Why Rite Aid Shares Jumped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of drugstore-chain Rite Aid (NYSE: RAD  ) were getting high off their own supply, climbing as much as 10% on improved same-store sales in January.

So what: Any sign of life is good news for the debt-laden retailer, apparently. Comparable sales grew by just 0.3%, but that was enough to spark the bull rush. You might think Rite Aid benefited from this winter's especially bad flu season, but even as flu shots and related prescriptions increased, pharmacy revenue still fell 1.4%. Comparable sales from the rest of store gained 4.2%, benefiting, in part, from over-the-counter flu-related sales. Overall revenue declined by less than 1%, as the company continues to close stores.

Now what: Rite Aid is going to need more than a 0.3% increase in same-store sales to get back to profitability. The company has nearly $6 billion in long-term debt, and continues to lose money. It's hard to see how the company will get back to financial health without selling a significant amount of real estate to pay off its debt. It racks up over $500 million in interest expenses a year, enough to kill any operating profit. Investors can hope for a buyout from one of its more-prosperous rivals, like Walgreen's or CVS, but that seems unlikely with Rite Aid's debt load. I'm keeping my distance.

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Comments from our Foolish Readers

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  • Report this Comment On February 02, 2013, at 1:33 AM, figglebird wrote:

    That's not why shares jumped... Jan sales were out the morning prior - rad went up 2.4 pct... No offense, but it's befuddling that you don't understand what you're talking about.

    Shares jumped because of refi commencement.

    Refi commencement commenced b/c S&P upgraded RAD's credit.

    It's a perfect storm.

    Good luck shorting.

  • Report this Comment On February 02, 2013, at 4:34 AM, bestwaytoriches wrote:

    Figglebird,

    Thanks your tentative and clarity. This helps others see the opportunity in RAD.

    My prediction for Rad will triple is value.

    Current price target $ 3.20

    The flu season sales effects will benefit February and March sales The will make for a great quarter

    This refi will continue throughout 2013 and the guidance should be raised.

  • Report this Comment On February 02, 2013, at 9:53 PM, wayouy wrote:

    agree with comment above on refinancing 9% debt to lower rate. it will help bottom line.

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