John Standley - Chief Executive Officer, President, Director and Member of Executive Committee Frank Vitrano - Chief Administrative Officer, Chief Financial Officer and Senior Executive Vice President Matt Schroeder - Group Vice President of Strategy & Investor Relations and Treasurer

Bryan Hunt - Wells Fargo Securities, LLC Joseph Stauff - Susquehanna Financial Group, LLLP Edward Kelly - Crédit Suisse AG Karru Martinson - Deutsche Bank AG John Heinbockel - Guggenheim Securities, LLC Steven Valiquette - UBS Investment Bank Emily Shanks - Lehman Brothers Karen Eltrich - Goldman Sachs Group Inc. Justin Van Vleck - Morgan Stanley

Good morning. My name is Tabitha, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Rite Aid first quarter earnings conference call. [Operator Instructions] Thank you. Mr. Schroeder, you may begin your conference.

Thank you, Tabitha, and good morning, everyone. We welcome you to our first 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 first 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 on 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 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. 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'll be using a non-GAAP financial measure. The definition of a 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.

Thank you, Matt, and thank you, everyone, for joining us this morning to review our fiscal 2012 first quarter results. Our results for the quarter show that our company-wide focus on taking better care of and meeting the needs of our customers is working. Our significant reductions in SG&A over the last 2 years have given us the flexibility to make the investments we need to connect with today's value driven consumer. We are making those investments through our wellness+ loyalty program, which continues to grow as a percentage of our business and in terms of total members enrolled. Combining wellness+ with our customer service initiatives like the 15 Minute Guarantee in the pharmacy and our focus on friendlier service on the front end are the primary reasons we have grown our same-store sales for 2 consecutive quarters. During the first quarter, we saw continued improvements in overall sales trends, although same-store sale front -- same store front-end sales were a little negative in March and April, but were positive enough in May to get us back to even. Same store script count and pharmacy sales were up for all 3 months of the quarter and drove a total store comp sales increase of 80 basis points. Same-store front-end sales, script count and pharmacy sales continue to grow in June. We will be announcing June sales next Thursday. First quarter adjusted EBITDA increased $13.1 million to $262.9 million this year versus $249.8 million last year. Very similar to last quarter and as expected, our continued investments in sales growth initiatives reduced first quarter front end gross margin but our improved operating efficiency and higher same-store revenues helped us grow adjusted EBITDA. Pharmacy margin was flat due to strong generic penetration and generic purchasing improvements, which offset declining reimbursement rates. Distribution costs also continued to show improvement in the quarter as we benefited from synergies of the Rome warehouse consolidation. Adjusted EBITDA SG&A declined 27 basis points due in large part to another great effort from our store teams. Liquidity remained strong with $1.2 billion of revolving credit and invested cash available at quarter end. Net loss narrowed in the quarter as we were able to offset the $22 million charge resulting from the refinancing we completed early in the quarter. During the quarter, wellness+ continued to gain traction, as I said, and was one of the key factors contributing to our first-quarter same-store sales growth. As of today, we have close to 40 million members enrolled in wellness+. Wellness+ members accounted for 67% of front-end sales and 62% of script count during the quarter. Almost 90% of our Gold and Silver members are shopping both sides of the store, which makes them our most valuable customers. And interestingly, almost 50% of our Gold and Silver members shop our stores every week, so we're getting good frequency. In addition, members continue to have larger basket sizes than non-members, and among members, Gold and Silver members have higher basket sizes and frequency than Bronze members. In the pharmacy, we continue to see a much higher retention rate with members versus non-members, and members are a very high percentage of our best patients. And our research tells us that wellness+ members are significantly more satisfied with Rite Aid than non-members, which is another good measure of how the program is working. Our Save-A-Lot Rite Aid stores continue to show solid sales gains, and we continue to have discussions with SUPERVALU about the future potential of the Save-A-Lot Rite Aid stores. We have now completed 8 wellness store renovations as our remodel program begins to ramp up. They are in Harrisburg, Pittsburgh, Southern New Jersey and one in Newport Beach, California, with another one to open soon here in the Harrisburg area. 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 consumers to make health decisions, and they are actively seeking advice on how to make the right ones. This new format is all about empowering our customers in their pursuit of wellness. As I mentioned on last quarter's call, the stores have a new look with a new decor package, lower shelving, wider aisles and brighter light. There are significant changes to our merchandising, including the addition of an expanded selection of organic foods, all natural personal care products and homeopathic medicines, just to name a few of the changes. The stores have additional resources to help customers obtain their wellness objectives, including expanding clinical pharmacy services and additional resource materials. The expanded clinical services include pharmacists that are diabetes care specialists, certified immunizers and medication therapy experts. One of the most significant new elements of these stores is the Wellness Ambassador, 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. They have been very well received by our customers. While the wellness stores continue to evolve, the key elements of these renovations are the prototype of our store renovation program in fiscal 2012. Other key accomplishments during the quarter include the continued rollout of our new private brand architecture. We now have over 1,200 items converted, and we're on track to have 22 items in these brands this fiscal year. For the quarter, our private brand penetration increased to 15.6% from 15.3% last year. We acquired new customers through $8.1 million of prescription file purchases. We continued to make progress improving our in-stock conditions by making process improvements to our ad forecasting, and we trained an additional 4,300 immunizing pharmacists during the quarter as we prepare to have over 11,000 immunizing pharmacists available for flu season. It's too early to know what to expect from flu season, but with all our pharmacists trained as immunizers, we've set a goal of 1.5 million shots this year. Overall, I'm pleased with the progress we've made in the quarter. In terms of fiscal 2012, it really is about the top line, and we're off to a good start. I'm very encouraged by the results so far from our sales 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 costs and operate their stores efficiently. Frank?

