5 Key Rite Aid Tailwinds

Rite Aid's run may just be beginning.

May 30, 2014 at 6:30PM

Rite Aid (NYSE:RAD) has had an incredible ride over the past five years, as management has restructured its debt, closed under-performing stores, and launched its Wellness rewards and store format program. Let's look at five key tailwinds that may help its shares head even higher.

RAD Chart

RAD data by YCharts

1. Regulators
Regulation like the Affordable Care Act may create hurdles for some businesses, but it's a boon to pharmacies like Rite Aid. More than eight million people are newly insured thanks to enrollment in plans offered through the ACA's Federal and state exchanges and more than 3 million people are newly enrolled in Medicaid since the ACA's Medicaid expansion provision kicked in last fall.

That means that Rite Aid and its pharmacy peers CVS and Walgreen have millions of potential new pharmacy customers that may boost prescription volume and provide sales-friendly foot traffic for products at the front of its stores.

2. Demographics
In addition to all these new potential customers tied to the implementation of health care reform, millions of baby boomers will turn 65 this year.

Since the average person between 65 and 74 years old fills nearly two times as many prescriptions every year as those aged 45 years to 54 years old, Rite Aid has a significant opportunity for pharmacy sales growth, particularly as it expands services catering toward seniors.


Source: Rite Aid Investor Presentation

3. Generics
Billions of dollars' worth of branded drugs lose patent protection each year and that's great news for Rite Aid given that generic drugs offer higher profit margins than brand-name drugs.

So far, the biggest year in terms of branded drugs losing patent protection was 2012, when $55 billion worth of drugs lost exclusivity. 2012 was also the year that Rite Aid's share price bottomed and its profit margin began climbing. Shares and profit could see a similar bump up next year when another $66 billion worth of branded drugs go off-patent.

RAD Gross Profit Margin (TTM) Chart

RAD Gross Profit Margin (TTM) data by YCharts.

4. Expansion opportunity
Rite Aid is a dominant player in the Northeast and West, but its doesn't currently have stores in key markets including Texas and Florida. Those markets are home to millions of pharmacy-friendly retirees and offer Rite Aid plenty of greenfield growth opportunities. 

To help fill that gap, Rite Aid recently acquired RediClinic, a Texas-based chain of 30 retail clinics operating in H.E.B. grocery stores. That move signals that Rite Aid may be ready to shift its strategy from closing stores to expanding its footprint. The company plans to not only expand RediClinic within other retail chains like H.E.B, but to also begin opening RediClinics in its own stores to boost foot traffic.


Source: Rite Aid Investor Presentation

5. Nondiscretionary
One of Rite Aid's biggest advantages is the non-discretionary nature of its business. The company gets roughly two-thirds of its sales from prescriptions and a large percentage of the remaining third comes from over-the-counter medicines. That means Rite Aid is fairly insulated against consumer shopping trends and suggests that as Rite Aid boosts its services to include more patient care offerings, it will become even less affected by inevitable economic booms and busts.

Fool-worthy final thoughts
Rite Aid has come a long way in its turnaround. The company's balance sheet is far better positioned thanks to its debt refinancing and cost cutting and its new Wellness store format is showing significant results. The company has remodeled more than 1,200 locations into the new format and front end same store sales at those locations grew more than 3% more than at non-remodeled stores during fiscal 2014.  As the company transitions from a turnaround to a growth story, a combination of a more insured, older population and potential expansion into new markets could provide plenty of shareholder friendly tailwinds going forward.

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