Rite Aid Hasn't Fully Recovered (RAD)

Rite Aid Hasn't Fully Recovered

By Ryan Fuhrmann, CFA | More Articles
April 11, 2008 | Comments (0)

At just $2.62, shares of Rite Aid (NYSE: RAD ) are trading at about the same price as a cart full of post-Easter marshmallow Peeps. Unfortunately for the stock, the current price still doesn't represent much of a bargain, and recent trends look about as stale as those Peeps.

Rite Aid reported fourth-quarter sales growth of 50.5% compared to last year, outpacing the year-end results, which saw a nice 40% jump in the top line. Of course, the bulk of this was related to last year's purchase of 1,854 Brooks Eckerd stores; same-store sales rose just 1.3% for both the quarter and the year.

The acquisition proved beneficial; it helped improve margins and brought total store count to 5,059 to end the fiscal year, placing the company third behind archrivals CVS (NYSE: CVS ) and Walgreen (NYSE: WAG ) . But Rite Aid is still recovering from its purchase. Integration charges and higher expenses contributed to the losses the company posted in both the quarter and the year. The company's now saddled with debt at about 77% of total capital. Hefty interest expenses could also be troublesome, considering that Rite Aid's times-interest-earned ratio sits at just 0.6.

The top line hasn't historically been an issue for Rite Aid, though management anticipates revenue growth of 9.8% to 11.9% in fiscal 2009, based on 2% to 4% comps. However, it also expects net income to drop further into negative territory, as a tough economy, intense competition, and more Brooks Eckerd integration costs keep profitability at bay for at least another year.

To me, it all adds up to too much debt, too little to show for it, and murky profitability and growth trends. Rival CVS has been very successful at integrating acquisitions, and Walgreen has proven extremely adept at opening hundreds of new stores annually. Sure, Rite Aid's stock price is low, at just 0.9 times sales, but I don't see it moving much higher in the near future until it can prove its ability to benefit from the Eckerd business and integrate a more competitive business strategy. Right now, the only thing I’m throwing in my Rite Aid basket are some heavily discounted Peeps.

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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.

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