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Does Rite Aid Measure Up?

Margins matter. The more Rite Aid (NYSE: RAD  ) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market. That's why we check up on margins at least once a quarter in this series. I'm looking for the absolute numbers, so I can compare them to current and potential competitors, and any trend that may tell me how strong Rite Aid's competitive position could be.

Here's the current margin snapshot for Rite Aid over the trailing 12 months: Gross margin is 26.4%, while operating margin is 1.2% and net margin is -1.6%.

Unfortunately, a look at the most recent numbers doesn't tell us much about where Rite Aid has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months, the last fiscal year, and last fiscal quarter (LFQ). You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for Rite Aid over the past few years.

Source: S&P Capital IQ. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months.

Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them. To compare quarterly margins to their prior-year levels, consult this chart.

Source: S&P Capital IQ. Dollar amounts in millions. FQ = fiscal quarter.

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 27.3% and averaged 26.8%. Operating margin peaked at 2.0% and averaged 1.1%. Net margin peaked at 0.2% and averaged -3.9%.
  • TTM gross margin is 26.4%, 40 basis points worse than the five-year average. TTM operating margin is 1.2%, 10 basis points better than the five-year average. TTM net margin is -1.6%, 230 basis points better than the five-year average.

With recent TTM operating margins exceeding historical averages, but net margins still negative, Rite Aid still has some work to do.

If you take the time to read past the headlines and crack a filing now and then, you're probably ahead of 95% of the market's individual investors. To stay ahead, learn more about how I use analysis like this to help me uncover the best returns in the stock market. Got an opinion on the margins at Rite Aid? Let us know in the comments below.

Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (6) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 11, 2012, at 1:07 PM, Lizzy010 wrote:

    I worked for a large grocery store for 16 years . I recently became employed by Rite Aid and yes they are a little behind on certain things. I do see the company going towards the right direction. They are implementing new procedures and controlling cost and expense like crazy. Store conditions are improving in stock conditions are also improving. Things don't change overnight and with the new CEO I see good stuff. Have you ever walked into a Cvs their store conditions are horrible, I understand controlling the cost of labor but once it starts effecting store conditions it will eventually cost you. I truly believe Rite Aid is moving towards the right direction.

  • Report this Comment On January 11, 2012, at 4:52 PM, FarmerCyst wrote:

    Whats funny is that I was thinking exactly the same thing. I am a New York based Pharmacist and have worked for an independent pharmacy for 25 years. Sometimes I do need products from a pharmacy when I am not working and have always been dismayed by the conditions at the chain store pharmacies, from stock (or lack thereof) to the disinterested attitudes of the employees. But, I recently noticed the recent positive changes at Rite Aid pharmacies near my house. There seems to be a more positive attitude in the air. The shelves are neater. The employees are more helpful. All of these things will translate to an upswing in sales once the customer comes to see the changes.

  • Report this Comment On January 11, 2012, at 8:16 PM, tbone37 wrote:

    As a long time stock holder of Rite Aid stock. I have let the board know what I think of their stores. They have listened and made changes. They have improved but they need to keep it going. They have good locations and can do the job. Courteous Employee visibility is important. I urge those interested in Rite Aid to make spot check in a store and let the board know what you find. I challenged the board to do the same thing. I hope they have and will continue to do so. In my opinion, Walgreen does the best job in employee visiblity, courteous and helpfulness. Good model copy. I think tRite Aid has a future.

  • Report this Comment On January 12, 2012, at 11:04 AM, clumsypanther77 wrote:

    People may be seeing changes on the sales floor but conditions in the pharmacy are horrible! They often have only one pharmacist that is responsible for verifying over 300 prescriptions a day. They are not mandated to take a lunch break because they are salaried as opposed to hourly. They are also responsible for keeping track of all CII prescriptions that enter and leave the pharmacy and need to log in every CII rx they have dispensed. THey have no time to counsel patients on new prescriptions because Rite-Aid only cares about script volume as opposed to patient care! The front end of rite-aid stores are not making money for the company. They have lowered prices on retail items to the point it is impossible to make a profit even just on volume. The "wellness+" program was supposed to increase foot traffic to the store and hopefully encourage more people to transfer their rx's to the pharmacy but despite the high number enrolled in the wellness program, script growth has been nothing to brag about. Rite-Aid is a failed company trying to keep its head above water. It is only a matter of time before it sinks to the bottom and stays there for good. Good customer service but poor associate and pharmacist appreciation and recognition!

  • Report this Comment On January 18, 2012, at 8:01 PM, nester509 wrote:

    I was managing a rite aid pharmacy on the front end until the end of last year. I think the pharmacy side of the business is doing just fine. The front end portion of the business is having the life strangled out of it.

    On the west coast years ago rite aid bought payless and slapped their name on the side of these huge stores and now they expect these monster stores to run on around 200 hours on the front end. Try running a business which is open 8am to 9pm 7 days a week with that. Things just do not get done. It starts with facing, then your recalls don't get done and you end up either writing off product or it just sits in the back forever, then your defectives don't get taken care of and they pile up in the back, then your freight starts not getting put on the shelf completely every week. Before I quit I was in a store that had more than 3 weeks worth of freight in the back and it was less than a month before xmas and they didn't have that built either. Now consider the west coast was always one rite aid could count on to make money. That store I was just telling you about was planned at around 80k per week going up to christmas. I think one week they managed to hit 50k. I believe rite aid slit their own throat for some short term numbers. Expect downhill in the near future.

  • Report this Comment On January 25, 2012, at 10:34 PM, manoman123 wrote:

    I don't see any positive changes in Rite Aid's future. They are riddled with layers of executive management who are awarded high salaries, buyers that travel first class overseas and stay at 5 star hotels, and a tendency to merchandise inferior product at unworthy retails. On the east coast their stores are outdated and small, which only costs more money to improve. They are pinching pennies, but not making the cuts where they really count (and hurt). They need to revamp their infrastructure, cut the fat out of their corporate sector and run a lean, mean drug store machine. How many highly paid execs would be willing to cut that kind of fat when it will directly impact their weekly pay check? Since it hasn't happened at Rite Aid Corp yet, it likely will not take place in the near future which only equals doom and gloom for the faded giant.

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10/26/2016 4:01 PM
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Rite Aid CAPS Rating: ****