Rite Aid's (NYSE: RAD) difficulties started before the economic downturn, but the recession has only compounded its troubles. Since acquiring the Brooks and Eckerd chains in 2007, the drugstore syndicate has suffered from a steady succession of setbacks, resulting in nine consecutive quarters of losses. As competitors like CVS (NYSE: CVS) and Walgreen (NYSE: WAG) attempt to one-up Rite Aid in every capacity, the company frantically tries to machete its costs. But its efforts keep getting tangled up in the recession's dense underbrush.
Rite Aid exhibited more of the same in its fiscal second quarter. Net revenue fell 2.7% to $6.3 billion, and net losses landed at $116 million. That's significantly better than the $222 million that Rite Aid lost in the same quarter a year ago, although large impairment and debt retirement charges hampered last year's results. This year, the company cut its SG&A costs, but it still suffered from massive interest payments on the mountain of debt it took on to buy Eckerd and Brooks in 2007. Rite Aid's liabilities outweigh its assets, giving the company a negative book value.
A host of problems
Walgreen and CVS are doing much better than Rite Aid; both are actually making money. Furthermore, Wal-Mart (NYSE: WMT), Costco (Nasdaq: COST), and Kroger (NYSE: KR) all have in-store pharmacies now, and they offer a wider array of peripheral products at competitive prices. However, lower reimbursement rates hurt all pharmacy operations, forcing companies to either squeeze their margins or pass the shortfall on to consumers in the form of higher prices.
So in addition to intense competition and a recession, these cuts are essentially making health care more expensive for everyone, right down to the end user. Rite Aid may be the worst off right now, but no one is immune.
A grave situation
Even worse for shareholders, Rite Aid lowered its full-year revenue and earnings guidance in light of these challenges. But keep in mind that to some extent, all retail pharmacies are seeing the same pressures. With unemployment still relatively high, people will continue to seek out bargains, put off refilling their prescriptions, and generally spend less at the drugstore. If this situation doesn't improve, it could signal dark days ahead -- not only for retail pharmacies, but also for consumers, drug companies, and the entire health-care system.
You should avoid Rite Aid like the plague for now. And if its problems are a sign of things to come, other health-care stocks may not be far behind.
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