Rite Aid: Comps Mean Competition

On Friday, Rite Aid (NYSE: RAD  ) reported its November and third-quarter comparable same-store sales figures. With another positive result in the bag, I can't help thinking that the beleaguered retail pharmacy chain could make for an interesting investment choice.

As for the November results, same-store sales increased 2.9% on top of a 2.6% November 2005 increase. The pharmacy contributed 3.8% on top of a previous 1.4% gain, while the front end -- literally, the front of the store -- contributed 1.2% on top of a previous 4.6% gain. Total sales for the month increased 5.2%, and that was on top of a 1.9% gain last November.

The recent sales results continue a trend showing signs that management is taking positive steps to right the ship. Consider that before Rite Aid's spectacular blowup in 1999, it was a three-horse race to dominate the U.S. retail pharmacy business. Since then, CVS (NYSE: CVS  ) and Walgreen (NYSE: WAG  ) have gone on to succeed and left Rite Aid behind. But with Rite Aid's operations gaining momentum by stringing together several months of positive sales results and the pending store purchases from The Jean Coutu Group, which will increase Rite Aid's store count to almost 5,000, the company is making this a three-horse race again.

Granted, Rite Aid has its work cut out for itself. Rite Aid's financials are not a thing of beauty, and management still has to show discipline in not making another mistake by overextending itself, the way it did in the late 1990s. And the Brooks/Eckerd purchase should give investors some pause, too. At the same time, I give management credit for looking forward and realizing what it has to do to survive against not only Walgreen and CVS but also against Wal-Mart (NYSE: WMT  ) which just introduced its new $4 generic-drug program.

If it's back to a three-horse race, then you could see Rite Aid's shares rebound. On an enterprise-to-revenue basis, Rite Aid trades at a 0.35 multiple, versus 0.75 and 0.90 for CVS and Walgreen, respectively. A multiple expansion is likely to occur if Rite Aid can continue to increase its operating leverage and expand operating margins. The funding for the Brooks/Eckerd stores, which involves more debt and equity issuance, will slow Rite Aid's balance-sheet progress.

However, the very fact that management didn't kill the pharmacy in 1999 shows the resilience of a good business and gives me confidence that there is more upside potential than downside risk. As for what other Fools think, check out our new Motley Fool CAPS rating service, where 157 fellow Fools believe Rite Aid will outperform and only 21 believe it will underperform.

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Fool contributorMatthew Crewswelcomes your feedback -- really! He has a financial position in CVS but in none of the other companies mentioned. The Motley Fool has an ironcladdisclosure policy.

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