Can Rite Aid Surprise Investors Anymore?

Source: Rite Aid

Heading into earnings on Jun. 19, shareholders of Rite Aid (NYSE: RAD  ) are probably trying to decide what to do with the company's shares. In light of recent developments that indicate that comparable store sales have not been meeting expectations, shares of the drugstore chain have fallen 12% from their 52-week high of $8.62. Is this a sign that the Foolish investor should trade in the business's shares for shares in Walgreen (NYSE: WAG  ) or CVS Caremark (NYSE: CVS  ) or will the retailer redeem itself when it reports?

Mr. Market's expectations are mixed
For the quarter, analysts expect Rite Aid to report revenue of $6.43 billion, echoing the business's preliminary sales release for the quarter that it made public on Jun. 5. If this metric turns out to be correct, it will mean that sales have risen just 3% from the $6.26 billion management reported the same quarter last year and will be due to a rise in comparable store sales, partially offset by a 1% reduction in store count from 4,614 locations last year to 4,581 this year.

Source: Rite Aid

From a revenue standpoint, this growth looks respectable but far from great. Looking at earnings, however, indicates that the company's financial situation may have deteriorated to some extent. While analysts have been hoping to see earnings per share come in at $0.05, the company's preliminary results forecast earnings of $0.04. On top of falling shy of what Mr. Market has been anticipating, Rite Aid's profits will have declined 56% from the $0.09 management reported the same quarter last year.

Is Rite Aid just a third wheel?
The past few years have revealed that CVS and Walgreen are the poster boys of the drugstore industry. Between 2009 and 2013, Walgreen saw its revenue climb 14% from $63.3 billion to $72.2 billion as its aggregate comparable store sales increase of 2% was made up for by its 14% rise in store count. CVS's top line performance has been even better. During this five-year period, the country's largest drugstore chain saw its revenue soar 29% from $98.2 billion to $126.8 billion as its 8% jump in store count was met with an 18% improvement in aggregate comparable store sales.

RAD Revenue (Annual) Chart

RAD Revenue (Annual) data by YCharts

Over the past five years, Rite Aid actually saw its revenue fall 0.6% from $25.7 billion to $25.5 billion. In its annual report, the retailer attributed this decline to a 4% reduction in store count which was somewhat offset by a 0.8% improvement in aggregate comparable store sales.

Although CVS and Walgreen have trounced Rite Aid from a revenue perspective, the situation isn't so one-sided when you look at how their bottom lines have done. Between 2009 and 2013, Walgreen saw its net income grow 22% from $2 billion to $2.4 billion while CVS's bottom line grew 24% from $3.7 billion to $4.6 billion. Both companies can chalk these results up to their higher sales but Walgreen's performance also takes into consideration the gain the business has received from its 45% stake in Alliance Boots, while CVS's profits have been pressured by rising costs.

RAD Net Income (Annual) Chart

RAD Net Income (Annual) data by YCharts

Unlike in the case of sales, Rite Aid saw some significant improvements on the bottom line. Between 2009 and 2013, the drugstore chain reported that its net loss of $506.7 million had turned into a net gain of $249.4 million. In spite of being hit by slightly lower sales, the company's cost-cutting initiatives have shown themselves in its cost of goods sold, which fell from 73.4% of sales to 71.3% and in its impairment expenses, which declined from 0.8% of sales to 0.2%.

Foolish takeaway
Investors appear to be taking a cautious note prior to Rite Aid's earnings. The biggest fear is likely that the retailer's falling profits forecasted for this quarter is a sign of more pain to come. While this is certainly a possibility, the business's bottom line has improved significantly over time and its recent performance suggests that sales are finally starting to pick up steam.

For this reason alone, Foolish investors should probably take a closer look at Rite Aid before disregarding it. However, for those who believe investing in a turnaround is too risky, shares of Walgreen or CVS may make for more attractive prospects.

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