Is Rite Aid Gaining on CVS and Walgreen?

Rite Aid (NYSE: RAD  ) has been under the weather these past few years, but its last earnings report shows the retail chain is on the road to recovery. In fact, Rite Aid's recent initiatives starting with remodeling stores and the acquisition of Texas-based Redi-Clinic have been a shot in the arm and make the company far more competitive.

Rite Aid posted very heatlhy financials last week. The company's adjusted earnings were up by about 43% year over year, coming in at $0.10 per share. Rite Aid also raised its fiscal 2015 guidance. The company anticipates revenue in a range from $26 billion to $26.5 billion. The pharmacy retailer also expects comparable-store sales growth in the range of 2.5%-4.5% along with earnings per share in a healthy range of $0.31-$0.42.

The report quickly helped to boost Rite Aid's share price by more than 10% --presently trading at about $7.10 per share.

Rite Aid throws its hat into mini-clinic ring
Rite Aid also made headlines earlier this month by announcing its acquisition of RediClinic. According to the press release, RediClinic currently runs 30 retail mini-clinics in several metropolitan areas in Texas. The company will operate as a subsidiary of Rite Aid and will undertake a bold expansion plan by adding 70 new clinics in the next two years.

Rite Aid's chairman and CEO said in a statement, "Retail clinics play a critical role in today's health care delivery system and will play an important role in Rite Aid's overall health and wellness strategy."

Rite Aid's acquisition of RediClinic is obviously designed to compete more effectively with sector leaders CVS Caremark (NYSE: CVS  ) and Walgreen (NASDAQ: WBA  ) . These companies also have well established mini-clinic services and have plans to expand clinics in retail outlets.

Like the other mini-clinics, RediClinics are staffed by board certified nurse practitioners and physician assistants. These licensed practitioners are capable of treating common conditions and providing preventive services. The clinics work in conjunction with local physicians affiliated with health-care systems in each market. Patients can be treated for an array of medical conditions and obtain prescriptions for these conditions if need be.

Why this matters
Rite Aid's recent earnings announcement combined with the acquisition of RediClinic is good news for the retail drugstore as it continues a long turnaround and aims to grow its brand.

Rite Aid has been an "also ran" against its rivals CVS and Walgreen for a number of years. Between 2008 and 2012, Rite Aid was losing ground and posting losses each year. But things are definitely on an uptick, and branching into the mini-clinic game will position the company not only as a comeback story but as a growth play as well.

Furthermore, the acquisition of RediClinic dovetails with Rite Aid's store remodelings already in progress. A number of stores are being transformed into so-called "wellness stores" that feature offerings like organic and gluten-free foods, fitness and workout equipment, and more personalized medication therapy management. In fact, these health-oriented outlets are presently outperforming the traditional stores with sales 3.2% higher.

Should CVS Caremark be worried?
CVS Caremark reported its fourth-quarter and full-year 2013 results on Feb. 11. Adjusted earnings per share came in at $1.12, and this exceeded prior-year earnings by 15.8%.

The company remains strong in many ways, with top-line growth of 4.6% in the reported quarter. This was driven primarily by a 5.2% year-over-year increase in net revenue from the pharmacy services segment and a 5.6% rise in net revenue from the retail pharmacy segment.

Moreover, same-store sales increased 4% compared to the same time period in 2012 aided by a 6.8% rise in pharmacy sales. This boosted net revenue in the retail pharmacy segment by 5.6% to a solid $17.2 billion. Going forward CVS raised its first-quarter 2014 adjusted earnings guidance to a range of $1.03-$1.06 per share, or 24.25% to 28.25%.

CVS Caremark, moreover, has set itself apart from Rite Aid and Walgreen by announcing in February it will phase out tobacco products by October. This move fits in with CVS' broader strategy to become a provider of health and wellness services.

Kicking the habit may also be a play to outmaneuver Rite Aid and Walgreen, as each company has yet to announce plans to follow CVS' lead. And whether this is wise is questionable in light of the recently reported letter sent to these pharmacy chains (and other retail outlets) by a group of state attorneys general urging them to stop selling cigarettes.

Investors should take note because this development might be the first step in a legal action by the government in time. Of course, this is purely speculation; but given the regulatory creep into the private sector since the financial crisis, any action by legal and regulatory authorities is something to watch.

Final Foolish prescriptions
Rite Aid's turnaround has the company back in play since it is a profit maker again. And the rebranding of the company with its wellness program aimed at healthy living makes it much healthier overall.

In short, Rite Aid's current share price makes this an attractive buy since it is much cheaper than CVS and Walgreen. That being said, these two leading pharmacy chains are still good bets for investors with a long-term view since each has a large market share and a big head start in the mini-clinic game. Ultimately the pharmacy sector continues to provide investors with a number of healthy options for growth and diversification.

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Kyle Colona

Kyle is a Long Island based writer and a Motley Fool contributor since January 2013. He has a broad background in the financial sector. His business and political writing is widely available on the web.

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