Is Rite Aid Corporation Getting Sick Again?

In its recently ended 2014 fiscal year, Rite Aid Corporation (NYSE: RAD  ) made significant progress in returning to sustainable profitability. Through the first three quarters of the fiscal year, the company swung from a pre-tax loss of $69 million in FY13 to pre-tax income of $201 million in FY14, despite higher debt retirement charges.

Rite Aid's better-than-expected profitability has caused the stock to nearly quadruple in the last year.

RAD Chart

Rite Aid 1-Year Stock Chart, data by YCharts.

However, the company seems to be losing steam. While Rite Aid has not reported Q4 earnings yet, its sales performance indicates that it lost quite a bit of market share to top rival Walgreen (NYSE: WAG  ) . This is a troubling sign, and investors should remain cautious ahead of Rite Aid's upcoming earnings report.

Sales under pressure
In February, Rite Aid's front-end (i.e., nonprescription) same-store sales fell 1.8%, while the comparable-store prescription count dropped 1.4%. Overall same-store sales still rose by 1.5%, but it was entirely due to rising costs for prescription drugs.

Rite Aid's sales trends weakened last quarter.

The weak February result capped a soft quarter. For the full quarter, front-end same-store sales decreased 0.7% while the comparable-store prescription count fell 1.8%. This is a significantly weaker performance than what Rite Aid had achieved recently -- through the first three quarters of FY14, front-end same-store sales were flat and the comparable-store prescription count was up 0.2%.

What's wrong here?
To some extent, Rite Aid's soft sales results can be explained by factors like tough year-over-year comparisons and a more mild flu season. However, neither of those things can fully explain Rite Aid's weakening sales.

Walgreen reported a 2% increase in front-end same-store sales for February, along with a 2.2% increase in the comparable-store prescription count. For the full quarter, front-end same-store sales were up 2% and Walgreen's comparable-store prescription count was up 2.4%.

Walgreen is winning back market share from Rite Aid.

Clearly, Walgreen is continuing to regain pharmacy market share that it lost during its dispute with pharmacy benefits manager Express Scripts two years ago. Walgreen has also revitalized its front-end sales since mid-2013 by offering more eye-catching discounts. Both of these trends are starting to hurt Rite Aid in a noticeable way.

Assessing the damage
While Rite Aid's recent sales results don't look particularly good compared to what Walgreen has been posting, its full-year revenue of $25.41 billion still came in near the top of the company's most recent guidance range.

There are two potential worries for investors, though. First, drug prices have been increasing, and Rite Aid can't fully pass those cost increases through to insurance companies and pharmacy benefits managers. Second, Rite Aid may be resorting to bigger front-end promotional discounts in order to keep customers from defecting to Walgreen and CVS Caremark (NYSE: CVS  ) .

Both of these headwinds would show up in Rite Aid's gross margin, rather than its same-store sales results. Until Rite Aid reports its full results later this month, investors can't be sure how much margin Rite Aid is sacrificing in order to hold on to revenue. If Rite Aid's gross margin comes under pressure, the stock could give up much of its recent gains.

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Read/Post Comments (10) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 11, 2014, at 2:34 PM, ChrisYuen wrote:

    This article is atrocious. I thought you finally gave up bashing Rite Aid.

    When will you finally admit that you were wrong all along with your bearish calls at $1, $2, $3, $4, $5?

    Surely if the so called financial numbers go bad, any company can theoretically lose it's steam. Why are you so adamant on this occurring with Rite Aid, and not with the thousands of other companies with deteriorating financials

    Rite Aid has rited the ship. The sooner you realize this, the sooner you'll avoid keeping other investors reading this site from profiting from good turn around plays

  • Report this Comment On March 11, 2014, at 8:51 PM, ang1 wrote:

    Well put Chris, you echo my thoughts exactly! I have to assume "they" keep bashing RAD to recover their Short sale losses! Just a theory...

  • Report this Comment On March 11, 2014, at 11:15 PM, ChrisYuen wrote:

    Exactly. If the previous year has been any indication, Adam will once again be proved incorrect.

    By the time you come to the correct consensus, Rite Aid will be $10-$15 and have reached near it's peak.

    This is why new investors never profit in the market. They are constantly told to buy 'safe' investments that have reached their prime and are near the top of their growth potentials. Namely, CVS and Walgreens.

    The choice is clear to me. Dish out nearly 70 dollars a share for Walgreens, or 6 dollars a share for a growth stock. It may not be the best of breed, but it is certainly a stock that has much more room for growth

  • Report this Comment On March 11, 2014, at 11:31 PM, KrisShankar wrote:

    There is a saying that 'a picture is worth a thousand words'. The single graph of RAD's 1-yr performance reproduced here, completely undermines his entire argument! Interestingly, the author previously stated he was short RAD - not anymore. I wonder if Motley Fool actually checks his portfolio or relies on a voluntary self-disclosure of equity positions.

    As they say, to find the true intentions, always follow the money trail.

