Matt Schroeder - Group Vice President, Strategy and IR John Standley - President and CEO Frank Vitrano - CFO and CAO

John Heinbockel - Guggenheim Partners Mark Wiltamuth – Morgan Stanley Matthew Fassler - Goldman Sachs Carla Casella - JPMorgan Karru Martinson - Deutsche Bank Emily Shanks - Barclays Capital Karen Eltrich - Goldman Sachs Bryan Hunt - Wells Fargo Securities [inaudible] - Cantor Fitzgerald Mary Gilbert - Imperial Capital

At this time, I would like to welcome everyone to the Rite Aid third quarter fiscal 2011 conference call. [Operator Instructions.] I will now turn the call over to Mr. Matt Schroeder.

Thank you operator, and good morning everyone. We welcome you to our third quarter fiscal 2011 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 third quarter results and discuss our business. Frank will discuss the key financial highlights and fiscal 2011 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 on our website, www.riteaid.com, under the Investor Relations Information tab for conference calls. We will not be referring to them directly in our remarks, but hope you will 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. 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. I would also encourage you to reference our SEC filings for more detail. With these remarks, I'd now like to turn it over to John.

Thank you Matt. It was a challenging quarter for us as we cycled a large self-insurance credit and an earlier flu outbreak and an H1N1 pandemic in last year's third quarter. Similar to the second quarter, the core operating numbers were generally pretty good, with the exception of revenues, which were lower largely to a decline in script count. Our wellness+ card-based loyalty program is going great, and helped fuel a significant turnaround in front-end sales during the quarter, and although our immunization program may fall short of our goal to administer 1 million doses, we provided four times as many flu shots during the quarter than we did in the prior year. During the quarter, we added the Save-A-Lot discount grocery concept to 10 of our stores in the Greenville, South Carolina market, and are very encouraged by the early results of these co-branded Save-A-Lot/Rite Aid stores. Before I get into the specifics about our initiatives, let me provide a little more color on the third quarter. After my comments, Frank will go through the results in much more detail. The $42 million decline in EBITDA was driven by two primary factors: a $29.5 million increase in self-insurance expense resulting from a credit in the prior year to reduce self-insurance reserves, and a 1.7% decline in script count due mostly to a weaker start to the cough, cold, and flu season compared to last year, which was abnormally early. Front-end comparable store sales, which made a nice turnaround during the quarter, including a 1.3% increase in November, were fueled by wellness+ and +UP rewards, which give wellness+ members additional savings on their next trip to Rite Aid. For the quarter, adjusted EBITDA gross margin was down only 8 basis points compared to last year, which, given some of the pressure we've seen on pharmacy margin in the past, is good news. Excluding self-insurance, adjusted EBITDA SG&A was flat to last year on a rate basis, which, given the decline in script count, was also good news. This was again due mostly to a great job by our store teams as they continue to focus on running more efficient stores. Liquidity remains strong, and we continue to make progress with working capital, with FIFO inventory declining $160 million compared to last year's quarter. As I said, other than script count, the core operating numbers were pretty good for the quarter. Turning to our sales growth initiatives, while we are not pleased with revenues for the quarter, we are encouraged by the progress we are seeing with our initiatives, and continue to believe they will ultimately gain enough traction to offset negative headwinds like the continued weak economy. We continue to exceed our enrollment expectations for wellness+, our card-based loyalty program launched nationally 8 months ago. You'll remember that wellness+ is unique to other loyalty programs because it offers tiered rewards with increasing levels of front-end discounts and health screenings based on the dollar amount of front-end purchases and the number of prescriptions filled. As of last week, we had over 29 million members enrolled in the program. Use of the card continues to be strong, with 70% of front-end sales, and 50% of prescriptions, from wellness+ members last week. Excluding New York and New Jersey, which are states that don't allow points for prescriptions, 64% of prescriptions were filled by patients enrolled in the program. We continue to see other encouraging results from wellness+, both on the front end and in the pharmacy. On the front end, as we discussed last quarter, wellness+ basket size is larger than non-members, 50% larger now compared to 40% larger last quarter. Redemption rates on +UP rewards, which provide additional value by generally reducing a retail price below our normal ad price, are strong, and increasing as customers learn the features of the program. +UPs combined with the tiered reward structures of wellness+, are helping us make solid improvements in front-end sales, as we saw in the third quarter. In the pharmacy, script count in the pilot markets continues to run ahead of the chain, which is likely an indication that as wellness+ matures, it will help us grow script count. wellness+ members fill more scripts with us than non-members, probably due to the fact that our best customers are enrolling in the program. We also see a much-higher retention rate for pharmacy customers when they are enrolled. Putting this all together, our data suggests that wellness+ retains and attracts good pharmacy customers, although it is taking longer than we expected to make as big an impact on our pharmacy business as it is starting to make on the front end. Overall, we remain very pleased with the results from wellness+. We also continue to make progress with our low-volume store opportunity. During the quarter, we opened 10 Save-A-Lot/Rite Aid combination stores in Greenville, South Carolina, entering into a license agreement with Save-A-Lot to add the discount grocery concept to 10 existing Rite Aids. These stores, which continue to be owned and operated by us, are split between Save-A-Lot products on one side of the store and traditional Rite Aid HBC products and pharmacy services on the other side. The Save-A-Lot portion of the store has a full grocery shop, including meat, produce, and dairy, and is 40% cheaper than traditional supermarkets. The stores have done extremely well since opening, and as a group are comping up over 100% on the front end, with pharmacy running consistent with the trends before the conversion. Feedback from our Rite Aid customers has been extremely positive, and adding Save-A-Lot to these stores has attracted many new customers. Our 37 value stores are also doing well, with 10% plus front-end comps in the third quarter. As you may recall, these stores have 9,000 fewer SKUs than our traditional drug store, a wall of values, a larger dollar shop, and are lower priced and have a smaller ad than our traditional drug stores. The result of both of these tests give us confidence that we have the solutions to address our low-volume front-end segmentation opportunity over the next few years. We launched our immunization initiative this quarter, with 7,000 immunizing pharmacists in over 3,000 stores. So far, we have administered 635,000 flu shots this year, versus 157,000 last year. 30% of the flu shots we have administered so far were for new customers to our pharmacy. We are currently projecting 700,000 to 750,000 flu shots this year, versus our original goal of 1 million. While we are short of our goal, we are up considerably from last year, and I expect that this business will continue to grow in the future as we further expand the number of immunizing pharmacists and establish ourselves as a known provider with additional marketing. It's important to note that increasing the number of our immunizing pharmacists also gives us the opportunity to increase script count by administering a variety of vaccines, like those for shingles and whooping cough. Customers continued their search for value during the quarter, as our private brand penetration increased to 15.7% from 15.2% last year. We continued the rollout of our new private brand architecture, and now have 319 items converted. And we are on track to have 2,200 items in these brands by the middle of next year. Although we are making progress on many fronts, script count and gross margin will not meet our fiscal 2011 projections. Accordingly, we are lowering our guidance. Even though we will not achieve our sales and EBITDA goals for the year, we remain encouraged by the progress we are making on our initiatives, and believe we have invested in the right strategies for future revenue and earnings growth. We continue to work hard to improve our performance. Before I turn it over to Frank, let me wish you all happy holidays and a good new year. Frank?

