NEW YORK (TheStreet) - Rite Aid (RAD) shares surged more than 12% on strong trading volume after the drugstore chain boosted its profit guidance for the full year.

The Camp Hill, Pa.-based company reported third-quarter net income of $104.8 million, or 10 cents a share, compared to $71.5 million, or 4 cents a share, in the year-ago quarter. Analysts were expecting earnings of 5 cents a share. Rite Aid's revenue rose 5.3% to $6.7 billion, also slightly above expectations.

Revenue was fueled by a 7.2% increase in pharmacy sales, vs. a 1.6% increase in sales of other merchandise, despite the 228 basis point negative impact from new generic drugs, according to the company. Rite Aid filled 4.5% more prescriptions compared to the prior year's period. The number of prescriptions filled in same stores increased 4.5% over the prior year period.

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Importantly, after a quarter in which Rite Aid trimmed its profit guidance for the second time this year, the company on Thursday raised its fiscal 2015 outlook. It now expects 2015 EPS between 31 and 37 cents a share vs. analysts' expectations of 31 cents a share. Rite Aid expects sales to top $26 billion in fiscal 2015, based on same-store sales growth of between 3.75% and 4.25% for the year.

Shares were surging 12.4% to $6.81 with roughly 75 million shares changing hands at last check -- triple its three-month average daily trading volume. Here are some initial thoughts from analysts.

Edward Kelly, Credit Suisse (Outperform; $8 PT)

Rite Aid's Q3 beat and raise provides solid evidence that the company's visibility on its outlook is improving and its turnaround is once again moving in the right direction. Q3 EBITDA of $332.8 million beat consensus by $40 million and the $1.29 billion mid-point of new fiscal '15 guidance exceeded consensus by over $50 million. While a fair amount of the upside was due to the fact that Q2's $40 million inventory valuation benefit will no longer reverse in the back half, management's improved tone and the fact that the company raised underlying guidance suggest an inflection point in momentum given recent disappointments. Improved sales trends, the early benefits of the MCK partnership, and better front-end profitability seem to be the drivers of upside, despite the offset of continued reimbursement pressure. We continue to expect better fiscal 2016 results, as remodels drive better traffic, MCK benefits ramp, the generic wave picks up (especially with the eventual launch of Nexium), and overall industry script trends remain solid. Reimbursement rates remain the key offset and we expect another reset in January (which is typical), but believe the company's tailwinds can more than offset this issue. We continue to rate the stock Outperform and raised our target price to $8 from $7.

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Karru Martinson, Deutsche Bank

Rite Aid lowered the bar on expectations last quarter as management warned on the timing of new generics and reimbursement rate pressures, yet a strong comp sales performance and script count growth for the fiscal third quarter has them raising guidance right back.

Rite Aid delivered EBITDA of $332.8 million on sales of $6.69 billion, well ahead of year ago EBITDA of $282.2 million on sales of $6.36 billion and expectations. Comp sales grew 5.4% for the quarter, with front end up 1.6% while pharmacy sales rose a sharp 7.1% even with a modest headwind from generic introductions. Script counted posted a 4.5% comp improvement, demonstrating in our view the continued traction of the company's wellness plus loyalty program and the stickiness of script files.

Robert Jones, Goldman Sachs (Buy/Attractive)

We think today's results demonstrate that RAD is taking advantage of a positive Rx environment while leveraging its generic procurement agreement with MCK and Wellness initiatives on the front-end. ... All in, we think today's results are encouraging and we continue to view RAD as an attractive way to gain exposure to an improving utilization environment.

Lisa Gill, JPMorgan (Overweight)

This morning, RAD reported fiscal 3Q15 results above expectations and raised FY15 adjusted EBITDA and EPS guidance. Adjusted EBITDA of $333M was above our estimate of $301M and Bloomberg consensus of $296M, and was up 17.9% y/y. EPS of $0.10 was above our estimate and Bloomberg consensus of $0.05. While we have continued to be encouraged by the trends on the top line, we note that gross profit and gross margin came in nicely above our estimates in 3Q, despite concerns around reimbursement pressure and generic inflation, as the benefit from the McKesson agreement appears to be more than offsetting those headwinds.

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TheStreet Ratings team rates RITE AID CORP as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:

"We rate RITE AID CORP (RAD) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, good cash flow from operations and growth in earnings per share. However, as a counter to these strengths, we also find weaknesses including relatively poor performance when compared with the S&P 500 during the past year and poor profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • RAD's revenue growth has slightly outpaced the industry average of 1.2%. Since the same quarter one year prior, revenues slightly increased by 3.9%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • RITE AID CORP reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. This trend suggests that the performance of the business is improving. During the past fiscal year, RITE AID CORP increased its bottom line by earning $0.22 versus $0.12 in the prior year. This year, the market expects an improvement in earnings ($0.29 versus $0.22).
  • The gross profit margin for RITE AID CORP is currently lower than what is desirable, coming in at 30.60%. Regardless of RAD's low profit margin, it has managed to increase from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 1.96% trails the industry average.
  • In its most recent trading session, RAD has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. We feel that the combination of its price rise over the last year and its current price-to-earnings ratio relative to its industry tend to reduce its upside potential.


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- Written by Laurie Kulikowski in New York.

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