  • Report this Comment On March 12, 2014, at 10:20 AM, TMFGemHunter wrote:

    Chris: You're entitled to your opinion. I will happily admit that I was wrong in my bearish call on Rite Aid last year -- that much is obvious. Nevertheless, I continue to believe that Rite Aid is a bad business, and the company's ongoing market share loss is just proof of that.

    I wouldn't call Rite Aid a "growth stock" by any means. If you mean by "growth" just that the stock has lots of upside potential, that's certainly true. It's an artifact of the company being barely profitable: small improvements in profitability can lead to big jumps in the stock price, which is precisely what has happened.

    On the flip side, Rite Aid has downside potential all the way to zero, which is not the case for CVS or WAG. Anybody investing in RAD should understand that it's cheap because it's a weak business. If you're willing to accept the downside risk in the hope of making a big gain, then it could be the right stock for you.

    @Kris: Motley Fool does not check my portfolio. We are required by our code of ethics to disclose our positions. I did own some puts on Rite Aid last year, which expired out of the money.

    In any case, I think it's childish of you to imply that I have some financial incentive to say certain things in articles. I have written hundreds of articles at The Motley Fool, and I think I can confidently say that none of them has had any impact on a stock's price. If I were trying to manipulate the market, I'd be a fool, with a small "f".

    Adam

  • Report this Comment On March 12, 2014, at 12:02 PM, HammerHead411 wrote:

    Great timing on this negative RAD piece just days before the GS BUY recommendation! I'll never argue RAD is a good company but money can be made from trading it. I bought some as a pure speculative play between $1 and $3. I did my first small sell recently @ $6.75 and have tried to sell more @ $7 but it pulled back. I still feel this puppy breaks $7 this year and if that happens I'll be about 1/3 out with some nice gains. Can't be too greedy with a stock like this. Next Months Q release will tell us where RAD is going.and I hope you are wrong (at least in the short term).

  • Report this Comment On March 12, 2014, at 1:55 PM, ChrisYuen wrote:

    Indeed. Would I believe some random blogger who has been wrong for over a year, or a top financial firm (Goldman Sachs) with a new upgrade? (They have been neutral for over a year and are now bullish).

    As you continue to write, you are entitled to do so - but at risk of sounding more and more like a real Fool. Not in a good way, Adam.

    There should be some kind of accountability on this site. I'm sure there are some foolish investors on here who buy or sell based on some author's recommendations here.

  • Report this Comment On March 12, 2014, at 2:13 PM, KrisShankar wrote:

    Adam,

    The stock price of a company is where it is based on the perpetual tussle between the bulls and bears. Tell me you are not 'cherry-picking' facts to support your bear case on RAD. You talk about headwinds. What about tailwinds? The fact that nearly $20B+ drugs are falling off a patent cliff (generics increase margin and hence cash flow) or that states that have adopted Medicaid expansion tend to be more along RAD's footprint. And all this talk that WAG is benefiting from return of ESRX customers at the expense of RAD (none of the management conf calls by WAG, CVS or RAD bear that out). Don't let facts get in the way of a good story. I will grant you points for consistency though - wrong at $2, $3, $4, $5, $6, ....

  • Report this Comment On March 13, 2014, at 9:11 AM, TMFGemHunter wrote:

    @Kris: There will always be prescription drugs going generic, but there will also always be new patented prescription drugs coming out. Last year there was a huge wave of generics, and it's not going to get any better than that. For the last few months Rite Aid has been facing harder comps and that will continue through most of the current year before some new generics arrive and turn things the other way. But it's not a one way street towards higher and higher margins, in my opinion.

    As for the market share, I don't know how you can dispute that. Just look at the rising same store prescription count at CVS and WAG and the falling same store prescription count at RAD. Much of my bear thesis is opinion or interpretation. The loss of market share is a fact.

    Adam

  • Report this Comment On March 13, 2014, at 2:57 PM, HammerHead411 wrote:

    The pills that went generic in 2013 have little importance on where RiteAid is heading. The generic sales benefits will not be fully seen until the implementation of AFA. Over the next few years, millions of previously un or under insured folks will now be covered and will be seeking pills for their ills. All the phams will benefit but Rite Aid maintains a strong presence in the states where medicaid is being expanded to include these folks. Another item that no one wants to talk about is RiteAid is not afraid to operate in not-so-nice areas. It's probably in these neighborhoods where there will be a high number of newly ACA insured. RAD should score the majority of these new scripts.

    RAD must also continue to create and nurture partnerships that will set them up as something different (i.e. GNC and the Sav-a-lot pilot in SC --- if that's still going on). The recent McKesson agreement was also a nice positive deal.

    I still say RAD breaks and holds $7 soon (opened @ $7.05 today).

    I have concerns about the large recent insider sales but those sales didn't really hurt the stock. I am also worried more about what will happen when the hedge funds begin dumping the stock (sounds like Einhorn is selling). The shows probably over when the large hedge funds sell out. However, I just don't see a solid reason for them exiting as there could be $2 to $3 left in this run.

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