Rite Aid Keeps Falling Behind

On Thursday morning, Rite Aid (NYSE: RAD  ) reported another month of lackluster sales results. For March, same-store sales were down 2%, whereas top competitor Walgreen (NYSE: WAG  ) reported a 0.7% increase in comparable-store sales. (The third pharmacy giant, CVS Caremark (NYSE: CVS  ) , does not report monthly sales.) Walgreen is continuing to recover strongly from last year's dispute with Express Scripts (NASDAQ: ESRX  ) , and the company appears to be winning market share back from Rite Aid. As a result, I expect Rite Aid's recent return to profitability to prove short-lived.

The details
Rite Aid's sales decline last month was comprised of a 3.8% increase in front-end sales and a 4.5% decrease in pharmacy same-store sales. Much of the decline can be explained by the introduction of various new generic drugs in the past year; generics are cheaper than brand-name drugs, but carry higher margins for pharmacies. It is perhaps more meaningful to look at prescription count, which does not differentiate between brand-name and generic drugs. On that basis, Rite Aid reported a modest 0.3% increase over the prior year.

On the other hand, Rite Aid estimated that front-end comparable-store sales benefited by 300 basis points due to the calendar shift of Easter into March. Stripping out all of the moving parts, it appears that Rite Aid's core sales growth is less than 1%, well below the pace seen for much of the last year.

Competition heats up
Much of Rite Aid's improved performance last year was a direct result of the commercial dispute between Walgreen and Express Scripts, which forced Express Scripts customers to fill their prescriptions elsewhere. While it is difficult to quantify the benefit seen by Rite Aid (and other Walgreen competitors), Rite Aid's management has admitted that pharmacy sales were boosted by the dispute last year. However, as of Sept. 15, 2012, Walgreen's stores began to accept Express Scripts prescriptions again, and the company has a made a strong push since then to regain lost customers.

Whereas Rite Aid's prescription count in comparable stores increased by just 0.3% last month, Walgreen's stores saw a 4% increase. Walgreen's management also commented that "the percentage of former Express Scripts customers returning to its pharmacies continued to increase in March."

Looking forward
Going forward, Rite Aid will continue to be squeezed by its two larger competitors, Walgreen and CVS. Now that Express Scripts customers are starting to return to Walgreen's stores, Rite Aid is experiencing anemic sales growth. Furthermore, Walgreen and CVS are both expanding, while Rite Aid is gradually shrinking its store base. This trend will give Rite Aid's competitors even more economies of scale, while new CVS and Walgreen's stores will likely target current Rite Aid customers.

Rite Aid stock is too speculative to recommend for most investors at this point in time. While Rite Aid's enterprise value of $8 billion is significantly below that of Walgreen ($49 billion) the lower valuation is fully justified by the company's weak profitability. Rite Aid continues to face significant long-term challenges, and I am skeptical that last year's upturn was anything more than a one-time bounce attributable to the Walgreen-Express Scripts dispute. With Express Scripts customers now returning to Walgreen's stores, Rite Aid will probably resume its slow decline.

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  • Report this Comment On April 05, 2013, at 1:32 PM, masterwallstreet wrote:

    In my opinion only, I disagree with your article about Rite Aid falling behind. How could they fall behind when they increased front end sales by 3.8%. Rite Aid reported a prescription sales increase of 0.3%. The only reason why Walgreens looks so good is because they did so bad last year. Any slight improvement looks good. Rite Aid did great last year. The amazing part is they are still growing and improving. How much debt does Walgreens have? Are dividends considered a liability or an asset to the company? Walgreens grew 0.7% front end sales. Rite Aid reported 3.8%. Isn't Rite Aid improving more than Walgreens? I guess we will find out in 6 days when they come out with earnings. Is it possible that they might have another profit this quarter.

  • Report this Comment On April 05, 2013, at 3:41 PM, KenMcG6150 wrote:

    If Rite Aid can just be successful in meeting the analysts' earnings expectations of $0.03/share this year and then maintain that level of performance for the next 95 years, they will successfully wipe out that pesky negative equity of $2.5 billion and be ready to move forward! I like to think of myself as a long-term investor...........just not quite that long term.

  • Report this Comment On April 05, 2013, at 4:55 PM, TMFGemHunter wrote:

    @masterwallstreet: Walgreen's comparable front-end sales were up 4.2%; total front-end sales were up 5.4%. I'm not sure where you saw 0.7%.

    As I said in the article, Rite Aid management attributed 3% of the 3.8% front-end gain to the Easter calendar shift. Those are sales that won't be in April. So you have 0.3% increase in prescription count and 0.8% increase in front-end. That's not even enough growth to keep up with inflation.

  • Report this Comment On April 08, 2013, at 3:58 PM, HughWade wrote:

    This is a fun stock to watch, and debate. I love it how you experts keep looking at the wrong metric. It's not about same store sales/ gross revenues. It's about margins. Doing more with less. That's called efficiency, profitability. Yes, they have a ton of debt. That hasn't changed since 2007 or 2008. They survived. They're margins are getting better, even though gross revs are falling (due to a fundamental shift in their prescription orders.) They will soon be profitable. They have had positive cash flow (albeit not much of course) pretty much the whole time. Those that focus on gross revs will be proven wrong. Those that focus on margins will be proven right. At least that's my prediction. Let's both keep watching and enjoy the volatility until the truth prevails. We are all going to learn something.

  • Report this Comment On April 10, 2013, at 2:19 PM, freefood89 wrote:

    I agree with HughWade, except that I think their margins are climbing due to store closures post-acquisition. They're dumping unprofitable stores.

    I suspect that in downbeat stocks like this the main contributor to the share price is it's bankruptcy risk. As earnings after tax/interest/etc becomes positive and then grows the bankruptcy risk will fade and RAD will become investment-worthy.

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