Here's How Rite Aid May Be Failing You

Margins matter. The more Rite Aid (NYSE: RAD  ) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market.  That's why I check on my holdings' margins at least once a quarter. I'm looking for the absolute numbers, comparisons to sector peers and competitors, and any trend that may tell me how strong Rite Aid's competitive position could be.

Here's the current margin snapshot for Rite Aid and some of its sector and industry peers and direct competitors.

Company

TTM Gross Margin

TTM Operating Margin

TTM Net Margin

 Rite Aid

26.4%

0.8%

(2.2%)

 Wal-Mart (NYSE: WMT  )

25.2%

6.1%

3.6%

 CVS Caremark (NYSE: CVS  )

21%

6.4%

3.6%

 Walgreen (NYSE: WAG  )

28.4%

5.5%

3.2%

Source: Capital IQ, a division of Standard & Poor's. TTM = trailing 12 months.

Unfortunately, that table doesn't tell us much about where Rite Aid has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months, the last fiscal year, and last fiscal quarter. You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for Rite Aid over the past few years.

Source: Capital IQ, a division of Standard & Poor's. Dollar amounts in millions. FY= fiscal year. TTM = trailing 12 months.

(Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them.)

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 27.3% and averaged 27%. Operating margin peaked at 2.3% and averaged 1.5%. Net margin peaked at 7.4% and averaged -2%.
  • TTM gross margin is 26.4%, 60 basis points worse than the five-year average. TTM operating margin is 0.8%, 70 basis points worse than the five-year average. TTM net margin is -2.2%, 20 basis points worse than the five-year average.

With recent TTM operating margins below historical averages, Rite Aid has some work to do.

If you take the time to read past the headlines and crack a filing now and then, you're probably ahead of 95% of the market's individual investors. To stay ahead, learn more about how I use analysis like this to help me uncover the best returns in the stock market.  Got an opinion on the margins at Rite Aid? Let us know in the comments below.

Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. Wal-Mart is a Motley Fool Inside Value recommendation and a  Global Gains selection. The Fool owns shares of Wal-Mart. 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.


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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.

  • Report this Comment On February 09, 2011, at 3:21 PM, adelomo wrote:

    Since the price of RAD been on the up, more analysts been trying to play down the stock move up to been foolish. In retail, I do not see any difference between wag, cvs and RAD in core business. In the past few weeks I see big improvement in product placements and aggressive promotions. If RAD keeps it up they will catch up to its peers. It’s a risk I am willing to take at 1.25-2.00 a share

  • Report this Comment On February 14, 2011, at 4:03 PM, sometomfoolery wrote:

    I made longer comment after your newer post on cash flow but i'll add a less detailed comment here.

    It seems like you're trying to gage the stores' operating peformance rather than the companie's financial peformance (the too are related of course and the second ultimately more important but there are reasons to asses both seperately to understand what is going right and wrong)

    The companie's debt service significantly effects the operating and net profit figures which are decisions made on the finacial level not the operating level.

    I'll put it this way, if they had sold a seperate division and carried back 7 billion in notes for the sale paying $500 million interest yearly to them, I don't think you would have included the interest from that investment in the table above, because you were trying to look at how they ran drug stores, not their investments?

    Of course the debt, and debt service is a huge issue with the company, but it can cut both ways even if the risk isn't worth it.

    I'd be more likely to overlook that if the article were about one of the competitors and RAD just appeared there... but I do question motives when your article is about RAD specifically and trying to expand understanting of it...that points to more loooking for a reason to criticize rather than to understand it.

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