Rite Aid Is Back in the Game, but the Investor Party Is About Over

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It looks as though drugstore chain Rite Aid (NYSE: RAD  ) has leapt out of its turnaround status and is more than back on track. While it's great for the company, the story may not be as sweet for investors. On a valuation basis, Rite Aid is trading much closer to its competitors and has erased many of the "no-brainer" elements to the stock's thesis. Fiscal 2014 ended on a high note for the company and there are certainly industry tailwinds to keep things moving in the long run. For growth-oriented investors, this could still be a compelling stock. Sadly for bargain hunters, Rite Aid's days of being on sale are about over.

Riding high
Rite Aid hit its 52-week high recently upon reporting its fourth quarter and full-year 2014 results. On a comparable basis (excluding one-time events), net income grew by $29 million in the fourth quarter. For the year, adjusted EBITDA grew a whopping $200 million to a record high.

The company's earnings came in well ahead of estimates, driven by a 2.1% bump in same-store sales. Leading the stores, predictably, was strong pharmacy results. The front end of the store, a focus point for all of the major drugstore chains, still needs improvement.

Rite Aid has spent boatloads of cash remodeling more than 1,200 stores, and it's noticeable. A location near this author's home in Northeast Los Angeles that was formerly understocked, understaffed, and underutilized is now a bustling store -- complete with a GNC mini-store, aisles and aisles of groceries, and attentive employees. The company plans to spend another $225 million on continued remodeling in the current fiscal year.

The coming year looks great, with same-store sales projected to grow 2.5%-4.5%, and adjusted EBITDA as high as $1.4 billion -- a near-6% gain on top of this year's record $1.325 billion. Adding together the just-ended year and the current one's forecast, adjusted EBITDA growth is an extremely impressive 23%.

Party over?
One year ago, Rite Aid was trading around $2 per share -- a zero-downside price for a company that only needed slight improvement in its margins to generate heaps of cash. Its big brothers, Walgreen and CVS, broadcast the opportunity available to well-run drugstores, and the market awarded them near identical valuations (much higher than Rite Aid's).

Today, the market loves Rite Aid, and you can't find an analyst without a buy rating on it. While it's true that the company is back on track and ready to grow, its biggest offer to investors has passed. For those less concerned about the price paid for value received, there are probably even better times ahead for Rite Aid. But for those who are compelled by the word "turnaround" -- this one's already in the bag.

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  • Report this Comment On April 19, 2014, at 12:22 AM, TURK3795 wrote:

    The "investor party" as it applies to Rite Aid Corporation is not over by a long shot. This stock will most certainly increase in value 75 - 100% within this calendar year. The company is increasing its sales volume and profitability while reducing the number of their retail outlets. Add to this picture, the enormous amount of retirees (10,000 per day) who are buying pharmaceuticals and nutraceuticals for serious medical conditions as well as those designed to ease the discomforts of aging, and one can see the potential for increased profitability is enormous. Finally, the stock has gained the attention of institutional investors as well as the common folk: put on your seat belts, the party is just gettin' started (IMHO)

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Michael Lewis

Michael is a value-oriented investment analyst with a specific interest in retail and media businesses. Before coming to the Fool, Michael worked with private investment funds focusing on deep value and special situations. Currently living in the media capital of the world--Los Angeles, California.

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8/28/2015 4:00 PM
RAD $8.24 Down +0.00 +0.00%
Rite Aid Corp CAPS Rating: ***