5 Key Rite Aid Tailwinds

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.

Will this stock be your next multibagger?
Give me five minutes and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks 1 stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.


Read/Post Comments (0) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2969877, ~/Articles/ArticleHandler.aspx, 9/1/2014 10:15:56 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement