Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Rite-Aid's Biggest Problem

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

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.

If you think Rite-Aid's debt is too much for it to handle, don't let that frighten you away from the bigger retail space. We have for you an emerging-market retailer that has the most upside potential we've seen in a while. We've featured it in our report "The Motley Fool's Top Stock for 2012." You can learn more by just clicking here.

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.   

Read/Post Comments (1) | Recommend This Article (6)

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 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!

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1901035, ~/Articles/ArticleHandler.aspx, 10/21/2016 2:58:56 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,154.82 -7.53 -0.04%
S&P 500 2,141.14 -0.20 -0.01%
NASD 5,255.79 13.96 0.27%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 2:43 PM
RAD $7.05 Down -0.06 -0.84%
Rite Aid CAPS Rating: ****
CVS $87.53 Up +0.23 +0.26%
CVS Health CAPS Rating: ****
ESRX $69.73 Down -1.31 -1.84%
Express Scripts CAPS Rating: *****
WBA $81.31 Up +0.29 +0.35%
Walgreens Boots Al… CAPS Rating: ****