Rite Aid Crashes: Buying Opportunity or Time to Panic?

Why the big plunge in Rite Aid could be a buying opportunity for investors.

Jun 6, 2014 at 9:50AM

Rad Image

Source: Rite Aid.

Rite Aid (NYSE:RAD) crashed by 7% on Thursday after the company reduced its earnings guidance for fiscal 2015, generating concerns regarding the health of its turnaround. On the other hand, Rite Aid has made impressive progress over the last years, and it still offers substantial room for growth in comparison to peers such as Walgreen (NASDAQ:WBA) and CVS Caremark (NYSE:CVS). Should you buy the dip in Rite Aid?

Bad news
Rite Aid has delivered spectacular returns for investors in the last year, even considering the recent retracement; the stock is up by nearly 195% over the last 12 months. Keeping these explosive gains in mind, the stock was vulnerable to negative news after such a steep rise.

Rite Aid announced that financial results were hurt by higher-than-expected drug costs because of a delay in realizing the expected purchase price reductions for generic medications. In addition, the company is being affected by a bigger-than-expected reduction in reimbursement rates.

Because of these factors, Rite Aid cut its earnings per share guidance for its fiscal 2015 year to between $0.30 and $0.40 per share, versus a previous guidance of $0.31 to $0.42 per share.

On the other hand, Rite Aid also reported strong sales figures for the month of May, indicating that the company is on the right track when it comes to turning the business around.

Same-store sales during the five weeks ended on May 31 increased by 3.5% versus the same period in the prior year. Front-end same-store sales increased 0.5% during May, while pharmacy same-store sales grew 5% in spite of the negative impact from new generic introductions, which reduced sales by approximately 156 basis points. Prescription count at comparable stores increased 3.2%.

Total drugstore sales for the five-week period increased 2.5% to $2.48 billion, versus $2.42 billion in the same period during 2013. Prescription sales represented 68% of total drugstore sales.

The big picture
Rite Aid has made impressive progress in its turnaround efforts lately. The company is restructuring its store base, increasing its focus on health care services, and implementing different plans and promotions to consolidate customer loyalty.

Rite Aid has transformed 1,215 stores into its wellness format, and management plans to remodel an additional 450 stores during the current year. The company has enrolled more than 1.7 million members in its Wellness 65+ loyalty program as of the end of the last quarter, which bodes remarkably well in terms of competitive strengths and growth opportunities over the coming years, as seniors are an essential demographic segment in terms of health care demand.

Temporary setbacks aside, the company's partnership with McKesson for the sourcing and distribution of generic pharmaceuticals is a smart move when adapting to major industry trends over the years ahead.

Both sales and profit margins have clearly been moving in the right direction over the last several quarters, so Rite Aid is translating its improvements on the commercial and operational level to better financial performance.

Rite Aid vs. Walgreen and CVS Caremark
Both Walgreen and CVS Caremark are much bigger than Rite Aid. Walgreen owns more than 8,600 stores, while CVS Caremark has approximately 7,600 locations, versus a store base of only 4,851 units for Rite Aid.

The market is already highly penetrated, so it's hard to tell if Rite Aid will reach the same size as Walgreen or CVS Caremark, but it's worth noting that the company still has considerable room for expansion in comparison to its bigger peers.

Besides, improving profitability could be a major growth driver for Rite Aid over the coming years. Rite Aid has a net profit margin in the area of 0.8% of sales, just a small fraction of the 3.7% net profit margin produced by Walgreen and the 4.4% net margin generated by CVS Caremark.

If management continues leading the company in the right direction, earnings could grow at a faster rate than sales as profit margins rise to levels more in line with those of Walgreen and CVS Caremark.

Foolish takeaway
It's never good to see a company reducing earnings guidance, especially when management is still trying to prove that it can turn the business around. However, sales are still remarkably strong, and this looks like a temporary setback for a company that has come a long way over the last several years. If anything, the dip in Rite Aid looks like a buying opportunity for investors.

Our best stock pick for 2014 can make you rich
Give us five minutes, and we'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks one 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.

Andres Cardenal 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information