Will Rite Aid Soar Past Walgreen and CVS in 2014?

Rite Aid (NYSE: RAD  ) put in an amazing share-price performance in 2013, with its stock almost quadrupling during the year. Yet even with the drugstore chain making huge progress last year in establishing itself as a potential survivor in the industry, Rite Aid still must face intense competition from Walgreen (NYSE: WAG  ) and CVS Caremark (NYSE: CVS  ) that has threatened to limit its growth for years.

Rite Aid's breakout year in 2013 resulted from the company finally delivering on its turnaround promise, returning to profitability and encouraging investors with its future prospects. But late in the year, Rite Aid started giving shareholders reasons for concern, as some of the favorable factors that had helped boost the drugstore chain's fortunes began to subside. Without that support, the main question investors have is whether Rite Aid can keep growing or whether a pullback is inevitable. Let's take a closer look at Rite Aid's prospects for 2014.

Stats on Rite Aid

Average stock target price

$5.64

Full-year fiscal 2014 EPS estimate

$0.22

Full-year fiscal 2015 EPS estimate

$0.34

Full-year fiscal 2014 sales growth estimate

0.1%

Full-year fiscal 2015 sales growth estimate

0.8%

Forward P/E

15.6

Source: Yahoo Finance.

What's in store for Rite Aid in 2014?
Analysts don't see Rite Aid having much upside potential left after its huge run last year, with the target stock price representing just a 6% rise from current levels. That level of upside isn't drastically different from what analysts show for Walgreen and CVS Caremark, but unlike Rite Aid those two stocks pay dividends, adding to the potential total return for investors in 2014.

Rite Aid also raised some new concerns in its most recent earnings report, released just before the end of 2013. Overall revenue for the third quarter climbed almost 2%, thanks largely to a 3.5% jump in pharmacy same-store sales, although front-of-store figures fell 0.2%. Yet guidance for the full fiscal 2014 came in below expectations, with earnings expected to hit between $0.17 and $0.23 per share.

Much of the challenge for Rite Aid comes from diminishing tailwinds from favorable industry factors. In the past several years, a huge number of high-profile pharmaceuticals have come off-patent, opening the door to generic competition. That's good news for Rite Aid, because generic drugs actually provide Rite Aid with higher margins than branded pharmaceuticals. More recently, the flood of new generics has slowed somewhat, and generic manufacturers have also boosted their prices, cutting margins for Rite Aid and its peers.

In addition, Walgreen and CVS have identified Rite Aid as a continuing threat and are therefore ramping up their competitive efforts. In an attempt to bolster its own poor performance in front-end sales, Walgreen has run more promotions to sell nonprescription items in its stores, sacrificing gross margin in order to boost sales volumes. Both CVS and Walgreen have used their loyalty programs in efforts to capture more long-term customers, helping Walgreen reverse the damage from its 2012 dispute with pharmacy benefit specialist Express Scripts. Rite Aid has its own loyalty program and will fight back against competitive pressures, but changing conditions in the industry will still make that fight harder than it was in 2013.

In the end, Rite Aid is highly unlikely to duplicate 2013's huge gains this year. Whether the chain can sustain its current price level without giving back ground in 2014 depends largely on its overcoming more difficult conditions and still boosting profitability. Without convincingly producing earnings growth, Rite Aid's 2013 could turn out to be a one-hit wonder for the stock.

Get smart in 2014
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Read/Post Comments (3) | Recommend This Article (3)

Comments from our Foolish Readers

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  • Report this Comment On January 08, 2014, at 12:29 PM, ang1 wrote:

    "Analysts don't see Rite Aid having much upside potential left after its huge run last year.." LOL! I've been listening to that load of rubbish since I purchased RAD at $1.17! So here is my financial advise to anyone out there wondering if they should purchase RAD. Do the exact OPPOSITE of what certain Fool "analysts" have been saying since it was at $1.17, $2.50, $3.55, etc, etc.. Funny, those same "analysts" barely acknowledged RAD's tremendous run in 2013! Well, of course, other than to use that same tremendous run as a reference point in which to steer you away and say, "it can't happen again!!!" Where does the Fool find some of those characters? Heck, even Cramer reversed course, and I don't have much faith in him either!!

  • Report this Comment On January 08, 2014, at 9:29 PM, bc3b wrote:

    After 22 years, I switched from CVS to Rite Aid because in recent years CVS has supported a number of liberal causes from amnesty to the Center for American Progress.

  • Report this Comment On January 23, 2014, at 1:47 AM, 20eagle16 wrote:

    I have to agree with you, ang1. My way of determining whether a company is doing well or not is the "old" Peter Lynch way, i.e., I drive to the a number of stores of each brand (e.g., CVS and Rite Aid) and see what the customer volumes look like. Rite Aid continues to take the lead on it, with their parking lots full. I guess the Fools who keep putting down Rite Aid are the same ones who kept putting down Netflix at 50, 100, 200, 300, and as I write this,393.80. I have several thousand shares of RAD, and will but several thousand more on any pull-back. The Peter Lynch way worked for him...and it's working for me.

    bc3b ... dittos. Totally agree. It is time to turn the tide, and to do so with our investment dollars.

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