Rite Aid Corp., the third-largest U.S. drugstore chain, on Thursday posted a smaller quarterly loss, aided by stronger sales of prescription medications and an income tax benefit.

While the results were in line with expectations, Rite Aid's shares fell more than 7 percent on the heels of the news that Wal-Mart Stores Inc. (NYSE:WMT - news), the world's largest retailer, is slashing prices on some generic drugs to $4.

Rite Aid does not have any stores in Florida, where Wal- Mart's low-price generic drug plan will debut. But Wal-Mart intends to expand the plan to as many states as possible next year, which could put pressure on the drugstore chain.

We'll be interested to see the results of the pilot program in Florida, Rite Aid President and Chief Executive Mary Sammons said during a conference call. I think it is really early to try to speculate on it until we can spend a little bit more time digging into what they're doing here.

Sammons also speculated that Wal-Mart is picking older generic drugs, where prices are already low, for the $4 plan and that by no means are they cutting prices on all generics.

They're obviously picking a subset of them for economic reasons, Sammons said.

Rite Aid, which plans to acquire the Brooks and Eckerd U.S. drugstore chains, also stood by its financial forecasts for the current fiscal year.

Rite Aid has been remodeling its stores to better appeal to customers as larger rivals Walgreen Co. (NYSE:WAG - news) and CVS Corp. (NYSE:CVS - news) continue to expand. It is also adding more in-store services. Just this week, Rite Aid said it would open three in-store clinics with medically supervised treatment for weight control with Lindora Inc. and open Sutter Express Care medical clinics in six of its stores.

The loss narrowed to $300,000, or 2 cents per share, in the second quarter ended on September 2, from $1.6 million, or 3 cents per share, a year earlier.

Rite Aid said it saw an income tax benefit of $3.2 million, up from $2.2 million a year earlier.

In August, the Camp Hill, Pennsylvania-based company announced a plan to buy the Brooks and Eckerd chains from Jean Coutu Group (PJC) Inc. (Toronto:PJCA.TO - news) for about $2.6 billion. The acquisition could close as early as Rite Aid's fourth quarter, which ends on March 3.

The deal would bring Rite Aid's store count to about 5,200 from 3,315 stores at the end of the second quarter. It would still be the No. 3 U.S. chain behind Walgreen and CVS.

Second-quarter revenue rose 3.8 percent to $4.29 billion.

Sales at stores open at least a year, or same-store sales, rose 3.8 percent, with pharmacy same-store sales up 4.7 percent and sales of general merchandise up 2.3 percent.

Rite Aid stood by its earlier forecasts for fiscal 2007.

It still projects a net loss of $5 million to a net profit of $40 million, or a loss of 7 cents per share to a profit of 2 cents per share; sales of $17.4 billion to $17.65 billion; and a same-store sales increase of 2 percent to 4 percent.

Analysts, on average, expect Rite Aid to post a profit of nil per share this year on $17.5 billion in revenue, according to Reuters Estimates.

Rite Aid shares were down 30 cents, or 6.3 percent, at $4.46 on the New York Stock Exchange after falling to $4.42 in morning trading. Walgreen shares and CVS were also lower.

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