Thanks, John, and good morning, everyone. As John mentioned, first quarter sales and earnings results reflect early benefits of the various initiatives we've been working on for the past 18 months. On the call this morning, I plan to walk through our first quarter financial results, discuss our liquidity position, certain balance sheet items, our capital expenditure program and, finally, confirm our fiscal '12 guidance. This morning, we reported revenues for the quarter of $6.4 billion, which was essentially flat to last year's first quarter. The increase in same-store sales was offset by a reduction in total store count. In the quarter, we closed 10 stores and did not open any net new stores. On a year-over-year basis, we operated 63 net fewer stores. Same-store sales increased 80 basis points in the quarter reflecting the positive impact of wellness+ and positive script count. Front-end same-store sales were flat and pharmacy sales were higher by 110 basis points and pharmacy scripts were positive 40 basis points. Pharmacy same-store sales included an approximate 145 basis point negative impact from new generic drugs. Adjusted EBITDA in the quarter was $262.9 million or 4.1% of revenues, which was a $13.1 million or 5% higher than last year's first quarter of $249.8 million or 3.9% of revenues. This is the second straight quarter of growth in adjusted EBITDA. Results were driven by favorable sales trends and lower SG&A dollars. SG&A dollars were $36.7 million lower and 56 basis points as a percent of revenues. Net loss improved for the quarter to $63.1 million or $0.07 loss per diluted share compared to last year's first quarter net loss of $73.7 million and $0.02 better than last year's $0.09 loss per diluted share. The net loss improvement was driven by higher adjusted EBITDA, lower interest expense of $10.9 million and a $4.7 million gain on sale of assets and lower interest tax expense -- lower income tax expense, partially offset by a $22 million charge for loss on debt retirement and higher lease termination and impairment charges. The loss on debt retirement charge was due to the Tranche 3 refinancing that was completed earlier in the first quarter. Our LIFO charge of $20 million was flat to last year. Lower interest of $130.8 million compared to $141.6 million last year resulting from the most recent 2 refinancing events. Total gross margin dollars in the quarter was $20.8 million lower than last year's first quarter and 31 basis points as a percent of sales. FIFO gross margin dollars was 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 first quarter of fiscal '12 earnings supplemental information, which you can find in our website, was $5 million or 6 basis points as a percent of sales lower than last year's first quarter. Front-end gross profit was lower due to the tier discount investments related to wellness+ loyalty program, partially offset by higher pharmacy gross profit dollars despite continued pressure on third-party reimbursement rates. Our distribution center expense trends continued to improve in the quarter. Selling, general and administrative expenses for the quarter were lower by $36.7 million or 56 basis points as a percent of revenue as compared to last year. SG&A expenses not reflected in adjusted EBITDA were lower by $18.7 million due to lower depreciation and amortization expense and a gain from litigation proceeds. Adjusted EBITDA SG&A dollars, which excludes specific items, again the details of which are included in the first quarter fiscal '12 earnings supplemental information, was lower by $18 million or 27 basis points as a percent of revenues. This reduction in dollars reflects the various cost saving initiatives, efficiency improvements and overhead reductions that have been implemented over the past 12 months. Turning to the balance sheet. FIFO inventory was $38 million higher than the first quarter last year. Our cash flow results for the quarter show net cash from operating activities in the quarter as a source of $385 million as compared to a source of cash of $519 million in last year's first quarter. Higher inventory as well as the timing of accounts payable payments at the end of the quarter influenced the balance. Net cash used in investing activities for the quarter was $48.4 million versus $36.6 million last year and also includes proceeds from script file sales. During our first quarter, we relocated 6 stores, remodeled 3 and closed 10 stores. Our cash capital expenditures was $56.8 million. Now let's discuss liquidity. At the end of the first quarter, we had $1.157 billion of total availability, including $1.036 billion under the credit facility and $121 million of invested cash. We had nothing under the revolver, and we had $139 million of outstanding letters of credit. Today, we have $1.147 billion of liquidity. Total debt net of invested cash was lower by $18.2 million from last year's first quarter and $169 million lower than year end. Now let's turn to fiscal '12 guidance. The company confirms our fiscal '12 guidance, which is a 53-week year, and our guidance reflects the extra week. The company expects total sales to be between $25.7 billion and $26.1 billion and expects adjusted EBITDA to be between $800 million and $900 million for fiscal '12. Same-store sales are expected to grow in a range of plus 50 basis points to plus 200 basis points over fiscal '11, which are not impacted by the 53rd week. Net loss for fiscal '12 is expected to be between $560 million and $370 million, or a loss per diluted share of $0.64 to $0.42. Our fiscal '12 capital expenditures are projected to be $300 million with a $127 million allocated to remodels and $75 million to file buys. We are planning to compete 20 relocations and remodel 500 stores. Remodels incorporate components of the various new formats. We're not planning to complete any sale leasebacks, and we expect to be free cash flow positive for the year. We expect to close a total of 60 stores, of which the guidance includes store lease closing provisions to close 35 and the remaining 25 closed 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?

[Operator Instructions] Your first question comes from the line of Mark Wiltamuth with Morgan Stanley. Justin Van Vleck - Morgan Stanley: This is actually Justin Van Vleck sitting in for Mark. Just wanted to talk about CapEx a little bit more, if we could. I was wondering, could you remind us what maintenance CapEx is, first off?

Maintenance CapEx is somewhere south of about $150 million to $175 million. Justin Van Vleck - Morgan Stanley: Okay, and how does that break down to for the stores themselves versus other things? Like, is there a per store maintenance CapEx that goes into that calculation?

Right. I mean if you think about right now, back office for us is about $50 million if you consider technology investments and distribution and other back office items. So about $100 million, $125 million would be allocated to the stores. Justin Van Vleck - Morgan Stanley: Okay, great. And then I was wondering if you could maybe talk a little bit more about the pharmacy margin trends that you've been seeing. Walgreens has commented for a few quarters now that they've been seeing positive pharmacy margin trends, and I guess given what you're seeing, do you think the pharmacy margin trends you're seeing will continue into 2012? Do you think they'll get better? Do you think they'll get worse? I guess, just give us an update there.

Our pharmacy margin, as I think we said, was kind of flat for the quarter. We continue to see reimbursement rate pressure from both managed care and government agencies, but we also continue to make good improvements on the purchasing side, as well as see continued increase in generic penetration, so that seemed to kind of balance out this quarter. I expect to see continued reimbursement rate pressure the rest of the year. However, as we get late into the year, we'll start to see the benefit as the new generics roll in, and it's our expectation that pharmacy margin will be better next year due to the impact of new generics. Justin Van Vleck - Morgan Stanley: Okay, great.

Your next question comes from the line of Karru Martinson with Deutsche Bank. Karru Martinson - Deutsche Bank AG: I was wondering, could you walk us through the customer loyalty card revenue deferral? I mean, you've taken about half of the expected charge here in the first quarter. How should we think of that? And how does it flow through the numbers?

How much time you got? Karru Martinson - Deutsche Bank AG: I got a lot of time.

Frank, we'll let you answer that one, or Matt.

Karru, it's Matt. What's going to happen is that deferral is going to continue to build as we continue to grow membership, and then at some point in time, when the membership numbers stabilize, we would expect that deferral to stop building. Because what happens then is you've basically kind of maxed out on the amount of liability that you have. I'm not going to give you a precise quarter-by-quarter breakdown, but it is a bit front end loaded because we're still building up basically to what we think is going to be a mature membership base. And then once that happens, the liability will stay stable, so what you ought to have is smaller, kind of, movements, either up or down in the charge that we take every quarter relative to that. Karru Martinson - Deutsche Bank AG: But -- and that charge that you take is to offset the discounts that you're giving.

That will be earned in the future, basically.

Right. So basically that charge we're taking now is basically cash we've gotten in the door, but we haven't been able to recognize the revenue on that yet. Karru Martinson - Deutsche Bank AG: Okay. All right. And then there's been obviously a lot of industry noise here on PBMs this past week. I kind of wanted to get a sense of the status of your relationships, contract renewals and how you're looking at that.

It is -- is there something going on? Karru Martinson - Deutsche Bank AG: Just a few minor headlines.

A few minor headlines. No headlines here. It's -- we're always in discussions with our PBM partners all the time on different things. And that hasn't really changed for us. I think it's been a fairly normal tempo of activity. I mean, we are, as we've said before, still having a lot of discussions about how the generic wave is going to work with everybody, but I wouldn't say there's anything kind of unusual happening at the moment. Karru Martinson - Deutsche Bank AG: Okay. And then just lastly, you guys have been very successful in taking SG&A out of the business for the past, kind of 2 years, or 2 to 3 years. How much more room is there to take SG&A out? Should we kind of think of current levels as the run rate going forward?

It's definitely getting tougher. That's why we're really focused on growing revenues here. And that's really kind of the key to what will make this year work the best that it can. So we continue to really push to get everybody focused on taking care of customers and really growing the top line. I think, Frank, the SG&A is just going to continue to get tighter to get kind of year-on-year improvements as we go.

Absolutely. I mean, we obviously over the last 9 quarters or so, we've probably taken out $270 million or so of cost here. So there's been a lot of progress made, but as John alluded to, I mean, the key here is really driving the top line. There is still opportunities. There's things that the team is working on in order to reduce our overall cost here, but it's becoming more and more difficult to find opportunities there.

Your next question comes from the line of Karen Eltrich with Goldman Sachs. Karen Eltrich - Goldman Sachs Group Inc.: Actually, following up on Karru's question with regard to Express Scripts, as you look at your store base -- I mean, we're not commenting on necessarily what the outcome of that is, but what percentage of your store base is kind of isolated from Walgreen and CVS where you can maybe get an opportunity to steal share?

I'm not sure I can answer that question off the top of my head, to be honest with you. There's markets -- there are markets where we compete more or less with both of them. So I'm not sure. I don't think I can tell you, actually. Karen Eltrich - Goldman Sachs Group Inc.: Okay, fair enough. Also with regards to the wellness+, obviously very good momentum being maintained in terms of growth. When do you see that starting to level off? And also, do you kind of attribute that to successful advertising? And are you getting any signs that this is in fact new customers coming into the program versus converting existing?

I think early on, we definitely went through a heavy, heavy conversion period. I think the change in our same-store sales momentum -- and by that way, early on, I think we changed out some customers as well. As we went to this program, what's a little bit different about the way our program works is that we require that our in-store, in order to get our ad discounts -- and we don't use store cards. And so if you don't have the card or your phone number or other identification number that you gave us, you don't get ad discounts. So early on, we went through a pretty big change out of customers where those people who didn't want to be involved with the program but wanted to get ad prices probably left us. People who I think -- and then we converted our existing customers, and I think what we're in right now is what we kind of call, "the acquisition phase" of this thing where we're really out trying to explain to our non-customers what this thing looks like. We're on TV across the country right now with advertising that I think tries to reinforce the message about the value of Gold membership or Silver membership, and so that's kind of the phase that we're in at this thing right now. I think we'll always have some level of additional enrollment in this thing, but you can see the rate of enrollment has slowed down quite a bit from the early days, and I think the pace that we're at now is probably kind of in that sort of mature range, I'd say. Could be up or down a little bit, but we're kind of at that pace. I think it'll sort of hang around for a while. Karen Eltrich - Goldman Sachs Group Inc.: Great. And final question with regards to store remodels. Can you maybe give -- do you have a little bit more clarity in terms of what the buckets will be between wellness, value and Save-A-Lot?

Well, it's probably just as time goes on, in terms of Save-A-Lot, we're still testing it. We're very encouraged, again, as we continue to have pretty good sales results there, but we're still working through the overall profitability of the store. We're also still having discussions with SUPERVALU about the mechanics of how it would work if we want to go forward. So -- but as more time goes by, it's more likely that capital shifts from any kind of Save-A-Lot thing towards our wellness stores. And so we haven't given out that number because we weren't sure what the timing on the Save-A-Lot would be, and so we're still a little hesitant to do that until we kind of button that down.

Your next version comes from the line of Emily Shanks with Barclays Capital. Emily Shanks - Lehman Brothers: I had a question around -- a couple questions around the balance sheet. Working capital management exceeded our expectations, and it looks like you got some nice accounts payable leverage during the quarter. Can you give us a little color around what was driving that? Or is just that a one-time item?

Emily, it's really just the timing of inventory and payables. There's nothing really...

Change in any payment terms or anything like that.

No payment terms, no vendor payment terms or anything like that.

No payment management going on, so...

Absolutely none.

Just really the timing of it. Emily Shanks - Lehman Brothers: Okay. And then a follow-on to that would just be-- I know, Frank, you had mentioned that you're still projecting to be free cash flow positive in fiscal year '12. What are the assumptions around working capital as it relates to that? Is that a source or...

Yes, I'll tell you, we've done a fair amount of work over the last 2 years in terms of reducing the inventory, unproductive inventory out of the system. And we're really getting to the tail end of that at this point, so this really isn't a huge opportunity for us to take a lot of inventory out of the system here. So I wouldn't expect it to be a source for us. If it is, it'll be a very small source.

Your next question comes from the line of Steven Valiquette with UBS. Steven Valiquette - UBS Investment Bank: Just a follow-up on some of the Express Scripts stuff and Walgreens. I'm trying to figure out what other question I want to ask in relation to this, but it's...

