Drugstore operator Rite Aid (NYSE:RAD) is a distant third-tier player in the industry, but a recent move to acquire a number of stores in its core East Coast market is expected to create a formidable competitor to the two industry titans. Thursday's first-quarter earnings results will shed more light on Rite Aid's integration efforts. If it can't find a way to post consistent, positive earnings, the shares could continue to flounder under $10 per share.

What analysts say:

  • Buy, sell, or waffle? Nine analysts currently follow Rite Aid. Two are bullish, five aren't, and the other two can't make up their minds and have a hold rating.
  • Revenues. Analysts are projecting first-quarter sales of $4.67 billion, or year-over-year growth close to 7.7%.
  • Earnings. Analysts project negative first-quarter earnings of $0.01 versus a slight gain of a penny last year.

What management says:
Back when Rite Aid released fourth-quarter results, management didn't provide first-quarter guidance, but said it expects fiscal 2008 sales of $25.3 billion-$26 billion, same-store sales growth of 3.8%-5.8%, and a net loss of $0.11-$0.23 as it digests a large acquisition of 1,854 Brooks and Eckerd drugstores from Canadian-based Jean Coutu Group.

What management does:
Rite Aid has posted solid sales growth as it continues to acquire rivals and report positive comps at existing stores. However, strong top-line trends haven't fallen to the bottom line as the company has a heavy debt burden and high subsequent interest expense from the buyout of rival drug chains. An acquisitive mindset has also led to constant doses of special charges and other restructuring expenses. 

Margins

11/05

02/06

05/06

08/06

11/06

02/07

Gross

29.4%

27.2%

27.1%

27%

26.9%

26.9%

Operating

2.7%

2.4%

2.1%

2%

2.1%

2.1%

Net

1.5%

7.4%

7.2%

7.1%

7.1%

0.2%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Rite Aid successfully closed the Brooks and Eckerd acquisition on June 4, and expects "additional benefit from improving the front end productivity of the acquired stores, increased purchasing scale, rationalizing the store base and optimizing our distribution network." This move could work out well for the company, as scale is becoming increasingly important to make a buck by filling prescriptions for the government and large health plans.

However, the drugstore industry is highly competitive, where Walgreen (NYSE:WAG) is the market leader in terms of overall sales and profitability. CVS (NYSE:CVS) isn't far behind and recently acquired pharmacy benefit manager Caremark, which may have just blazed a new health care trail in the drug-retailing realm of the industry.

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Fool contributor Ryan Fuhrmann is long shares of Walgreen, but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.