Please ensure Javascript is enabled for purposes of website accessibility

Why Rite Aid Is Down 35% in 2018

By Dan Caplinger - Nov 14, 2018 at 6:02AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Find out what's kept the drugstore chain from recovering.

Rite Aid (RAD -7.92%) has gone through monumental challenges over the past several years. Having been under threat as the No. 3 player in the drugstore retail industry, Rite Aid seemed to have reached a final solution to its difficulties by negotiating a merger deal with Walgreens Boots Alliance (WBA -7.27%) back in 2015. Only after years of delays and review did Rite Aid manage to get a severely scaled-back deal done with Walgreens in 2017, under which Walgreens took over more than 1,900 Rite Aid store locations for $4.4 billion.

Unfortunately, that left Rite Aid with the colossal task of figuring out how to handle a large amount of debt with a much smaller store base. Even as it tried to come up with a turnaround plan, Rite Aid also went back to its old playbook of trying to find a potential buyer. As it turned out, those plans worked out to be equally frustrating for Rite Aid shareholders, and the question now remains whether the drugstore chain can ever get back to its former glory.

RAD Chart

RAD data by YCharts.

Merger part 2?

Rite Aid entered 2018 with a mission to continue to move forward with the provisions of the Walgreens deal. Under the asset sale's terms, Rite Aid was transferring stores gradually, earning parts of the overall purchase price along the way. Meanwhile, Rite Aid's strategy aimed at making the most of its remaining stores and using favorable provisions in the Walgreens deal letting it buy certain generic drugs at cost.

Yet it didn't take long for Rite Aid to do a repeat performance of its previous M&A strategy. The company said in February that privately held grocery store chain Albertson's would purchase Rite Aid, giving shareholders the choice to accept either cash or stock in the combined company.

At the time, those favoring the deal suggested that Albertson's might seek to use Rite Aid's extensive store network to give it more outlets and distribution nodes to sell products online. In addition to digital grocery offerings, Albertson's was looking at enrolling third-party vendors to sell a host of other types of products.

Stats on Rite Aid

Revenue, Past 12 Months

$21.56 billion

1-Year Revenue Growth


Net Income, Past 12 Months

$703 million

Year-Earlier Net Income

$89.2 million

Source: Rite Aid. Net income includes discontinued operations.

Yet even the prospect of a buyout didn't keep Rite Aid from responding negatively to the biggest competitive threat in the drugstore business. (AMZN -2.49%) said in June that it would move into the pharmacy services industry, and that sent shares of Rite Aid, Walgreens, and other drugstore operators plunging. With its acquisition of a company that packages multiple prescriptions for patients in easy-to-use shipments, Amazon signaled that it wanted to make moves that would potentially threaten Rite Aid's profit margin levels.

Walking away

Another dose of bad news came in August, when news came out that Rite Aid and Albertson's wouldn't be merging after all. Opposition from institutional investors in Rite Aid centered on the fact that they'd be left with only 30% of the combined company, arguably giving the private equity acquirers too large a share of the company. Yet given that Rite Aid cut its guidance for the remainder of the year and that no other bid has thus far emerged, it's questionable whether opponents of the merger were right to fight it.

Four Rite Aid products next to promotional language.

Image source: Rite Aid.

At this point, some have even started talking about the possibility that Rite Aid's debt burden might prove insurmountable. Interest expense has run at about a $220 million clip over the past 12 months, and although long-term debt of $3.5 billion is about half what it was a year ago, it's crept up gradually in the quarters since Rite Aid made its big debt payoff. The company does have several years before its next major debt repayment is due, but it still faces operational challenges that have put it in a negative free cash flow position.

Can Rite Aid bounce back?

2018 hasn't been kind to Rite Aid, and the drugstore chain doesn't have an obvious path to a brighter future. That's not to say that all hope is lost, but it does mean that Rite Aid will have to keep working hard to come up with a creative solution to reinvent itself as a successful business in a tough industry.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Rite Aid Corporation Stock Quote
Rite Aid Corporation
$6.74 (-7.92%) $0.58, Inc. Stock Quote, Inc.
$106.21 (-2.49%) $-2.71
Walgreens Boots Alliance, Inc. Stock Quote
Walgreens Boots Alliance, Inc.
$37.90 (-7.27%) $-2.97

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.