We're not going to help you much because we're not going to go near it. Steven Valiquette - UBS Investment Bank: Okay. Well, I guess the question I have is to the extent that some of the issues that were in dispute that were made public. I'm just trying to get a sense for if one of your competitors is uncomfortable with some of those variables, are you perhaps more comfortable? And maybe just in general, are you generally comfortable with definitions of brand versus generic drugs? Are you comfortable with the level that you're being informed, if there's adds or transfers to prescription drugs to different networks? Just some of those variables. I'm trying to get a sense of whether...

Yes, I'm not going to wade into this thing. I'm not doing it. We work very closely with our PBM partners every day. We try and have a constructive dialogue and resolve issues as they come up, and that's what we're going to continue to do. And it's a constantly evolving process, so I'm not going to wade into the specifics of the dispute. Steven Valiquette - UBS Investment Bank: Okay, that's fair.

Your next question comes from the line of Edward Kelly with Credit Suisse. Edward Kelly - Crédit Suisse AG: I'd like to ask you a question about reimbursement rates sort of in a different way, because you kind of mentioned that you're in a more normal environment in terms of negotiations for reimbursement rates. But yet at the same time, you talk about how the pharmacy is still seeing pressure on the reimbursement rate side. And as you think about your business, right, I mean you've got a 4% EBITDA margin, I can't imagine that you want to see continued pressure on reimbursement rates. So how do we think about the outlook for that going forward? Obviously, you got one of your competitors kind of saying, "enough is enough" with one account. But is this something that we should be expecting long-term? And is there any way to kind of stop the bleeding there?

Well, I think the reimbursement rates go down always. I mean, since I've been rolling around here, which is a long time, every year, reimbursement rates decline. There's a couple things that impact them. Obviously, one is the maturing cost cycle of the drug, right? And obviously, mix impacts it as well. So what our challenge is, is in these kinds of -- in contracts is to have positive discussions, good discussions around what we think future costs are going to look like and what are acceptable reimbursement rates to us. And we're really focused on our situation, what we think is appropriate for us, and that's really the kinds of dialogues that we have with our PBM partners. But there is an expectation when we have these conversations that we are going to be able to find more ways to reduce costs and become more efficient. And they're in the marketplace on their side battling for business as well, and we'll have to work together to kind of get the whole thing to flow. I'm not sure if I'm answering your question but... Edward Kelly - Crédit Suisse AG: Well -- and as you look at 2012, I mean obviously, the mix of generics is going up a lot.

Yes. Edward Kelly - Crédit Suisse AG: So it's probably fair to assume that there's going to be more pressure on reimbursements. Are you seeing that pressure in your negotiations today? And like I guess it sounds like how things are playing out is acceptable. Is that fair?

I would say that that's still a little bit of an unknown. We're still working through discussions that involve that period of time. Edward Kelly - Crédit Suisse AG: Okay. And I'd like to ask you another question about your loyalty card. Can you give us some estimated cost in terms of what wellness+ is actually costing you? And sort of let's say, this first year, I don't know if you can talk about dollars or percentage of sales. Because I got to imagine that there's some investment.

Sure, it's a significant investment.

Yes, and Ed, it's -- I mean, it really -- a benchmark for you to look at is really what the revenue deferral is. So over the last 2 years, we will have put up a revenue deferral of almost $100 million, okay? And on a net basis, that should be a pretty good proxy for what the cost is going to be. Edward Kelly - Crédit Suisse AG: Okay. And as you think about the payback on this, when do you think you get to a point of breakeven? How long does that take?

Well, I think it's starting now. I mean, obviously, the trick to this whole thing is to get the top line growing to -- although we're going to obviously investing some rate here to drive more footsteps in the store. And part of it's actually sitting over in the script count. One of the key components of this thing is the loyalty aspect of it where you earn points for scripts and then you benefit from that with future front-end discounts. So stirring all that together, we think when we kind of put this whole thing together, that it was going to have kind of a return that sort of met our normal thresholds. So it would pay for itself, cash on cash return over, I don't know, 24 months or something, kind of in that range and would show a real return over a period of time. Edward Kelly - Crédit Suisse AG: Has some of that included working with vendors to get them to maybe fund some of the stuff that you're doing or even sort of shifting the way that you're promoting in the store?

Yes. I mean, one of the key features of this thing are the +UPs. I don't know if your familiar with -- how familiar you are with our program, but our +UP program is really a new way to bring value to market, and our vendor partners have been very supportive of the effort and have invested with us to make that program work. Edward Kelly - Crédit Suisse AG: Okay. And then just last question for you on inflation within the front end of the store. What level of product cost inflation are you seeing today? And are you successfully passing that through?

