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CAMP HILL, PA-Rite Aid, the country’s third-largest drug chain, reported a third-quarter loss of $7.7 million, down from profits of $73.6 million for the same quarter a year ago. It has also lowered its 2005 guidance.

The culprits include the continuing negative impact of a mandatory mail-order drug policy, instituted by the United Auto Workers, and a slow start to the flu season (this year), “which began in earnest mid-November last year,” said Mary Sammons, president and CEO. These negative factors were compounded by comparison with last year’s third-quarter during which Rite Aid benefited significantly from increased traffic from the California grocery store workers’ strike.

“While we cycle the impact of the UAW mandatory mail program and the results of last year’s grocery strike over the next three to six months, we expect these factors to negatively impact our business the rest of the year, which led us to lower guidance,” Sammons said. The lowered 2005 guidance projects earnings to come in over a wide range of between $49 million and $99 million, compared with previous projections of from $122 million to $155 million for the year.

Same store sales in the quarter increased a lackluster 0.2% over the same quarter a year ago. Prescription sales accounted for 64.3% of total sales and third-party prescription sales accounted for 93.4% of all pharmacy sales. In a conference call, Sammons said Medicare/Medicaid accounts for about 16% of the company’s pharmacy business and has “grown somewhat in the past six months.”

During third quarter, two new stores opened, nine stores were closed, four were relocated, and 46 were remodeled. The company has developed a new 14,500-sf prototype store format, which opened in one location, and Sammons said it is generating positive sales improvements. It will be the new format when Rite Aid begins an expansion of units, which will be later than anticipated. A second new format for the west coast is 14,800 sf, primarily to accommodate more space for receiving product.

Unit expansion is scheduled to move forward faster following the approximately 180 remodels that will take place next year, “replacing older, smaller, tired stores,” Sammons said. Regarding new units, she said, “we’re being adamant that new locations make absolute sense for us. Identifying key markets and finding sites took longer than we expected, but the building pipeline is moving at a good clip and firming up for 2006.”

Meanwhile, “we’re pushing hard on (improving) the relationship of pharmacist to patient. We think growing pharmacy sales is key to our success,” she said, calling it the “number one priority.” Among the initiatives being looked at is the potential for affiliations with nurse practitioners. Sammons does not expect the UAW prescription business to return, but does not see further erosion from mandatory mail-order policies by companies.

Today, while raising stock in Rite Aid’s competitors, CVS and Walgreen’s, to “buy” recommendations, Merrill Lynch analyst Monica Aggarwal issued a “sell” recommendation for Rite Aid. By mid-afternoon, following release of the third-quarter results, Rite Aid stock, which trades under RAD on the NYSE, was trading at $3.39 a share, down slightly for the day, but almost half the $6.34-a-share 52-week high, which occurred on Jan. 6 this year.

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