness remodels, geographically where are those remodels occurring? Are they on the East and West Coast primarily?

John T. Standley - President and CEO: Mary, they are. They are in eight. Right now they are in eight key markets, both East Coast and West Coast.

Mary Gilbert - Imperial Capital: Can you tell us which markets those are? I’m sorry did you hear?

Frank Vitrano - Sr. EVP, CFO and CAO: I’m sorry. We didn’t hear the question.

Mary Gilbert - Imperial Capital: Can you tell us what markets those are?

John T. Standley - President and CEO: LA, Seattle, Baltimore, Pittsburgh, Buffalo, New York, Philadelphia and Boston.

Mary Gilbert - Imperial Capital: Then on the free cash flow, the magnitude of the free cash flow. Is it in the $50 million to $100 million range?

Frank Vitrano - Sr. EVP, CFO and CAO: It’s probably, I will call it modestly positive. How’s that?

Mary Gilbert - Imperial Capital: Modestly positive; that sounds like less than $50 million. Is that after considering the bond repurchases or before?

Frank Vitrano - Sr. EVP, CFO and CAO: Before.

Mary Gilbert - Imperial Capital: Then specifically which issues will – the actual issue that you repurchased?

Frank Vitrano - Sr. EVP, CFO and CAO: It was the March 15, Mary. That was predominantly what we (bought at) March 15.

Mary Gilbert - Imperial Capital: It was $40 million exactly, and then the rest were the 6.875% of 13?

Frank Vitrano - Sr. EVP, CFO and CAO: 13 and then we actually got a little bit of the December 15.

Mary Gilbert - Imperial Capital: Then how should we look at working capital changes? Seeing that you are adjusting your inventory levels to have a better in-stock position, and then it sounds like we have some modest inflation. How should we balance that net year-over-year? Are we going to see a cash generation or a net use in cash?

Frank Vitrano - Sr. EVP, CFO and CAO: I think they are probably either flat or slightly some generation here, but I don’t think it’s going to be as -- I don’t think it will be significant.

Operator: (Joe Staf, Susquehanna).

Joe Staf - Susquehanna: Talking about your capital allocation policy, I mean, can you give us a little bit more background in terms of, you’re clearly dialing down some of your CapEx expectations this year. You bought back bonds. Obviously, it’s a very powerful tool in terms of deleveraging. Can you talk a little bit about how that balance act between reinvesting back you in stores, obviously, there is fair amount of deferred CapEx there versus kind of your willingness to delevering in the near-term?

John T. Standley - President and CEO: John wants to spend all the money on the stores, Frank wants to delever. That’s a dynamic tension that exist, but honestly, there were some change in plans, particularly as it related to capital we put aside to invest in, in potentially Save-A-Lot stores or otherwise that we’re not going to do, so that quite frankly freed up some capital that Frank put to work.

Joe Staf - Susquehanna: But isn’t the total number of remodels for the year generally coming down?

John T. Standley - President and CEO: It is because those Save-A-Lots that we were going to do, we were calling those remodels.

Joe Staf - Susquehanna: Got it. Then just one quick one, I mean, how do we think about just the accounting effect from your revenue deferral piece on the customer loyalty, there is around $6 million or $7 million in a quarter. It’s bounced around historically. It’s fair to assume that’s going to be relatively consistent at that level?

John T. Standley - President and CEO: Joe, as membership levels start to flatten out, that deferral charge that we take is actually going to get smaller and smaller.

Joe Staf - Susquehanna: Do you think you’re achieving that level or do you think they are still…?

John T. Standley - President and CEO: I don’t know if we’ve achieved it, but we’re certainly getting closer.

Frank Vitrano - Sr. EVP, CFO and CAO: Like, obviously by the end of the year, the deferral that will be up there is probably going to be around $90 million or so. In the outer years, it will increase to the degree that our enrollment increases.

John T. Standley - President and CEO: Okay. Well, I think that wraps it up here. I appreciate everyone listening in here, and we’ll talk to you in the third quarter. Thank you.

Frank Vitrano - Sr. EVP, CFO and CAO: Thank you for joining us.

Operator: Thank you. Ladies and gentlemen, this does conclude today’s conference call. You may now disconnect.