Rite-Aid's Biggest Problem

Last month I covered drugstore Rite-Aid's (NYSE: RAD  ) fourth-quarter earnings release. And on the face of it, the numbers weren't that great. The company posted its 19th consecutive quarterly loss but managed to grow its top line as same-store sales went up.

As I had mentioned in the article, the reason for these losses is the heavy debt on its books. The company has suffered from debt ever since it acquired the Brooks and Eckerd chains way back in 2007 and hasn't been able to report a single profitable quarter ever since. Well, as we all know, it is important for companies to invest in capital in order to grow and expand their horizons. But it is also important to keep track of how these companies are managing their debt load, which provides an insight into the management's performance.

Till debt do us part
Rite-Aid ended the last quarter with a debt of $6.4 billion on its books. What's even more worrying is that its debt is more than five and a half times that of its market capitalization of $1.11 billion. The interest payments related to this debt have contributed to the company's losses in the past few quarters. Note this -- the company's interest expense was more than double that of its operating income last year. So you can see how the debt burden is eating into Rite-Aid profits.

To help us understand how the company is managing this load, let's take a look at two metrics. The first is the interest coverage ratio, which gives an indication of the company's ability to pay off its interest expenses on its outstanding debt. The other is the current ratio, which tells us what portion of a company's short-term assets is on hand to fund its short-term liabilities. Rite-Aid's interest-coverage ratio stands at 0.5, which means that it is not bringing in enough revenues to cover for its short-term interest payments.

Compare that with peer Walgreen's (NYSE: WAG  ) interest coverage ratio of 54.4 and CVS Caremark's (NYSE: CVS  ) figure of 11 times and you know where we stand. CVS' total debt stands at $9.2 billion, while it's at $2.39 billion for Walgreen. However, Rite-Aid's current ratio stands at 1.8, better than its peers' ratio of 1.5 -- which indicates that Rite-Aid has time to manage its debt.      

What the future holds
As I had mentioned earlier, Rite-Aid's revenue increased in its most recent quarter, which helped the company narrow its quarterly loss. Revenue was helped by a 3% rise in same-stores sales as the company grew its prescriptions by 2.4% -- this as it managed to steal customers from Walgreen. Walgreen and Express Scripts (Nasdaq: ESRX  ) squabbled last year over pricing, which led to the two terminating their contract. Some customers were no longer able to fill their prescriptions with Walgreen, so they flocked to Rite-Aid and CVS stores. Earlier this year, CVS also raised its annual guidance to $0.03 as it expected to gain more customers from the impasse.   

Another area in which Rite-Aid has been doing well is its wellness+ loyalty program -- where enrollment went up by 52 million in the last quarter. Wellness+ is important as it contributed to 74% of the company's front-end sales. The company will surely look to cash in on this program as well as the impasse as much as possible in order to help grow its top line. If it can do that, the company will be in a much better place to manage its debt more effectively.

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Fool contributor Shubh Datta doesn't own shares in the companies listed above. Motley Fool newsletter services have recommended buying shares of Express Scripts Holding. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.   


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  • Report this Comment On June 11, 2012, at 7:36 PM, earleytech wrote:

    I see they are replacing Mary Sammons as CEO after 10+ years .. I wonder why they seem to try the same thing expecting different results? Is no one accountable for the mountain of debt they accumulated? It really is a time for Rite Aid to dawn a new look and attitude all together .. there isn't much appealing about the company really, nothing to make it stand out. Hopefully the new CEO coming in a few weeks will realize this and just not continue the same path ... time to think outside the box Rite Aid .. time to come out from the shadows if you ask me. All or nothing I say!

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