After Another Good Quarter, Does Rite Aid Have More Gas in the Tank?

Rite Aid has been a feel-good story over the past few years, escaping the gravitational forces that were pushing it toward Chapter 11. After a big, multiyear run, though, is there more upside for investors?

May 14, 2014 at 11:00AM
Rad

Source: Rite Aid.

Drugstore giant Rite Aid (NYSE:RAD) has been on an impressive upswing over the past few years, thanks to a renewed focus on being a provider of health and wellness products, a strategy also in vogue at larger competitors Walgreen (NASDAQ:WBA) and CVS Caremark (NYSE:CVS). Rite Aid's renewed focus has significantly improved its profitability and financial profile, powering a more than 500% gain for its stock price over the past five years.

Despite weather-related headwinds, the company's latest results were more of the same, as evidenced by positive comparable-store sales growth as well as a further improvement in its adjusted operating profitability. So, after a big, multiyear run, is Rite Aid still a good bet?

Chart forRite Aid Corporation (RAD)

Source:  Yahoo! Finance.

What's the value?
Rite Aid is the No. 3 player in the domestic drugstore space, operating nearly 4,600 stores around the country that dispense roughly 300 million prescriptions per year. The company's debt-fueled expansion strategy placed it in a precarious financial position during the financial crisis in 2009. Rite Aid narrowly made it over the hump, thanks in part to agreeable debt holders who provided the wiggle room necessary for the company to keep its store network intact. Rite Aid is now reaping the rewards of its large footprint; it is benefiting from its drugstores' increasingly important position in the health care delivery system as well as from a loyal customer base that is attracted to its convenient neighborhood locations in 31 states.

The rewards have flowed down to Rite Aid's financial statements. This has been highlighted by four straight years of increases in operating income, including a 6.3% jump in its latest fiscal year. More important, the improved profitability has led to much better operating cash flow, a far cry from the situation of only a few short years ago. The net result for Rite Aid is an ability to simultaneously pay down debt and fund its growth initiatives, like the ongoing overhaul of its store base into management's next-generation Wellness format.

Chasing down the leaders
Rite Aid may be out of the woods with regard to its solvency issues. But it still has much more work to do in order to catch sector leaders Walgreen and CVS, both of which have larger footprints and fill more than twice as many annual prescriptions as Rite Aid. While Walgreen and CVS have pursued vastly different strategic road maps, both companies have the same general goal of building impenetrable moats, capable of withstanding the advances from a myriad of smaller competitors.

Walgreen, the larger of the two with nearly 8,500 stores, has pursued horizontal integration by continuing to buy up competitors in the drugstore space, including the tuck-in acquisitions of USA Drug and Kerr Drug in FY 2013. The company has also broadened its strategy to include international markets. This was highlighted by its 2012 purchase of a major stake in U.K. retailer Alliance Boots, one of Europe's largest resellers of health care and personal care products. Combined with its recent sourcing partnership with drug-wholesaling giant AmerisourceBergen, it adds up to an unmatched reach of roughly 170,000 distribution points for Walgreen, designed to give customers little reason to shop anywhere else.

Meanwhile, CVS has chosen a different tack. It put much of its eggs into the vertical integration basket, highlighted by its 2007 blockbuster acquisition of pharmacy benefits manager giant Caremark. Despite lower operating margins in the PBM business, the company's size differential vis-a-vis its competitors allows it to spread its overhead costs across both sides of its business; this leads to higher profitability for its retail operation than that attained by either Rite Aid or Walgreen. The net result for CVS is consistently strong cash flow, funding its retail growth initiatives. These include the expansion of its in-store MinuteClinic franchise, currently tipping the scales at 800-plus locations.

The bottom line
Rite Aid is undoubtedly on a roll, as better financial results have allowed management to focus on growth initiatives rather than spending all of their time putting out fires. While the big money has likely already been made after the company's huge stock price run, Rite Aid should be a good long-term performer for investors due to the seemingly permanent propensity for health care spending to go only one way: up.

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

 

Robert Hanley owns shares of Rite Aid. 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