Yes. In terms of what we've seen so far, Ed, it's running somewhere south of 1%. We're reading the same headlines you are about there's things to come. The key for us as we think about passing along is one is we need to maintain our competitive position, but we're also looking to pass them along where we can. Edward Kelly - Crédit Suisse AG: Are your competitors pretty much taking the same stance, do you think?

I think our sense is that we're going to -- what we're going to do is maintain our positioning in the marketplace. So I think that kind of answers your question.

Your next question comes from the line of John Heinbockel with Guggenheim. John Heinbockel - Guggenheim Securities, LLC: A couple of things. What do you think the natural inflation is in operating costs at this point when you look across labor, utilities, rent, et cetera? What do you think that is right now?

Kind of all in, 2%, 3% range.

Yes.

Kind of all blended together, something in that range. John Heinbockel - Guggenheim Securities, LLC: Okay. And you have some ability -- it's waning, but some ability to reduce that, so I guess when I start to think what's a minimum comp to get expense leverage going forward, I guess it sounds like it's maybe 1 to 1.5, or something like that. Do you think that's fair or...

Yes, maybe one.

Yes, I would say one. Maybe a tad less than that, but depends on how much margin it takes to get that comp. John Heinbockel - Guggenheim Securities, LLC: Yes, okay. Secondly, when you think about the wellness+ remodels, as you know today, how would they compare to kind of your past -- the metrics compared to your past remodel efforts when you think about capital investment, SG&A I guess might run a little higher, gross, ROIC? How does that compare?

Well, these stores here, the remodels I think are a little bit more significant in terms of scope than some of the things we've done in the past. We've had some different variations where we did sort of paint and powders, or maybe it was a paint and powder with a reset, that kind of thing. But we're -- as we're tackling a lot of these RA1s and addressing some issues in those stores, the costs can actually be a little bit more. The stores actually probably look more dramatically different after one of these renovations than they have probably over earlier forms of renovation that we did. So I think it's more truly impactful to the store. So the capital cost is, as I said, a tad bit higher, so we're probably looking for a touch more sales. And I don't know, Frank, if you want to talk about return on invested capital.

Yes, I mean, right now the cost of this, the ones that we're doing right now, is about $250,000 with the wellness. And we're looking at a 3% comp and to be able to get about a 20% return on investment. John Heinbockel - Guggenheim Securities, LLC: And I imagine the SG&A is higher and the gross is higher, kind of...

Yes. The gross is really not significantly different, okay? Expenses -- in terms of from an expense standpoint, really, the incremental expense here is -- John talked about the Wellness Ambassador position that we're adding. That's really kind of the net incremental expense for this thing. John Heinbockel - Guggenheim Securities, LLC: All right. And thirdly, if you look at what's your best guess on how MAC-ing plays out in the 2012 generic cycle compared to prior ones? Because this is so well-known and telegraphed, does it happen quicker than in the past or not?

I wish I knew the answer to that. I mean obviously, as I was mentioning earlier, someone was asking -- I think it was Ed Kelly or somebody who was asking earlier about this. And as I've said, I think there's still a great deal of uncertainty around how mechanically it's going to work as we go through the wave for us, and we are in some discussions with our partners about -- PBM partners about how that's going to work. And so in terms of what expectations are in the marketplace from an employer perspective and whatnot, I'm sure there's expectations out there, John. Yes, as you know, we're going to save money, but remember, they get, on the floor [ph], get significant savings just by virtue of this thing's going to be a generic. There's a huge, huge reduction cost just getting there. And so then it really, I think, sort of gets into the mechanics of how the MAC-ing works once we sort of get there. It's going to depend a little bit on how quickly other players come to market. We still have a little bit of an unknown on some of these things. And so I think there's still a large number of questions to sort of answer before we can give you an answer. John Heinbockel - Guggenheim Securities, LLC: Okay. And then one last thing, when you look at impact of gas prices on the business, in terms of your -- 2 parts to that. In terms of your consumer, do you look at that as kind of a wash? And then, really, I guess the supermarkets have done a good job tying loyalty into gas programs with gas stations. Drug generally hasn't done that to this point. Is there an opportunity to do that? Or not really because it dilutes the message of wellness?

Well, we've done it in the past. We had a "Fill Up & Fuel Up" program a couple years ago. It was actually a pretty good program for us. I think one of our competitors is out with a temporary program, kind of messing with it. We're pretty focused on what we're doing, and what we're doing seems to be working. And so we're going to stick with what we're doing here. We kind of like where we're going, and that's really our focus. That's our program. John Heinbockel - Guggenheim Securities, LLC: And do you think it's a neutral? It doesn't help you, doesn't hurt you in terms of convenience versus people having less money in their pocket.

I think that's probably right so far. I mean, if something -- if it goes wacky, it's probably not going to be great for any of us, but...

Your next version comes from the line of Mary Gilbert with Imperial Capital.