Thanks John, and good morning everyone. As John mentioned, third quarter results were influenced by the comparison to last year's strong H1N1 flu event, as well as a favorable self-insurance liability adjustment in last year's third quarter. On the call this morning, I plan to walk through our third quarter financial results, and discuss our liquidity position and certain balance sheet items. I will also provide a capital expenditure update and discuss the costs associate with our wellness+ loyalty card rollout. Finally, I will review our revised fiscal '11 guidance. This morning we reported revenues for the quarter of $6.2 billion, compared to $6.352 billion for the third quarter last year. The decrease in total sales was primarily driven by a decline in same-store sales as well as a reduction in total store count of 70 stores. Same-store sales declined 130 basis points, with front-end sales trends improving during the quarter. Front-end same-store sales were flat for the quarter, as our wellness+ loyalty card program continues to gain traction with consumers. Pharmacy scripts were down 170 basis points, primarily due to a 130 basis point negative impact of the H1N1 comparison to last year and 90-day scripts. Pharmacy same-store sales were lower by 190 basis points during the quarter, of which 120 basis points was H1N1-related. Pharmacy sales included an approximate 242 basis point negative impact from new generic drugs. Adjusted EBITDA in the quarter was $212.5 million, or 3.4% of revenues, which was lower than last year's third quarter of $254.2 million, or 4% of sales. The comparison to last year's results was impacted by $12 million due to the negative pharmacy script count resulting from a weak flu season so far this year, as well as a $29.5 million increase in self-insurance, workers compensation, and general liability expense due to a previously disclosed favorable reserve adjustment in last year's third quarter. Net loss for the quarter was $79.1 million, or $0.09 per diluted share, compared to last year's third quarter net loss of $83.9 million, or $0.10 per diluted share. The reduction in net loss was primarily driven by $18 million in lower lease termination and impairment charges and a lower LIFO charge of $11.7 million as well as lower depreciation and interest charges offset by the reduction in the adjusted EBITDA previously discussed. The lease termination charge in the current period includes 11 stores for which we recorded a closing provision of $5.1 million during the quarter. The LIFO charge of $3 million compares to $14.8 million last year. The decrease is due to lower than planned pharmacy inflation. Interest expense of $133.7 million was $10.4 million lower than last year's interest expense and securitization costs. Non-cash interest, primarily debt issuance, cost amortization, and workers compensation interest accretion, was $10 million. The gross profit dollars in the quarter were $45.3 million lower than last year's third quarter, or 9 basis points as a percent of sales. Adjusted EBITDA gross profit dollars, which excludes specific items including LIFO and the wellness+ deferral revenue, the details of which are included in the third quarter fiscal '11 earnings supplemental information, which you can find on our website, were lower by $45.8 million due to lower sales and lower by 8 basis points to last year. Adjusted EBITDA gross profit front-end margin rate was slightly negative in the quarter. Pharmacy margins were lower by 4 basis points of pharmacy sales, driven by lower third-party Rx reimbursement rates. The 4-basis point quarterly variance compares to the 13-basis point decline in pharmacy margins we saw in the second quarter of this year. The pharmacy margin pressure has stabilized here in the last two quarters of fiscal '11 as we cycle the most significant MAC-ing of new generics which occurred last year. Selling, general, and administrative expenses for the quarter were lower by $27.1 million, but higher by 17 basis points as a percent of sales as compared to last year. SG&A expenses not reflected in adjusted EBITDA were lower by $22.9 million or 31 basis points, primarily driven by lower depreciation and amortization costs and securitization costs from the accounts receivable facility reported last year as SG&A. Adjusted EBITDA SG&A dollars, which excludes specific items, the details of which, again, are included in the third quarter fiscal '11 earnings supplemental information, were lower by $4.1 million and 49 basis points higher as a percent of sales. Costs incurred in the quarter related to our growth initiatives include a $4.6 million advertising and supply expense related to the startup of our wellness+ loyalty card and $1.1 million in training costs associated with our pharmacy immunization program. During the quarter, we shot 575,000 flu shots and season-to-date we shot 635,000 shots. The flu immunization initiative contributes slightly during the quarter after advertising and startup costs and positions the company and our pharmacist for the future. Flu shots increased same-store script count in the quarter by 61 basis points and pharmacy same-store sales by 26 basis points. Incremental to those expenses was a $29.5 million increase over last year in our workers compensation and general liability