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

Those who are touting a turnaround are behind the ball. Rite Aid is turned around and doing great. Things are likely to keep going well, but the fire-sale prices are over.

Apr 14, 2014 at 2:00PM

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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Michael Lewis has no position in any stocks mentioned. The Motley Fool recommends CVS Caremark. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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