Just wanted to follow up on the generic mix and the gross profit. So if we look at your portfolio of generics versus branded, is it still, from a gross profit dollar standpoint, 50% higher for generics, the mix of the portfolio today? Even with all...

Yes.

Okay. So even with all the reimbursement rate pressure.

Yes. And then again -- and part of the reason why is reimbursement rates are coming down, but we're also working hard to get costs down.

Okay. That's helpful. Also, dark rent, where is that currently running? And how should we look at it for the full year given the stores that are going to be closing?

Mary, right now we're projecting about -- dark rent about this year to be about $95 million.

$95 million. Okay, super. The other thing is if we look at the results in the first quarter and the trends that we've been seeing in terms of comp sales, I mean, it looks like you're running at a nice rate to exceed guidance. Are there any concerns that you have or are there other things that we're just not considering that would suggest that the guidance is more in line? Or is it that you're being conservative and the trends are definitely favorable in suggesting that guidance could be exceeded?

Mary, we -- I mean, when we gave out the guidance, the spread was between $800 million and $900 million, and the driver to that was sales, okay? So we have a sales range here of up 50 basis points to up 200 basis points. For the first quarter, we're up 80 basis points or so, so we're pretty comfortable with the guidance range that we have here today.

Okay. Also, can you give us an idea, and I know it's very early, but what are the sales lifts that you're seeing in the wellness stores? And then also, if we can get an update on the Save-A-Lot and the value stores.

Sure. The -- in the wellness stores, the lifts in the front end has been probably 100 to 200 basis points better the chain. But remember, we're just a few weeks into those stores, so those are -- those numbers are going to change a lot over time, so I wouldn't run too far with that yet. In the Save-A-Lot stores, for the quarter, on the front end, we were up about 68% -- almost said basis points. About 68% year-over-year for the quarter. The value stores slowed down a little bit in the quarter. We've introduced some new stores into the mix that have probably pulled down the number a little bit, so I think we were up 140 bps or something on the value stores. So they were a little bit slower.

Okay. And how many value stores do we have currently?

51.

51, okay. So on the Save-A-Lot -- you were talking about the fact that you're in negotiations with SUPERVALU, looking at the profitability of those stores.

Yes.

It looks like the top line traction continues to be very, very good. How does the bottom line look for those stores?

Not quite as good. And really, part of it is it's obviously a significant change for our stores to go from no perishables to a lot of perishables, because perishables are a big part of the mix in these stores. And that's where we have a learning curve. I think we're making some good progress with it, but I think we have to convince ourselves that that's a business that we can successfully execute and take good care of before we get too far down the line with this thing. So we again remain very encouraged by the early results, but we've got some work to do. SUPERVALU has been a great partner. They've worked with us very closely. They're really helping us work through it and sort it out, and we continue to work with them to see if it's something that we all want to go forward with.

Okay. So okay, you're not getting the bang for the buck on the bottom line on those.

Not yet.

What about the value stores?

Value stores actually have done pretty well from a profitability perspective. There was some margin investment there, but they're also very efficient stores to run. And the other thing is the capital invested in those is significantly less. So it only takes a couple percentage points of comp store sales gain in those stores to actually make a good decent return on what we're doing there. So although the sales softened a little bit here over the last quarter, that one there probably has some legs on it.

Okay, great.

Your next question comes from the line of Joe Stauff with Susquehanna. Joseph Stauff - Susquehanna Financial Group, LLLP: Could you give -- just zoom out a little bit with respect to the remodeling program? You've got a significant step up in investment this year. So you've outlined that you're going to do roughly 500 stores. You haven't done many yet. How do we think about the timing of when you start deploying that capital, when it starts affecting in terms of the payback, either your same-store comps and what you expect to be the effect? I mean, you've under-invested in your stores for some period of time, and so the natural thought is once you implement these, you'll probably get a pretty large initial return on investment. Can you help put some borders around that discussion?

Sure. So as you've said, we were -- obviously the first few are really about trying to get the concept down and the various elements sort of figured out. And so they take a while to get done. Now we do them fairly quickly, and they will ramp up fairly significantly as we move across the fiscal year. And we'll be doing a significant number every week as we sort of get into the deep part of getting these done. So there's a fairly significant ramp-up as we move through the fiscal year. A lot of the impact, because of the way it works, because of the way it'll ramp up, a lot of the impact really falls into next fiscal year in terms of timing. And again, Frank, we've talked about it a couple times already in the call, but do you want to talk about the investment capital return?