costs due to a favorable claims experience recorded in last year's third quarter. Without last year's self-insurance adjustment, adjusted EBITDA SG&A would have been flat as a percent of sales compared to last year. We continue to believe there are opportunities to reduce our costs in the future through operational efficiency and cost controls as part of project simplification and segmentation initiatives. On the last call, we discussed our decision to further rationalize our distribution center network and the announced plans to close our Rome, New York distribution center facility. During the third quarter we kicked off a project simplification project in the corporate departments to streamline home office functions. We have earmarked $37 million of annualized cost savings to be implemented during the next two quarters. We incurred a $2 million severance charge in the third quarter related to the elimination of 63 corporate positions. Our liquidity position continues to be strong from the various working capital initiatives and spending our capital wisely. As compared to the third quarter of fiscal '10, FIFO EBITDA inventory was lower by $161 million, of which $115 million, or 72%, is due to initiatives and the balance due to store closings. FIFO inventory increased $136 million from the year end, due to normal seasonal trends. Our cash flow statement results for the quarter show net cash used in operating activity as a use of $46.4 million as compared to a use of cash of $435 million in last year's third quarter. Last year's included a $400 million repayment of the accounts receivable securitization facility. Our days payable outstanding in the quarter was 25.8 days. This compares to 26.2 days in the third quarter of last year. The decline was impact the timing of generic pharmacy purchases between the second quarter and third quarter of this year. Net cash used in investing activities for the quarter was $29.4 million versus $42 million last year. During our third quarter fiscal '11, we opened one new store, relocated 11, remodeled 15, of which 10 were Save-A-Lot conversions, and closed 17 stores. Our cash capital expenditures was $37.7 million, of which $5.8 were script file buys. Now let's discuss our liquidity position. At the end of the third quarter, we had $966 million of liquidity - $965 million under the facility and about $1 million of invested cash - and we had $152 million of outstanding letters of credit. Today, we have a similar amount of $947 million and total debt, net of invested cash, was lower by $153 million from last year's third quarter. Now let's turn to guidance. Our guidance is based on current trends, 9 months of results, and a continued difficult economy, specifically a high unemployment rate. We have revised our guidance as a result of the first 9 months' sales trends and now expect total sales to be between $25 billion and $25.15 billion. We've also lowered our adjusted EBITDA to be between $815 million and $855 million for fiscal '11. This largely reflects the impact of the third quarter results and projected fourth quarter sales and margin trends. We expect same-store sales to be in a range of 150 basis points of decline to a 90 basis point decline compared to fiscal '10 and net loss for fiscal '11 is expected to be between $655 million and $525 million, or a loss per diluted share of $0.74 to $0.60. The change in net loss largely reflects the change in adjusted EBITDA and a higher impairment charge. We expect fiscal '11 capital expenditures to be approximately $215 million, which is lower than planned due to fewer new stores opening in fiscal '11, and fewer renovations and file buys than we had anticipated. We now expect to open 3 net new stores and relocate 28 stores. We are not planning to compete any sale lease backs, and we continue to expect to be free cash flow positive for the year. The adjusted EBITDA guidance includes the startup, advertising, and supply costs and discounts associated with the chain-wide rollout of the wellness+ customer loyalty program. The advertising and supply costs for the program are estimated to be $32.4 million, with $29.4 million incurred in the first 3 quarters. In addition to those costs, generally accepted accounting principles require us to defer a certain portion of revenues generated by customers as they qualify for their tiered discount benefit. A silver member must earn 500 points, while a gold member needs to earn 1,000 points. Once the wellness+ member qualifies as either a silver or gold member, and begins to use his or her tiered discounts, we are permitted to recognize the deferred revenue as income to offset a portion of the tiered discount. Within each customer qualification and discount use period, which can span multiple calendar years and fiscal periods, the net impact of these adjustments has no impact on the income statement, as the entries will net to zero over time. Included in our net income guidance is a wellness+ deferral range of $40 million to $50 million, which covers fiscal '11 and reflects current enrollment levels. Fiscal '12 will have an additional charge to reflect the full 12-month qualification period. This completes my portion of the presentation, and we will now open the lines for questions. Operator, we're now ready for the first question.

