Rite Aid May Be Headed Downhill Again

For much of 2012, troubled pharmacy chain Rite Aid (NYSE: RAD  ) seemed to be pulling itself up by its bootstraps. It benefited from a dispute between Walgreen (NYSE: WAG  ) and Express Scripts (NASDAQ: ESRX  ) that forced many former Walgreens patrons to fill their prescriptions elsewhere. Furthermore, the company saw improved sales at stores that it remodeled to a new "wellness" format. In Q3, these sales drivers culminated in Rite Aid's first quarterly profit since 2007.

However, Walgreen and Express Scripts finally settled their long-running dispute last summer, and Walgreens stores rejoined the Express Scripts network on Sept. 15. Moreover, at the same time the company rolled out its first loyalty program, called "Balance Rewards", as part of a push to win customers back from Rite Aid and CVS Caremark (NYSE: CVS  ) . While it's too early to be sure, it appears that Walgreen's resurgence is squeezing Rite Aid again. Rite Aid has a heavy debt load of roughly $6 billion and is much smaller than Walgreen and CVS -- two major competitive disadvantages. Rite Aid is therefore a very risky investment and should probably be avoided.

Sales momentum tapers off
Rite Aid's strong Q3 earnings were the result of 1.1% same-store-sales growth in the front end (non-prescription sales) and a 3.6% increase in prescription count in comparable stores. (Overall, same-store sales decreased 1.5% because of the introduction of new lower-cost generic drugs.) However, performance was strongest early in the quarter, before Walgreen had a chance to win back Express Scripts customers.

Q4's performance could have been much worse, if not for the bad U.S. flu season. Front-end sales decreased 1% in December while prescription count increased 4.4%, including a 170-basis-point gain from sales of flu shots and flu-related prescriptions. January was even stronger, with the front end up 4.2% (2.4% attributable to flu treatments), and prescription count up 5% (3.4% resulting from flu-related prescriptions). However, Rite Aid's momentum dissipated with the end of flu season. With no flu-related tailwind in February, front-end sales dropped by 1.3% and prescription count increased by a meager 0.3 %.

Turnarounds are expensive
Rite Aid once again faces two stronger competitors in Walgreen and CVS. Convenience is a key competitive advantage in the drugstore industry, giving larger chains such as Walgreen and CVS an edge. I'm skeptical that Rite Aid will be able to successfully fend off this competition in light of its fading sales momentum and weak balance sheet. A case in point is the rollout of the "wellness" format stores. While these stores outperform the company average, Rite Aid has been remodeling stores at a rate of only 110 to 120 per quarter. At that rate, it will take roughly a decade to convert all stores to the new format. However, Rite Aid's weak balance sheet and limited cash flow make it difficult for the company to invest more aggressively in its stores. Ultimately, Rite Aid's weaknesses outweigh its strengths and make it a poor long-term investment candidate compared with Walgreen and CVS.

What's inside Supernova?
If you're an investor looking for big long-term winners, Motley Fool co-founder David Gardner's picks have frequently trounced the market. How? Because he's always on the lookout for revolutionary stocks and recommends them before Wall Street catches on to their disruptive potential. If you're interested in how David discovers his winners, click here to get instant access to a personal tour behind David's Supernova service.


Read/Post Comments (4) | Recommend This Article (2)

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 March 11, 2013, at 11:53 PM, bestwaytoriches wrote:

    Adam,

    It's clear you chose to leave out the best parts. RAD is Now profitable and getting stronger.

    RAD recently refinanced there debt. Earning many upgrades. This should free up a great deal of cash per year. Plus management is closing the under preforming stores bringing the profits to light.

    Currently RAD stock price is 1/10 it's peers WAG CVS ESRX. Most professional money managers 2013 prediction believe RAD to triple from it's bottom with a price target of $ 3.20. RAD will give much better return on your investment.

  • Report this Comment On March 11, 2013, at 11:55 PM, masterwallstreet wrote:

    In my opinion only, maybe you should change the title of the article to a comeback. It is a turnaround company. They had nine improving quarters. Last quarter record profit. This quarter probably record profit. beat quarter estimated 9 straight times refinanced debt saving millions of dollars remodeling 480 stores a year they are doing such a great job competition copying giving out their own reward cards February increased prescriptions by 0.3% proves that people are not leaviing Rite Aid to go to Walgreens Rite Aid more likely to double or triple before Walgreens, Rite Aid ridiculously low price of 1.65 make more money speculation play sounds like a turnaround comeback company my opinion of course I love money Money is good money is green I see a lot of green in Rite Aid by author Master Wall Street available on Amazon kindle ebook

  • Report this Comment On March 12, 2013, at 12:08 AM, bestwaytoriches wrote:

    Adam,

    Don't be so eager to follow the crowd. These Fools will start to go where the puck is going. RAD stock price will out preform it's peers.

  • Report this Comment On March 12, 2013, at 11:22 AM, TMFGemHunter wrote:

    Rite Aid is cheap for a reason. One quarter of profit does not make a great investment after years of losses. While it's helpful that Rite Aid refinanced its debt, that's a far cry from actually paying down the debt: something that Rite Aid can't do. The refinancing will lower interest expense a bit, but not enough to make a difference in the grand scheme of things.

    There are huge advantages to scale in this business, and Walgreens and CVS are both significantly bigger. They also have much more capital at their disposal. As a result, they will probably continue to take market share away from Rite Aid over the next several years.

Add your comment.

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: 2304494, ~/Articles/ArticleHandler.aspx, 10/23/2014 3:00:40 AM

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...


Advertisement