Yes. Again, we're going to spend about $250 million -- or $250,000 per store. But one thing you got to recognize is a piece of that -- you mention the fact that we haven't invested in the stores for some period of time. A piece of that is really delayed CapEx. So a piece of the $250,000 that we're spending is really just trying to get the store back up to speed, incremental to some of the new merchandising concepts that we've added into this. Joseph Stauff - Susquehanna Financial Group, LLLP: Okay, fair enough. And then with respect to the wellness program, can you talk a little bit, I guess, about sort of the evolution of the buying pattern of members that have been on this for roughly the duration or over a year? Have they become more and more profitable per customer? Can you give us a little background there?

Yes, I mean, in terms of the progression, what basically happens is a Gold customer buys just much more frequently. I'm not sure it accelerated per se, maybe to some degree. But what happens is there's -- if you come into this program and as you start to engage with it and you start to make progress towards your goal, it definitely does seem to incense your behavior a little bit. So if you're a Silver and you're trying to get to Gold, your purchases can pick up, and you can see some acceleration there. One of the things that we have in the marketplace right now is a statement that shows kind of what your cumulative point total is, what your spending rate is and helps you see how you're tracking to get to Gold and Silver, which I think also encourages behavior with the card. And so we do see those kind of behaviors inside of this thing. More globally, as we talked about earlier, people who are tracking towards Gold and Silver just shop with us a lot more frequently. Like, every 2 weeks is kind of the tempo versus lower-level members or non-members, we don't know, but lower-level members shop with us much less frequently. And so when you look at total profitability, when you look at a Gold member versus a base-level member, I think we call them a Bronze or a plus member, they're 3 to 4x more profitable in terms of what it means to us to have those customers, even with the loyalty investment that we're making. Joseph Stauff - Susquehanna Financial Group, LLLP: Great. Final question, your private label proportion, it's been about 16%, I guess, for the last couple quarters. I mean, is it fair to assume that, that proportion is going to go up? Or would you think it's somewhat capped here?

No, we expect private label to continue to grow. We continue to invest in private label. We've got a redesign of our brand architecture that's rolling out during this year. We've got a lot of new packaging in the store. We've done a lot to reposition it from a pricing and promotional perspective. And so I think it's going to continue to gain traction and grow as we go forward.

Okay, your final question will come from the line of Bryan Hunt of Wells Fargo Securities. Bryan Hunt - Wells Fargo Securities, LLC: I was wondering if you all could talk about just competitive activity, especially with regards to circulars. Are you seeing, in light of the pressure on the consumer, the consumer consistently seeking out value, a greater number of items or increased sharpness of promotions within circulars from your competitors?

Definitely. I mean, it seems like it's a very competitive marketplace out there from a circular perspective, from where I sit. We continue to see hot promotions on consumable-type products on the front page, people trying to drive foot traffic. And so it looks like folks are making some investment to drive towards sales, I'd say. Bryan Hunt - Wells Fargo Securities, LLC: Great. Has that level of investment accelerated recently? Or would you say it's remained at a steady state?

I think it's kind of gradually ramping up. That's my sense. Bryan Hunt - Wells Fargo Securities, LLC: Okay. And then my next question, going deeper into wellness+, when you look at the distribution of your members across the various levels, Silver, Gold, Platinum, how does that distribution stand relative to what you've modeled out? And as the consumer becomes more educated about the program, have you seen a greater shift or accelerations toward those upper-level savings programs or levels?

I would tell you versus what we've sort of modeled out when we started this thing, we've probably seen a greater penetration towards Gold and Silver than we what we initially expected. And I think it's going to continue to grow as people do gain awareness about the program. And it is truly a great value if you just think about the 20% discount every day. That's a pretty big deal. And combined with +UPs and our ad prices, I mean, there's a lot of value in this program. So I think it's going to continue to grow over time, but it's definitely -- probably definitely exceeded our expectations out of the gate, and that's a good thing. Bryan Hunt - Wells Fargo Securities, LLC: And then lastly, with regards to wellness+, I mean, it's now, as you said, John, about acquiring new customers.

Yes. Bryan Hunt - Wells Fargo Securities, LLC: From competitors. One, who do you think you're going to take customers from to grow your wellness+? And two, maybe what do you think the cost is of acquiring those customers?

I think the cost is in the loyalty discount that we have. I mean, you're seeing the deferral. That's where it kind of shows up. And then it flows its way through our gross margin, right, as we actually give those discounts in the future. So that's what the cost of it is, and I think we've dimensionalized that a little bit on the call today already. In terms of where it comes from, I think it comes from all over the place. I mean I think our 20% discount makes us very competitive from a price perspective with a lot of different channels. So I think what it does is it makes you much more comfortable that you can run to your local Rite Aid and get what you need and then some and not worry about, "Am I paying a premium for convenience?" Because it's really gone in this particular instance. And so I think it allows us to reach across a broad number of channels to get customers. Bryan Hunt - Wells Fargo Securities, LLC: I appreciate your time this morning.

Thank you very much. We appreciate everybody joining the call this morning, and we'll talk to you next quarter.

This concludes today's conference call. You may now disconnect.