[Operator Instructions.] The first question comes from the line of John Heinbockel of Guggenheim. John Heinbockel - Guggenheim Partners: There's two things I want to drill down on. To me it looked like - and maybe I'm missing something - that the change in EBITDA guidance looked large relative to the change in revenue guidance. And I understand that you've talked about the pharmacy impact in the third quarter, and the incremental EBITDA margin makes a lot of sense, but particularly for the fourth quarter it looks like the EBITDA changes big relative to sales. Am I missing something there? Is there some incremental costs you expect to continue? Maybe talk about that a little bit.

I think it's primarily revenues. There's also a little bit of margin rate impact in there as well. Frank, do you want to -

Right now, if you look at the range that we have in terms of sales, it's basically a $150 million swing, and a margin rate that would probably account for about three quarters of the $40 million swing that we now have in the EBITDA range for the full year, the impact for the fourth quarter. And the balance of that is really from a rate perspective. John Heinbockel - Guggenheim Partners: Okay, rate meaning - you think we're going to see more pressure than we saw in the third quarter?

Not necessarily. First of all, on pharmacy we have been what we know and there's still some pretty significant things sort of rolling around before we get to January and sort of button down here. So I'm not sure we know a precise answer on that. The bigger issue is probably, honestly, kind of what we had in the forecast or guidance and we had some margin pickup also in the fourth quarter. So right now our thinking is that margin rates in the fourth quarter would be flat for the most part, maybe slightly down, but not significantly different than what we saw in the third quarter. But relative to what we had in our previous guidance, they're down. John Heinbockel - Guggenheim Partners: And all of the top line shortfall fourth quarter, it looks like all of it is in pharmacy. None of it is in front end at this point?

That's kind of the way we've pushed the numbers around a little bit here. So far in terms of where we are with sales this month pharmacy's actually up a little bit. Front end started off great the first two weeks, but I guess with some weather here we've kind of gotten pounded the last few days. So the trends are a little different than we saw last quarter at the moment. John Heinbockel - Guggenheim Partners: Because the idea, I guess, had been that the flu was just being deferred and we were going to see it pick up in January-February. I guess it's possible that this is just a lower flu season by historical standards. Is that your assumption?

We have a little bit of flu built in. We probably think it could be a little softer than historical assumptions. We do know that the planned flu report is ticking up year-over-year pretty strongly at the moment, but haven't seen a huge impact on our numbers from any flu. John Heinbockel - Guggenheim Partners: All right. And then finally, you guys a while back had identified more than $500 million of cost saving or EBITDA-enhancing initiatives. How much of that have you realized to date?

We identified for the year about $340 million of initiatives, about $100 million related to the segmentation, about $240 million was tied to all the various business initiatives. And on the segmentation initiatives, we're pretty much on track with what we had expected. A lot of that had to do with how to become more efficient in the store in terms of staffing levels and trying to introduce some new technology in place. And Brian at the operations team has done a pretty good job, a very good job, in terms of getting the benefits out of that. In terms of the overall store initiatives, we're tracking slightly below the $240 million, but not significantly below. Right now we're probably tracking around $200 million or so.

I think the big issue has been the top line. That's where we're short of where we want to be at this point. John Heinbockel - Guggenheim Partners: And then just this last thing, what do you think now is your cost inflation on SG&A, meaning, so every year you're seeing what, if you do nothing? $200 million, $250 million of cost inflation or less than that?

Probably a little less than that. John Heinbockel - Guggenheim Partners: Okay, and you think there should be enough proactive cost initiatives to bring that close to zero, at least for the next little while, or completely offset it?

Yeah, I think what we're seeing right now is that we're able to hold the line on SG&A. I think the challenge is going to be the negative leverage if we don't get revenues going. So where I think there could be some offset to that is where we may need to make continued investments to grow, and some of those will come through SG&A. So I think as far as wages and benefits and those kinds of things, and other operating expenses, we continue to work hard to try and manage those costs and hold the line there, but I think there could be some other areas where we need to make some investments as we get into next year.

Our next question comes from the line of Mark Wiltamuth of Morgan Stanley. Mark Wiltamuth – Morgan Stanley: You talked a little bit about the comp positives you're getting out of wellness+. Can you talk about the margin cost of that? I presume you have to set aside some discounts for the customers?

Absolutely. Honestly, there are pluses and minuses to this thing. The pluses are I think the ability to probably obtain some vendor funding that we didn't really have access to before. There is a markdown management aspect to it because we do require the card to get the discounts. And that is being offset by the tiered discounts as well as some investments that we're making with the +UPs and other promotions. So when you stir all that together, what we said was other than that $13.5 million deferral, front-end margin was actually pretty flattish for the quarter. So when you put the pluses and minuses together we're washing out except for the deferral piece right now. Mark Wiltamuth – Morgan Stanley: So we should look at is a margin-neutral event, but revenue-enhancing?

I think as we get into next year and this thing is mature it will have a modest impact on margin, so there will be a cost associated with it. I don't think it's going to be gigantic, but I think there will be some margin impact from it. Mark Wiltamuth – Morgan Stanley: And also wanted to dig in a little bit on the economics on the Save-A-Lot/Rite Aid combo stores. How much are those to put up? And what are your returns on those versus a regular drug store?

Well, we're going to find out I guess over a little bit more time, so the way the thing's shaking out is we've got 10 stores there. We've got very strong front-end sales. We have very good customer count. We have a little bit larger basket as well in these things. As you can expect, there's some variation in that 100%. We have some stores that are up 30% and 40% and we have some stores that are up 100%. We have some stores that are up 200% and 300%. Mixed together that kind of averages out to this 100%. Obviously the margin on this thing is going to be a little bit lower, with the perishables and whatnot in there, and a little bit of the unknown for us so far is where the perishable margins are going to settle out. So I think we still need a few more months to get to the bottom of the economics on this thing. However, if you compare it to a relocation, where you relocate a store, and you might get that same kind of sales lift on the front end, we do not have increased rent. We did not make an investment to the magnitude that would go with a store relocated. So my gut is when the thing sort of settles out and we get the margin mix figured out, that we're going to have a fairly decent return and the trick will be, as we open additional stores if we can work that out, will be to zero in on those stores where we can get the higher end of the lift that we're seeing in these things. Mark Wiltamuth – Morgan Stanley: And when you say front end, is that including the grocery sales, or is that just typical HBA -

That's the whole front end. That's grocery, HBA, that's the whole front end. Mark Wiltamuth – Morgan Stanley: And do you think this could be a vehicle to getting into more urban markets, or more of an impact in urban markets?

I think it could be, yeah. And I think it's exciting to take a store that was a low-volume store that was doing $20,000 a week on the front end and make it do $60,000 or $70,000. That's a pretty good answer for us, and we have some real estate that fits this demographic very nicely. Mark Wiltamuth – Morgan Stanley: Do you have any thoughts on timing on the AMP implementation and how big that could be for you? On Medicaid?

You know, it's a pretty big unknown at this point. I think the old lawsuit pretty much got resolved, but I think we don't have a lot of clarity into how new AMP is going to work yet, and we don't have any vision, insight yet into what the numbers are that are being submitted by drug manufacturers. We just don't know yet. Mark Wiltamuth – Morgan Stanley: Any sense of timing from CMS on when things get posted to a website or anything like that?

We don't.

Our next question comes from the line of Matthew Fassler of Goldman Sachs. Matthew Fassler - Goldman Sachs: Couple questions here. First of all, you gave us the deferred revenue number for the third quarter. I know that wellness+ has only really been ramping in the past couple quarters, but can you give us the deferral number for the first couple quarters of this year?

The deferral in the first quarter was about $5 million. The [deferral] in the second quarter was $15.4 million. Matthew Fassler - Goldman Sachs: So then we can back into fourth quarter from the annual numbers you gave us. And I understand it's just a timing issue and doesn't really reflect on the ongoing profitability of the business, but at what point would we expect a start to reclaim those back into grosses and bookings going forward? How long is the deferral period?

I think we have to really cycle a full year of this and probably then some. So I'd say probably the program would probably be in place 5 or 6 quarters before you'd hit the peak of that. Matthew Fassler - Goldman Sachs: So it's margin-dilutive in the short run and you start to get payback, call it, the beginning of the fiscal year that follows the upcoming one?

Basically what will happen is the deferral will be up there and it will stay there, okay? It will stay there forever.

But as we - I guess to your point - as we roll along here through the next several quarters the deferral will eventually, in terms of the expense impact, will move up into gross margin and be more of a cash expense. Matthew Fassler - Goldman Sachs: Fair enough. Second question, just on the cadence of business. I know you don't give quarterly guidance. To the extent that we saw the cut to guidance for the year, how much of that reflects your performance versus plan for adjusted EBITDA in the third quarter and how much of that reflects your expectation for Q4?

It's really a combination of both. Third quarter results, as John mentioned, were below what we had thought, and we basically took that trend and reforecasted the fourth quarter here. Matthew Fassler - Goldman Sachs: Just a couple other quick ones. The LIFO charge was meaningfully lower than in some time. If you could just give us some visibility on what drove that and how that might impact your expectations for LIFO going forward?

The real driver there was we had seen last year a fairly significant - primarily driven on pharmacy increases. And the last two years we had seen what was equivalent to about a 6% increase in pharmacy and right now, through the first three quarters, we're not seeing anywhere near that kind of inflation increase in pharmacy. It's probably on an annual run rate at about 2%. Basically, now that we have that information we adjusted what we think the annual cost is going to be. Matthew Fassler - Goldman Sachs: And then finally, you took your cap ex guidance down by about $35 million as you took the EBITDA guidance down. Can you speak to the kinds of projects that you're presumably deferring into next year?

There's a couple things. One is some of the replacement stores that kind of got pushed out into next year. On the renovation dollars, we originally had some dollars allocated and we're still doing some work around the Save-A-Lot and the value concept, so we decided not to make any other decisions, other investments in the balance of the year. And the last piece is file buys. We originally thought we'd have about $50 million of file buys and right now we're projecting - although we're pushing real hard to close these things - we're going to have about $40 million in the year.

