Rite Aid Looks a Little Peaked

Drugstore retailer Rite Aid (NYSE: RAD) recently got a whole lot bigger when it purchased a large block of competing stores, and a long-term record of rival buyouts has allowed it to grow into the third-largest industry player. But bigger doesn't necessarily mean better, and Rite Aid has quite a bit of work to do to convince investors it can successfully manage the empire it has acquired.

Rite Aid announced second-quarter results this morning that saw it miss sales and earnings expectations. Sales growth of 53.9% still sounds impressive, but most of this came from the recently closed acquisition of Brooks and Eckerd drugstores. Same-store sales expansion of 1.1% was respectable, but pales in comparison to the impressive comps archrival Walgreen (NYSE: WAG) posted last quarter. CVS (NYSE: CVS), which operates the most stores in the industry, proved it's no sicko, also posting comps trends significantly higher than Rite Aid's.

Rite Aid admittedly has a lot on its plate as it works to integrate the acquisition that has allowed it to become such a major competitor. As part of the earnings press release, management boasted that its "integration of Brooks Eckerd is off to an excellent start, and we're seeing more cost-saving synergies from the acquisition than we initially expected."

But for some reason, that isn't translating into the financial results, as the company tempered full-year sales and comps guidance and also increased its expected earnings loss to $0.15-$0.27.

The higher bottom-line loss was attributed to amortization of acquired intangible assets and higher interest expense. Years of acquisitions have increased debt to just less than 70% of total capitalization, which is definitely a high amount for most companies. Good thing Rite Aid operates in a stable industry; people need to fill their prescriptions regardless of what goes on in the economy.

Overall, though, I can't find much positive to say about recent results at Rite Aid. The stock price still looks like a steal, hovering around $4.80, which is only slightly more than Wal-Mart (NYSE: WMT) charges for filling a generic prescription these days. But until management can prove it's an able operator of its current drugstore base, I'll stick with the larger players and their clearer financial directions.