Why Rite Aid Shares Tumbled

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 Rite Aid (NYSE: RAD  ) were in need of a prescription today, falling 10% after issuing disappointing guidance in its quarterly report.

So what: The drugstore chain posted earnings of $0.04 per share, in line with expectations, as sales improved 3%, to $6.4 billion, beating the analyst consensus at $6.29 billion on a 2.3% increase in same-store sales. Results for the past quarter were solid, and further evidence that the company's turnaround strategy has taken hold with shares skyrocketing this year, jumping more than 300%. Despite the strong quarter, Rite Aid's outlook was weak. It sees earnings per share of $0.17-$0.23 for the full year, below estimates at $0.24, and expects same-store sales of less than 1%.

Now what: The light guidance may be evidence that the stock's dramatic jump has run its course. This is just a drugstore chain, after all, not a tech company or start-up enterprise that's innovating and breaking barriers. Investors can only ask for so much. Based on 2014 earnings projections, shares seem fully priced at a P/E of 15, and analysts expect almost no sales growth next year. While there's no reason to fear a crash, it seems like the magic is over for Rite Aid shareholders.

No whammies
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Comments from our Foolish Readers

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  • Report this Comment On December 19, 2013, at 8:07 PM, JoeDee wrote:

    At this point I would like to hear Brian Nichols opinion of RAD's position going forward. He has been on the mark for the last year.

  • Report this Comment On December 19, 2013, at 9:21 PM, bluesky64 wrote:


    Has called RAD to the tee from the bull call in early Jan to the yr end price target. The the earnings call RAD making the number or not does not matter 13 reasons. RAD will be brought down.

  • Report this Comment On December 19, 2013, at 9:44 PM, scowler42 wrote:

    It's easy to get caught up in the excitement of a turnaround story. But I'm afraid Jeremy Bowman got it exactly right when he pointed out "This is just a drugstore chain....."

    Indeed. Nothing super cool here. Just another retailer. With shares up over 260% on the year, it might be wise for investors to take at least some off the table and smile on their way to the bank.

  • Report this Comment On December 19, 2013, at 10:11 PM, graciefan1 wrote:

    "This is just a drugstore chain'

    So was CVS at $23

  • Report this Comment On December 20, 2013, at 12:23 PM, hughjwade wrote:

    Here's a different take. I've owned a lot (for me) of RAD for at least five years now. The old team, when Mary Sammons was more directly involved, would consistently put a dagger through your heart during earnings season. The turnaround that was to be after the ill-advised merger was always just out of reach, and never materializing. They couldn't project, so they couldn't deliver. Things have changed. They have become profitable. I think these guys have set the table to exceed expectations in 2014. They are just being honest and responsible by making projections with integrity, based upon what they see. This is a huge improvement. And, a lot of the market looks at the wrong metric, revenues. I know it may be a short term deal, but with the generics, revenues were down, but margin and profits are up. Less with more. Now, same store sales show an uptick. That has always been a key metric, and usually negative or weak, with RAD. If you look at the pricing of RAD, on earnings per share, but also price to cash flow and price to sales, and this stock is cheap compared to WAG and CVS. Risky, but cheap. PS: Keep an eye on what Edward Kelly at Credit Suisse has to say. He knows the company and it's stock about as well as anyone. My take: very bullish on RAD long-term. Pretty good time to think about buying. It's been beaten up pretty good, and the market, in general, has expected it to fail for years now. That's the underlying tide that results in these great drops, while the overall outlook is pretty darn good.

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