3 Reasons Rite Aid Continues to Crush the Market

Shares in Rite Aid (RAD) may keep heading higher thanks to these three reasons.

Apr 17, 2014 at 6:30PM

It's rare for struggling retailers to come back from the brink, but that's exactly what has happened at Rite Aid (NYSE:RAD). Shares in the east and west coast pharmacy operator traded below $1 as mounting losses threatened its survival just a few years ago.

However, a significant restructuring that included refinancing debt and shuttering under-performing stores has returned the company to profitability. With Rite Aid reporting yet another quarter of earnings and margin growth, here are three reasons investors are increasingly optimistic that Rite Aid can compete against CVS (NYSE:CVS) and Walgreen (NASDAQ:WBA).

RAD Chart

RAD data by YCharts.

1. Quality over quantity
Rite Aid's struggles stem from its multibillion-dollar acquisition of Eckerd in 2007. At the time, Rite Aid hailed the deal as a game changer that would help it challenge market leaders CVS and Walgreen. The company believed the acquisition, which added 1,500 stores to Rite Aid's footprint, would become accretive to earnings within a year.

However, that never happened. Instead, Rite Aid floundered under an increasing debt load while newly acquired stores, many of which operated in the same markets as Rite Aid's existing locations, cannibalized revenue. To make matters worse, while Rite Aid struggled to overcome its headaches, CVS and Walgreen continued to expand throughout the pharmacy supply chain.

That prompted Rite Aid's management to shift its focus away from absolute sales growth to profit growth instead. As a result, Rite Aid has jettisoned more than 4% of its stores over the past four years, relocated more than 100 stores to better locations, and remodeled more than 1,000 stores in a bid to increase operating margin.

Rite Aid's focus on quality over quantity has led to surging profitability. It's gone from losing hundreds of millions a year to forecasting it will earn between $313 million and $423 million in the current fiscal 2015.

2. Boomers driving generic scripts
At the same time Rite Aid was putting money back into its best stores, the patent cliff was providing profit tailwinds. While low-priced generics weigh down pharmacies' top-line sales, their friendlier margins support earnings.

In 2013, some $28 billion in branded drugs lost patent exclusivity, but that pales in comparison to the $55 billion that saw patents expire in 2012. This year, the patent cliff re-exerts from its 2013 lull with an expected $34 billion in branded drugs losing patent protection. And pharmacies will enjoy even better margin next year when $66 billion in patents expire.

That generic tailwind has already helped Rite Aid's profit jump. In the company's fiscal fourth-quarter conference call this week, the company cited generic purchasing efficiency as a key reason behind its EBITDA margin expanding from 5.27% to 5.40% year over year last quarter. For comparison, Rite Aid's EBITDA margin was just 3.6% in fiscal 2012.

RAD EBITDA (TTM) Chart

RAD EBITDA (TTM) data by YCharts.

In addition to a margin-friendly patent calendar, aging consumers are also supporting Rite Aid's recovery. The average pharmacy customer over age 65 fills more than 28 prescriptions a year, while those under age 45 fill less than 10. Given more than 8,000 baby boomers are turning 65 every day, prescription volume should continue to provide a big tailwind for Rite Aid, CVS, and Walgreen.

3. Reforming the role of pharmacies
Boomers present a significant driver of Rite Aid's future growth, but Obamacare may have a more immediate impact. More than 3 million people are newly covered by Medicaid, and that population has historically been more inclined to visit emergency rooms and health care clinics than primary care doctors.

As a result, there's an opportunity for retailers like CVS and Walgreen, which already offer basic primary care services through clinics at hundreds of their stores to capture relationships with newly insured patients.

While Rite Aid has been slow to adopt a primary care model, it has had considerable success in providing flu shots and immunizations. The number of flu shots given at Rite Aid stores climbed from 675,000 in fiscal 2011 to more than 2.5 million last year. Demand for those shots should head even higher given millions of new customers will now be covered by insurance.

Additionally, Rite Aid's acquisition of Texas based MediClinic, which provides in-store clinics at 30 grocery stores in Texas, provides Rite Aid with a model it can -- over time -- roll out nationally. If it does, it could eventually erase CVS and Walgreen's lead in store-based clinics.

Fool-worthy final thoughts
Rite Aid will likely have bumps along the way, but it appears that after years of struggle, the company is back on solid ground. The company expects its existing stores will see their sales climb between 2.5% to 4.5% this year. If so, full-year sales should eclipse $26 billion for the first time in since 2012. 

If you think Rite Aid's future is bright, you should learn about this stock, too
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd also owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers