After Hitting a Speed Bump, Is Rite Aid a Strong Long-Term Play?

Source: Rite Aid

After reporting revenue and earnings for the first quarter of its 2015 fiscal year on Jun. 19, shares of Rite Aid (NYSE: RAD  ) fell 3.5%. Despite the fact that management reported revenue that exceeded its own expectations, Mr. Market pushed the company's shares down for fear that the drugstore chain won't turn around as quickly as some may have hoped. In light of this share price decline, does Rite Aid present the Foolish investor with some attractive long-term prospects, or would rivals like CVS Caremark (NYSE: CVS  ) or Walgreen (NYSE: WAG  ) be more appealing plays?

Rite Aid couldn't match expectations
For the quarter, Rite Aid reported revenue of $6.47 billion. In addition to seeing sales come in 3% above the $6.29 billion management reported the same quarter last year, the company's top line results surpassed the $6.43 billion the business anticipated in a Jun. 5 press release. According to the company's earnings release, this rise in sales was driven by a 3.1% improvement in comparable store sales but was negatively affected by a 0.7% reduction in store count to 4,581 locations this year from the 4,614 locations reported this time last year.

  Actual Forecasted Last Year's
Revenue $6.47 billion $6.43 billion $6.29 billion
Earnings per Share $0.04 $0.08 $0.09

Source: Yahoo! Finance

The biggest contributor to Rite Aid's comparable store sales increase came from its pharmacy operations, which rose 4.6% for the quarter, while front-end metrics came in flat. The strong performance in the business's pharmacy operations was attributed to a decent increase in the number of prescriptions filled during the quarter, but was partially offset by more generic introductions, which generally carry lower revenue but higher margins.

Source: Rite Aid

While Rite Aid's top line performance was impressive, the drugstore chain's bottom line was anything but. For the quarter, management reported earnings per share of $0.04, less than half the $0.09 management reported the same quarter a year ago. Even though revenue increased during the quarter, Rite Aid's profitability was negatively affected by rising costs, primarily in its cost of goods sold, which rose from 71.1% of sales to 72.1%.

Can Rite Aid keep up with the competition?
From a revenue standpoint, the past few years have been a wash for Rite Aid. Rite Aid's revenue has been more or less flat over the past five years, moving down from $25.7 billion to $25.5 billion. Now, keep in mind that store count fell by 4% from 4,780 locations to 4,587 as management strove to close underperforming stores. This was, however, mostly offset by an aggregate 0.8% increase in comparable store sales.

In contrast to Rite Aid's poor revenue performance in recent years, both Walgreen and CVS demonstrated their ability to grow rapidly. Between 2009 and 2013, Walgreen grew its sales by 14% from $63.3 billion to $72.2 billion, while CVS's top line skyrocketed by 29% from $98.2 billion to $126.8 billion.

RAD Revenue (Annual) Chart

RAD Revenue (Annual) data by YCharts

From a revenue perspective, Walgreen and CVS trounced Rite Aid during this timeframe. The same cannot be said, however, for their rise in profitability. Between 2009 and 2013, Rite Aid saw its net loss of $506.7 million turn into a net gain of $249.4 million as lower revenue was more than offset by a reduction in costs. During this period, Walgreen's net income jumped 22% from $2 billion to $2.45 billion while CVS's increased 24% from $3.7 billion to $4.6 billion.

Can Rite Aid keep it up?
Moving forward, investors will look not only for improved margins, but will also seek out revenue growth from Rite Aid.  In an effort to grow its operations, management at the retailer has been focused on a few different initiatives aimed toward growing both profitability and market share. 

In 2011, Rite Aid began selling its own private branded items.  Although the company's selling price on these is likely smaller than name brand items, the margins tend to be higher because there's no intermediate party to pay for said products.  Since launching this plan, the company's private brands have grown to represent 18.2% of consolidated sales, which is en par with CVS, which derives 18% of its revenue from private brands.

Source: Rite Aid

Another potentially large growth driver for Rite Aid is its decision to ramp up its Wellness store format development.  In its press release, the company claimed to have 1,325 of its 4,581 stores (or 29% of total stores in operation) already tooled in this manner and it expects to add more moving forward.  By the end of its 2015 fiscal year, Rite Aid plans to turn at least 295 of its stores into Wellness stores, which could help the business's turnaround and might serve as a stronger base from which growth can pick up.

Foolish takeaway
Considering that Rite Aid's bottom line has been growing in recent years and in light of forecasted revenue growth moving forward, it's an interesting investment opportunity.  This is especially true when it's clear that management is dedicated to new innovations that it believes could cause growth to pick up and margins to improve.

However, investing in a turnaround is not without its risks. With such small margins now compared to the margins posted by its peers, any downturn in business could be disastrous for shareholders. For those unwilling to accept these risks, Walgreen and CVS seem to present the Foolish investor with more stable and faster-growing prospects.

Top dividend stocks for the next decade
Aside from the company's less-than-profitable past, there is one other thing Rite Aid is lacking; a strong, stable dividend that could send your portfolio rising for years... maybe even a decade... moving forward!

The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.


Read/Post Comments (0) | Recommend This Article (5)

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: 3006374, ~/Articles/ArticleHandler.aspx, 10/1/2014 4:26:46 PM

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