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| REPORT DATE: Nov 03, 2009 |
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| DUANE READE HOLDINGS, INC. | GCS ANALYST RATING: | E- (HIGH RISK ) | ||
| 440 NINTH AVENUE | INDUSTRY: | DRUG STORES | ||
| NEW YORK, NY USA 10001 | SIC CODE: | 591200 | ||
| WEBSITE: WWW.DUANEREADE.COM | INDUSTRY ANALYST: | JOHN ANALYST | ||
| PARENT COMPANY: DUANE READE SHAREHOLDERS, LLC | < DELETE COMPANY > | |||
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Description Of Business
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| Analyst Commentary: "REPORTS Q3 2009 RESULTS " |
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This morning, Duane Reade Holdings reported financial results for its recent third quarter and nine-month period ended September 26, 2009. The NYC-based druggist produced a 3.7% increase in net retail sales to $429.2 million during Q3 2009 and a 3.6% increase in net retail sales during the year-to-date period. To reconcile net retail sales back to total firm revenues, you can simply add back pharmacy resale activity of $19.7 million (versus $16.9 million last year) to the third quarter figure and $66.3 million (versus $48.5 million last year) to the nine-month figure. Same store sales grew during the recent third quarter ended by 0.7%, bringing Duane Reade's year-to-date comps growth to 1.2%. Further decomposing the firm's same store sales growth reveals a continuing outperformance of the pharmacy versus the front-end. Pharmacy comps rose 5.3% during Q3 2009 and have risen 4.2% through September of this year. Conversely, front-end comps fell 2.7% during the latest quarter and have fallen 1.1% on a year-to-date basis. In the opening weeks of Q4 2009, management has noted a noticeable improvement in front-end comps trends. CEO John Lederer was quick to assert that this pick-up, which had front-end comps basically flatlining during October, is likely more related to better product offerings and new initiatives that have been rolled out over the past several months than it is an improving New York economy. Regardless of the cause, Duane Reade tightened its same store sales guidance to 1.1% to 2.1% from a previous range of 0.5% to 2.2%. Thus far in 2009, Duane Reade has recognized approximately $8 million out of the $7 million to $10 million in annualized expected cost savings. Private label penetration during Q3 2009 was up approximately 200 basis points to nearly 10%, according to CFO John Henry. The firm's adjusted operating line, which we will break-out in greater detail when we release our next Credit Research & Analysis, reflected a third quarter loss of $0.8 million (versus a profit of $0.3 million in Q3 2008) and a year-to-date profit of $2.5 million (versus a profit of $0.4 million in the year-ago period). During Q3 2009, Duane Reade completed a refinancing of a sizeable portion of its debt, including all of its $210 million senior secured floating rate notes due 2010 and $143.3 million of its 9.75% senior subordinated notes due 2011 (leaving $51.7 million of this issuance still outstanding). To get this deal done, Duane Reade raised proceeds by issuing $300 million of 11.75% senior secured notes due 2015 and also garnering a $125 million redeemable preferred equity investment from Oak Hill Capital and its affiliates. Excluding the balance sheet liabilities related to preferred equity investment but including capital lease obligations, Duane Reade's debt balance was down more than 16% since the beginning of 2009 to $464.9 million. Some of this latest transaction proceeds were used to reduce revolver borrowings; revolver availability of $107.1 million in late-September 2009 represents this facility's highest availability in several years. This fall, Duane Reade was operating with 254 stores. Three new stores were opened during Q3 2009 as the retailer also closed two underperforming locations. So far this year, the firm has opened seven new stores and closed four others. Total new store openings are expected to tally nine in 2009 and between 10 and 15 in 2010. Moreover, management expects to remodel between 10 and 15 stores during both 2009 and 2010. New store development and remodeling work may pressure occupancy costs next year, but management believes it can offset this factor with other savings that could keep SG&A expenses relatively flat in fiscal 2010. Jonathan Kanarek, CFA Director of Analysis |
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