Rite Aid's Earnings: A Bandage, Not a Cure

Drug store chain Rite Aid (NYSE: RAD  ) sailed to new highs this week as the company reported in its earnings release a return to annual profitability. The $2 billion company is trading up over 40% in the last year, and 60% since the beginning of 2013. The thing is, earnings did not show much to celebrate in the operating business, and its black bottom line was more the result of cost-cutting efforts and margin enhancement. At more than 20 times forward earnings, the market clearly is expecting some degree of sales growth down the line. Is this an accurate assumption, or should investors exercise caution?

Headline numbers
The Street was expecting a loss for the fourth quarter of 2012, even though the company had achieved profitability in the prior quarter -- against analyst estimates. Instead, Rite Aid posted earnings per share of $0.13. This helped lead the company into its first profitable year since 2008, to the delight analysts. In the prior year's quarter, the company posted a loss of $0.18 per share.

While the headline numbers look appealing, investors need to read between the lines. Fourth-quarter revenues were actually down by $600 million, though partially due to the prior year's fifty-third week. More importantly, same-store sales sank 2% year over year, due, in part, by more generic drugs at the pharmacy. Management was eager to point out that generic drugs tend to drag down sales, but prove helpful to gross profit.

For the year, the company earned $0.12 per share, with an adjusted EBITDA of $1.13 billion. Same-store sales dropped a negligible 0.3%. The company closed 44 underperforming stores, and remodeled over 500. It did not open any new stores.

What investors need to focus on
I'm a sucker for turnaround stories, but this one has yet to ring a positive tone for me. The return to profitability is commendable, and clearly, management has taken action to get the company on a growth track -- like its peers Walgreens and CVS. But remember that these seemingly positive figures are not indicative of sales growth or any other organic factor. In the coming quarters, investors need to keep an eye on two crucial metrics: same-store sales and sales per square foot. With the massive remodeling (and closure of unsalvageable stores), we need to see these numbers swing up in a material way. Store remodelings are great, but only if they result in more customers and more sales. At this point, we just don't know if that's the case.

For 2014, EBITDA is projected to come in at just over $1 billion, with net income between $0.04 and $0.20 per share. This guidance is likely hinged upon the efficacy of continued cost-saving measures, and the upward performance of newly remodeled stores.

Investors intrigued by Rite Aid's recent rise may want to wait until more data is available regarding the remodeled stores. The company's cost cutting and reorganization has been effective, but at some point, sales growth must take the front seat.

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Read/Post Comments (4) | Recommend This Article (1)

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  • Report this Comment On April 19, 2013, at 7:43 AM, bestwaytoriches wrote:

    Michell,

    RAD new in store clinic is the growth engine.

    Valuations still count and RAD is 1/10 it's peer.

    $ 7 price is fitting not $ 2.40.

  • Report this Comment On April 19, 2013, at 12:28 PM, masterwallstreet wrote:

    In my opinion only, I find a lot of fault in your article. The only numbers that I really care about are the earnings if they made a profit that quarter or not. They made a record profit they went down from losing 18 cents a share to making a profit of 13 cents a share. That is amazing. The revenues are not as high as they were last year they have a lot less stores than they did last year. Having less stores means less expensive. They closed down stores that underperformed. It saved the company a lot of money. It still produced a lot of revenue. This is great management. I believe we are seeing a turnaround in the process. This company should be trading above 7 dollars not 2.40. Walgreens has more debt than Rite Aid. Why is Walgreens so ridiculously high? Walgreens has dividends that are a liability, not an asset. It creates more debt for them.

  • Report this Comment On April 19, 2013, at 4:23 PM, wayouy wrote:

    Blew thru the 2.4 today

  • Report this Comment On April 20, 2013, at 9:05 PM, CTadvocate wrote:

    As a former employee, if you all knew what REALLY went on behind the scenes, you might be careful investing here. The Dayville, CT distribution center has become a nightmare and the employees are scared to even leave early for a dental appointment because when they get back, a Temp to hire is in their place. PLEASE read the latest Consumer Reports which shows Rite Aid is almost top for ripping off the consumer and insurance companies. Rite Aid's prices for drugs are 4 TIMES that of Walmart or Costco. Rite Aid should due VERY WELL if folks keep throwing cash at em.....

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