Rite Aid Is on the Right Track

After struggling for years to keep up with major rivals Walgreen and CVS Caremark, Rite Aid seems to have found a formula that works.

Apr 18, 2014 at 4:00PM

For years, Rite Aid (NYSE:RAD), America's third-largest drugstore chain, has been locked in a struggle for survival as larger rivals Walgreen (NASDAQ:WBA) and CVS Caremark (NYSE:CVS) aggressively expanded their footprints. In fact, Rite Aid posted a loss in every year between 2008 and 2012. Then, things started looking up in 2013 as the company bent years of losses around into a slim profit. Now, after a series of turnaround initiatives things seem to be looking up for the company. Its most recent earnings report was a huge success and this sent the stock up more than 10%. What's the company doing to restore its brand?



Earnings beat, raised guidance
Rite Aid pulled off a classic beat and raise last week which most definitely pleased investors. Its adjusted earnings of $0.10 per share were up nearly 43% year-over-year to smash the $0.04 consensus. Its revenue also surpassed analysts' expectations as it showed a year-over-year increase of 2.2%. Its pharmacy sales did especially well as they were up 3.5%, and comp-store sales rose a healthy 2.1%.

Perhaps more importantly, the company raised its fiscal 2015 guidance. The company now expects revenue of between $26 billion and $26.5 billion while analysts expected $25.8 billion. The company expects comp-store sales growth in the range of 2.5%-4.5%,and EPS in a fairly wide range of $0.31-$0.42.

For a long time, the firm's growth had been stunted by aggressive expansion efforts from its two bigger rivals, Walgreen and CVS Caremark, which have around 8,700 and 7,600 stores respectively. CVS Caremark made waves earlier this year with its decision to stop selling cigarettes, while Walgreen still seems committed to selling smokes. Generally, the drugstore industry seems to be moving toward a "wellness" strategy which favors products that support healthy lifestyles, which discourages the sale of cigarettes. What wellness initiatives does Rite Aid have?

Healthy living to fuel growth
Much of Rite Aid's turnaround success has resulted from its store remodelings, in which it converted traditional drugstores into Wellness stores. The initiative fits well into a more-modern notion of health and well-being, as the new store concept offers things such as organic and gluten-free foods, fitness and workout equipment, and more personalized medication therapy management.

The Wellness stores are already outperforming the traditional stores, as their front-end same-store sales are 3.2% higher. The strategy has also gained a boost from the Wellness+ loyalty program, which the company has geared at strengthening its relationships with its customers and retaining a higher percentage of its customer base. Last year, the company launched its Wellness65+ program, which it has aimed at older customers who generally spend more money on health care and pharmaceuticals.

Meanwhile, Rite Aid and Walgreen are, in my opinion legitimately, catching flack for failing to follow CVS Caremark's lead in removing cigarettes from its shelves. With healthy living and wellness appearing as the primary buzzwords in the drugstore industry today, the sale of cigarettes seems wholly incongruous with the message these major corporations are trying to send. Attorney generals from 28 states have urged major companies like Rite Aid and Walgreen to stop selling the lethal and addictive substances as public pressure to promote healthier living intensifies.

The bottom line
After the company struggled to turn a profit for years, Rite Aid's turnaround initiatives seem to be taking hold, with the company finally turning a profit again. The main driver behind Rite Aid's renewed strength is its Wellness program, in which it has remodeled its traditional store locations to promote a more general idea of healthy living. With loyalty programs and new initiatives drawing in and retaining customers, Rite Aid's outlook is healthy.

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Daniel James 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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