Our next question comes from Carla Casella of JPMorgan. Carla Casella - JPMorgan: My questions are all on the rent expense. What are you paying currently in dark store rent?

It's still approximately $100 million. Carla Casella - JPMorgan: And does that run through the P&L or is that just running through the cash flow, meaning you took a charge when you closed the stores, and then ran it through the cash flow?

Exactly. We took the charge and it goes through the cash flow. Carla Casella - JPMorgan: And what is the duration of that? Are those 5-year leases? Will that roll down over the next 5 years, or is it longer than that?

Average term is about 7-8 years. Carla Casella - JPMorgan: Okay, so we should see that working its way down -

It will continue to kind of work down.

It steps down over time. Carla Casella - JPMorgan: As you're closing stores now, are those going into the dark store rent, or are you typically just closing stores when they're up for renewal?

It's really a combination. There's some dollars that do go into the closed store, others are - there's some stores that we've closed that were on lease term. Carla Casella - JPMorgan: Okay. And then a couple questions on the cap structure. The 2013 notes, are you able to draw your revolver to pay those at maturity?

Yes. Carla Casella - JPMorgan: And what is your capacity currently for additional secured debt, first or second lien?

If you assume full draw on the revolver, we do not have any more senior capacity.

Our next question comes from Karru Martinson of Deutsche Bank. Karru Martinson - Deutsche Bank: When you talked about the guidance revision you said part of it is going to be the rate in pharmacy. I thought we were anniversarying the cuts back last September. What are the cuts that you are seeing in pharmacy today?

I'm not sure that's what we said exactly. I'll just clarify that. Our expectation is that from the third quarter to the fourth quarter margins will be reasonably stable. What it's really relative to is our prior guidance. We had some margin improvement in our prior guidance, actually on the front end, and that's probably not where we're going to be. So that's really what changed relative to the guidance. Relative to the run rate, we're expecting the pharmacy margin's generally going to hang in there. Now, we do have some January plans that are not buttoned down yet. We need to get those done so we know exactly where we're going to be, but that's kind of our expectation at the moment. Does that help? Karru Martinson - Deutsche Bank: Yeah, that helps. Was the reversal of the $29.5 self-insurance built into your original guidance?

It was. Karru Martinson - Deutsche Bank: And then when you look at the Save-A-Lot, I know it's early, but in terms of the structure of the agreement with SUPERVALU, is that something that can be rolled out nationally, or will you have to go back and revisit that agreement?

We need to revisit that agreement. Karru Martinson - Deutsche Bank: And when we look at the script counts being lower, where are we roughly on an annualized script count? I think historically we've been talking about a 300 million number. Do you still assign $10-$20 value per script?

Yeah, I think in the market we're seeing about $20 as the market -

The range could be pretty wide. Again, it could spread from like $10 to $20. Karru Martinson - Deutsche Bank: Okay. But are we still tracking towards a 300 million annualized script -

Probably 290, 300. That's probably the range. Karru Martinson - Deutsche Bank: And just on that file buy, is that a file buy deferral of that last $10 million, or it's just the files aren't available out in the market?

No, we're working very diligently. It's just a matter of we weren't able to close some of the deals that we got. There's a number of deals in the pipeline.

The next question comes from Emily Shanks of Barclays Capital. Emily Shanks - Barclays Capital: I had a followup and I wanted to make sure I understood this right in your prepared remarks. Did you make the comment that you're seeing an abatement and pressure on the prescription margin?

I think what we're saying is that our pharmacy margins have actually been fairly study for the last couple quarters. So normally, because of reimbursement rate pressures, we generally see a deterioration over time on pharmacy margin. And in particular, last year we saw a lot of MAC-ing activity because we had a lot of new generics the year before that. The bad news is there haven't been a ton of new generics, although a couple have slipped in over the last few months. The good news is that's taken some pressure off of reimbursement rates because there hasn't been a lot of MAC-ing activity over the last couple of quarters and so the pharmacy margin situation has been a little more stable than what we've really seen in the prior couple of years. Emily Shanks - Barclays Capital: And then around the balance sheet, around inventory, even if you exclude the closed stores, you guys did a pretty nice job in terms of managing that down, plus you've got some increased accounts payable leverage. Do you think that there's greater efficiencies to be had as you look into the fourth quarter as it relates to inventories and payables?

Yeah, I think there's something there. Nothing extraordinary.

We think it's kind of slowing down. I think we're going to continue to show some year-over-year improvement in the fourth quarter, but as we've said before, we really took the big hunks and chunks out of inventory already, so now we're getting more into our category management process and some of the tools that we have there to just make sure we have the right inventory selection as we go forward. Emily Shanks - Barclays Capital: And then my final question is just around the cap ex. You mentioned that a portion of the lowering for fiscal year '11 is due to pushing the reloads out. Should we assume as we look into fiscal year '12 kind of the $250ish number, or what's the right ballpark?

Right now we're still working through next year's plan, so we'll have to defer that a little bit in terms of giving you a number.

Our next question comes from Karen Eltrich of Goldman Sachs. Karen Eltrich - Goldman Sachs: In the current quarter, can you give us a sense of how seasonal is performing for you, and how you feel your inventory position is relative to demand?

Right now I'd say seasonal is tracking just slightly behind last year. We bought down just slightly compared to last year so, so far I'd say I think we're okay, but we obviously haven't got to the guts of the selling season for us yet. We're a little bit of a last-second shop in seasonal, so I don't think we're going to know for sure where we are until we get another week in and see what we've got. Karen Eltrich - Goldman Sachs: And last quarter you gave us the spread between how the comps were at the pilot wellness+ and the rest of the chain. Can you give that to us again?

I think we said last quarter about 70 basis points was the spread. It's a tad higher than that, but still right in that range. Karen Eltrich - Goldman Sachs: And as you look at those test scores- and you mentioned obviously doing well in pharmacy in growing the script counts - is this kind of an existing customer that you are getting more share of? Or are you actually getting new customers coming in with this program?

That's the great question. Here's how it shakes out. We do this sort of deciling work on our customer base and we decile by script count. So our best customers would be in the top deciles and as we look at that, if we look at the top 40% of our script count, the customers who make up that top 40% of our script count, about 90% of those customers are actually enrolled in wellness+. So what it seems like is people that we had that were customers who were strong pharmacy users really sort of jumped in and grabbed ahold of this thing, which I think kind of makes sense. What we think is happening in the pilot stores is it is starting to drive some attraction of new customers, but we haven't seen that yet on the wider store base, which is why we're not quite where we thought we would be on script count at this point. But we're going to continue to market and promote this thing and the way our customers have reacted to it encourages us that if we can explain it to more non-customers that we are going to be able to drive maybe some additional foot traffic into our pharmacies with this thing. Karen Eltrich - Goldman Sachs: And on that same note, as you build this database of customer information and get email addresses, are you finding email promotions to be a good way to drive people into the store?

Not really so far. It's a little early to give you a ruling on that, but I wouldn't say it's been a huge impact so far. I think a lot of it's really about trying to understand the customer and look at the things that they're interested in and understand their behavior. And that takes a little bit of time to truly get that kind of data.

Our next question comes from Bryan Hunt of Wells Fargo Securities. Bryan Hunt - Wells Fargo Securities: With your stabilization in your script gross margin over the last couple of quarters, can you talk about whether that's had an impact on the valuation for what you're paying for on your script file buys?

I don't think the price has gone up a bunch in the last two quarters, has it?

No, it doesn't, and clearly the variability on that is largely - it's a matter of competition. If there are two other national chains that are bidding for it and four supermarkets that are bidding for it, that's going to be more of a driver than necessarily the change in margin.

I think if you're trying to value a script file too, the way you're thinking about it, which is not a bad way to think about what's the margin going to be like over time, really. The thing that you also have to keep in mind is what's going to happen in the future with the brand-generic mix change that will start to take place at the end of next fiscal year. That will create more value I think associated with a script file. Bryan Hunt - Wells Fargo Securities: And are you all seeing more competition bidding for script files? I guess given the tenuous growth picture for supermarkets the big boxes and yourself?

I think the answer is it's really situation-specific. It really depends on how many competitors might be in the space. Generally speaking, though, there are a number of active buyers of script files today. Bryan Hunt - Wells Fargo Securities: And then lastly, you all kind of touched on the surface of my last question. Generic introductions I believe are supposed to, from a dollar perspective, double year-over-year in '11 versus '10. Could you just talk about generically, no pun intended, how that impacts your margins going forward as well as maybe what the window looks like for generic introductions for 2012?

Well, it's fairly significant. There's a number of large brands that become generic. It really starts Septemberish, I guess, of next year, or September-October I think is the scheduled date is Lipitor is out there. And so things start to come over and as we've talked about before, we make 50% more gross margin dollars on a generic than a brand. A lot of it's going to really depend on how reimbursement rates are as we get into that and what happens with those drugs when they become generic. So I can't give you a precise number for it, but it should be helpful. It should be very helpful to pharmacy margin when we get to that point. Bryan Hunt - Wells Fargo Securities: And so it sounds like most of the generic introductions in 2011 are at the very end of the calendar?

That's true.

The next question comes from [inaudible] of Cantor Fitzgerald. [inaudible] - Cantor Fitzgerald: You've achieved some success with your front-end same-store sales and it was positive 1.3% in November. What color can you give us either for the month or in a general sense of how much that was due to customer count versus transaction size?

I think it's a little bit of both, kind of split it. [inaudible] - Cantor Fitzgerald: Okay, do you have a sense overall of market share in terms of what's going on either front end or in pharmacy?

My guess would be that last month on front end we probably held steady last quarter. On pharmacy we've probably given up a little bit of share with our weaker script count than a couple of our competitors. [inaudible] - Cantor Fitzgerald: And I guess that's what I'm most concerned about, and you addressed a little bit in a previous question what you're seeing with the effectiveness of the wellness program on script count, but overall - and you said you're a little disappointed in that - but overall, your same-store script count seems to be substantially below, at least for November it was substantially below some of your competitors, even adjusting for differences in accounting for 90-day scripts. So could you talk to that a little bit? It seems that it's not just [inaudible], it's market-share loss. To whom is it?

