Can Rite Aid Keep It Up?

Shares of Rite Aid (NYSE: RAD  ) were one of last week's biggest winners, soaring 30% after another blowout quarter. The once profitless drugstore operator has now surprised the market by rattling off four consecutive profitable quarters. Analysts were braced for deficits in three of those periods, including last week's report.

Sales inched marginally higher to $6.3 billion, fueled by a 1.7% increase in same-store pharmacy sales that was more than enough to offset a few store closures over the past year. Rite Aid now has 4,604 locations.

Investors trying to play the all-weather nature of drugstores have turned their attention to CVS (NYSE: CVS  ) and Walgreen  (NYSE: WAG  ) , and rightfully so. They are substantially larger, and they have been consistently profitable. The yields of 2.3% at Walgreen and 1.5% at CVS also help woo income investors. These aren't necessarily huge payouts, but they certainly beat Rite Aid, which hasn't paid out a dividend since 1999.

However, Rite Aid investors are the ones riding high these days. The stock has soared fivefold since falling below $1 this past December. 

That's a pretty spectacular return out of any retailer, but it doesn't mean Rite Aid is expensive. Rite Aid has been juicing up its guidance along the way, and analysts have no choice but to try to catch up by raising their own estimates. 

Wall Street's now eyeing a profit of $0.22 a share for this fiscal year that ends in February and $0.30 a share for the following year. The stock may have soared 243% so far this calendar year, but it's trading at a surprisingly reasonable 15.6 times next year's earnings. That's actually the same forward earnings multiple that Walgreen is fetching. CVS is cheaper.

Rite Aid isn't perfect. Debt is still clocking in at more than $6 billion. That's not as problematic as it was a year ago, given that the chain now expects to generate at least $1.24 billion in adjusted EBITDA this year. However, that's heavy leverage that needs to be noted.

We also can't ignore that non-pharmacy comps actually dipped 0.3% in its latest quarter. Rite Aid's turnaround has been largely the handiwork of cutting costs and improving margins. The real cheers will come when sales outpace inflation growth. After all, even looking out to next year, analysts are eyeing only 1% in top-line growth.

Rite Aid has still come a long way, and that's why a seemingly dead drugstore operator has been one of the biggest winners over the past year yet is still commanding a forward earnings multiple in the mid-teens. 

It can keep it up if it continues to deliver market-thumping results through improving margins, but sooner or later it's going to have to start becoming as popular with customers as it has been with investors over the past year. 

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Read/Post Comments (5) | Recommend This Article (3)

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  • Report this Comment On September 24, 2013, at 3:21 AM, bluesky64 wrote:

    Rick,

    Great write up. RAD still has another double.

    New price targets have been moved up from the raised guidance Dec 2013 $ 8 and Dec 2014 $ 14

  • Report this Comment On September 24, 2013, at 9:07 AM, ghstflame wrote:

    Cutting costs and improving margins.

    Cutting costs- yes.

    Improving margins will be happening across the board as more and more drugs turn to generics. Along with that you will have falling revenues across all 3 pharmacies. That being said RAD managed to grow same store sales by 1% this past quarter, which is better than WAG.

    There is more to the story than just catching up to fundamentals (however that will be the key driver for the next couple of legs up).

    I have been a bit more conservative than Blue Sky, thinking $6 for 2013 and $10 for 2014, $15 for 2015. Still a triple in the works at these prices, with an ounce of patience at least.

  • Report this Comment On September 24, 2013, at 2:38 PM, Wuffy wrote:

    It all depends on good sound management. Which RAD didn't have a decade ago. Tough market and now everyone is watching RAD again. This management team has been super so far. I bet they will continue to shine.

  • Report this Comment On September 24, 2013, at 8:17 PM, popeye305 wrote:

    Previous reader indicates that sound management is the answer to higher stock prices. Right you are! But while the newest senior management is much better (how could it be worse than previous management, or the management before that which only had time to cook the books), this newest management MUST spend a lot more time training it's regional/district management, which this reader is in a position to know, in general, shows little initiative to correct operational issues right before their very eyes. This has led to a sizeable loss of business and customers throughout the country. Having said that, and saying it for the last many years, if senior management can pay a lot more attention to the social networks that give senior management a perfect roadmap to the many problem stores that do not appear in the mood to provide superior customer service, and make the regions accountable for the stores under their supervision,"then we have a ballgame". The question is, Can senior management confront and change it's bureaucratic ways and put systems in place to easily identify the middle management, that quite frankly do not deserve the salaries they are getting paid, and provide them additional training. Many readers are already counting their money assuming an $8-$14 stock price. The only way that happens soon is if there is a buyout. Once that immediate fantasy subsides, good old-fashioned great customer service at the stores is the tested way to get the cash registers to ring much more often. The big three chains, Rite Aid, Walgreen's and CVS are grouped very closely together on the various sites in customer service, by that I mean they are all hated in comparison to the independents whose livelihood depend on service. True enough they routinely receive the highest customer remarks in all categories. So, Rite Aid if you really want to get your stock price up and not be "out of gas" you will need to give customers a reason to pick you, instead of the others, not by default because you are the closest or your employer forces you to, but because when you go there, like when you go to Publix and have the best supermarket experience available to you, you leave feeling you purchased your pharmacy or front end merchandise at a reasonable price (given the convenience) and purchased them from helpful, caring and pleasant employees. It is as simple as that. Rite Aid, please start with your middle management, because that is the key to what goes on at the stores. A hint Rite Aid-you have a long way to go to get there, but the report card does not have to be filled out just yet.

  • Report this Comment On October 15, 2013, at 4:37 PM, MarkSutton85 wrote:

    RAD is definitely a buy at these levels as it should command almost 2.4b annual EBITDA, as seen here: http://seekingalpha.com/article/1745052-rite-aid-does-things...

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