Absolutely. Let me take a stab at it and then ask me five more questions and I'll try to answer those. But first of all, looking at November, I would just say, and I don't want to bring up any competitor's name, but I have to tell you it's difficult to compare our numbers month to month to what others report month to month. One significant issue are these calendar day shifts. If you start to adjust our numbers to include more Mondays or Tuesdays than we had in other months, it would really move our numbers around like it's moving their numbers around. That's one factor. Two is we don't adjust for 90-day scripts. Others do. So like you said, there's a lot of differences going on. If you take all that monkey business out of the numbers, we are definitely still short from where we want to be on script count, there's no question about it. And so what we've got to do is we've got to get people engaged in wellness+, which I think we're having luck with our existing customers, but we've got to attract new customers to that program. It does clearly have better retention than non-wellness customers. So to the extent we think we can get people in and get them signed up on that thing we think that's going to make a difference and that's really the key to how we get our script count where we want it to be. Now last quarter was a funky quarter with the way flu fell and all those other things that went on and so we then sort of turned around and look at this month where we are and here we have script count comping up, which is a pretty big turnaround from last month and last quarter. So what is that? Well, I think flu is picking up a little bit. I think wellness+ is having maybe a little bit of an impact on things. And what we've got to do is we've got to continue to provide good service and we've got to continue to introduce new people to wellness+ and that's how we can get it. [inaudible] - Cantor Fitzgerald: Okay. And I guess finally, related to that, do you have any updates on your ongoing customer scores on pharmacy satisfaction as far as timeliness and the overall experience that they have. And are you satisfied with where they stand?

I'll give you two comments there. Our internal surveys, which as I think you know are generated based on a random selection of customers on a receipt, then you call and you take the test. They continue to show improvement. We measure a significant number of internal performance criteria in the stores through the pharmacy system. We can see how long it takes to fill a script and all those kinds of things. And I think we continue to do a good job on all those metrics. We also do a statistical survey that we go out and do in all of our markets, and it's not just our customers. We actually survey the whole market, customers and non-customers, and that last survey that we got in on that also showed that we were making some good progress on pharmacy service. So we've got the right tools, I think, to manage service in the pharmacies. We continue to work on that really hard. We think that's a key to our success. And when we take that, and hopefully combine it with continued push on wellness+, we think that's what can get us over the hump here on script count and maybe get us going in the right direction.

I think we have time for one more question here.

The next question comes from Mary Gilbert of Imperial Capital. Mary Gilbert - Imperial Capital: Wanted to find out first of all free cash flow guidance. Is it still $100-$110 million, or should we drop that back?

No, it's still about $100 million is what we're looking at here. Mary Gilbert - Imperial Capital: Okay. The other thing is with the Save-A-Lot strategy showing very good success, what is the timing of expanding that and how many stores are we going to effect through that expansion?

The answer is it's obviously a two-party relationship and so we - somebody asked earlier can we go to a national rollout with our existing contract. We cannot. It's a test. So the next step is we really need to sit down and formulate a strategy that works for both us and SUPERVALU and we're having those discussions now. And probably when we get into next year's plan we can provide some more clarity as to how we're going to handle that. Mary Gilbert - Imperial Capital: And then looking at, given the trends that we've experienced this year and where we are with EBITDA and how we come out for the year, looking out to next year, and I know we're going to get a benefit in the fourth quarter with Lipitor and then we have a whole flood of new generic introductions going forward, correct? But looking at the first three quarters, how should we look at it given the trends, and we know you have these initiatives underway, but it seems like we're having a difficult time gaining some traction. How should we look at that? Are we looking at sort of continuing to tread water, or continue to experience some erosion in EBITDA?

Good question. Obviously we're all pretty focused on that too, and as Frank mentioned earlier, we're grinding our way through next year and so we'll provide color on next year whenever we normally do that, I guess next quarter. From my perspective, our top priority is the top line. We've absolutely got to get ourselves to a point where we have strong revenue growth or the whole thing won't work. And so when we talk about next year, I think a lot about what we're going to talk about are the things that we're going to do to make sure we get the top line where we want it to be. And that's truly kind of where we're headed. So I can't give you precise insight into next year's numbers yet, but expect we're going to be talking a lot about the initiatives that are going to help us get revenues where we want them to be. Mary Gilbert - Imperial Capital: Could that include increasing ad spend on wellness+ to get that rolling out again? You spent on that before. Could you increase expenditures there next year?

It could include a lot of things, and we'll talk about that more when we get into next year. But it will be a combination of things I think that are really designed to help us get the top line where we want it to be. Mary Gilbert - Imperial Capital: And are there any comparisons, considerations, that we should note in looking out next year compared to this past year that could be a benefit, or the other way around?

Off the top of my head, I can't point you to anything significant other than probably what we're looking at in pharmacy margin towards the end of the year. But again, we'll have more color soon. But I can't think of anything that's ginormous one way or the other. Mary Gilbert - Imperial Capital: Okay, one last thing on the liquidity. You had $965 million, is that correct, available under the revolver at the end of the quarter?

That's correct. Mary Gilbert - Imperial Capital: Should we deduct the $150 million of required availability, or would you have been in compliance with that ration and so you would have had full access to that?

We have full access and we're well in compliance with the [inaudible] coverage ratio. Thank you everyone.

Thank you everyone, happy holidays, and we appreciate you visiting with us this morning.