Please ensure Javascript is enabled for purposes of website accessibility

Rite Aid: E-Cigs Bad, Tobacco and CBD Rad

By Rich Duprey - Apr 22, 2019 at 3:00PM

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

The pharmacy operator is fine with selling cigarettes -- just not the electronic kind.

Rite Aid (RAD 0.71%) says it's fine with customers buying cigarettes in its stores, and it's willing to stock products made with cannabidiol (CBD) even though there's little scientific data to back up their efficacy, but it will absolutely, positively draw the line when it comes to electronic cigarettes.

The drugstore operator says over the next 90 days it will remove e-cigs from all 2,469 stores in 18 states because of the "epidemic" of teen use of the devices. COO Bryan Everett said Rite Aid would be removing them even though "many feel these products are beneficial to those of legal age who are trying to quit the use of tobacco."

Marijuana leaf and oils.

Rite Aid will soon sell cannabidiol-based products while banning e-cig sales. Image source: Getty Images.

The fog of war

The Food and Drug Administration has been waging a battle against e-cig makers and tobacco companies over teen usage for more than a year. The Centers for Disease Control and Prevention says between 2017 and 2018, high school students' use of electronic cigarettes jumped 78% and middle school student usage rose 48%.

What's been left unsaid is that teen smoking rates are at historic lows. A study by the University of Michigan's Institute for Social Research found teen use of cigarettes at the lowest level since it began recording data in 1991. Use began tumbling significantly lower starting in 2017 -- the same year it began recording e-cig usage. While there is a concern over casual e-cig use by nonsmoking teens, it seems the devices could be doing what they're intended to do.

It doesn't make sense that Rite Aid's decision to ban e-cigs is over teens buying them in its stores -- though the drugstore was one of 1,300 retailers hit with warning letters from the agency for selling e-cigs to minors, it also routinely receives warning letters for selling cigarettes to minors. It raises the question why Rite Aid believes it is able to keep tobacco out of kids' hands, but not e-cigs?

The answer may have to do with money. E-cigs, despite their tremendous growth, still represent a small portion of the cigarette industry and the billions in revenue it generates for retailers. When CVS stopped selling cigarettes five years ago, it gave up some $2 billion in sales. It's estimated Walgreens generates a similar amount of revenue from tobacco and convenience stores are also said to derive around 30% of their sales from cigarettes.

Rite Aid doesn't say how much it makes from tobacco sales. Soft tobacco sales caused the pharmacy's front-end sales to fall 1.9% in the fourth quarter while contributing to a $20.8 million decline in adjusted earnings before interest, taxes, depreciation, and amortization.


The drugstore operator also said it would begin selling CBD-infused creams, lip balms, and lotions in several hundred stores in Oregon and Washington. It is the third major drugstore chain to begin selling cannabis-based products, joining CVS Health and Walgreens, which previously announced their intention to do so.

Yet the benefits of CBD products are dubious since it greatly depends on the quality of the CBD being used and how it is being applied. Studies showing positive results from the compound have only used pharmaceutical-grade CBD, which is very different from and more expensive than what is found on store shelves. Most topical applications can't penetrate the epidermis without special formulations, which might end up making them a drug and require regulation.

Outgoing FDA chief Scott Gottlieb also warned drugstores wanting to cash in on the soon-to-be-$16 billion industry that the agency will be monitoring their conduct. He tweeted, "We'll be contacting them to remind them of #FDA obligations and our commitment to protect consumers against products that can put them at risk."

Odd man out

With the intense scrutiny e-cigs are getting, Rite Aid likely didn't want the hassle. Tobacco still provides a strong, recurring stream of revenue, even if it messes with front-end sales from time to time, while CBD's growing popularity might just make up any difference in lost e-cig sales.

Even if tobacco carries proven health risks and CBD products offer customers sketchy value, eliminating e-cigs was an easy choice to make from a bottom-line perspective.

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
$5.66 (0.71%) $0.04
CVS Health Corporation Stock Quote
CVS Health Corporation
$95.57 (0.67%) $0.64
Walgreens Boots Alliance, Inc. Stock Quote
Walgreens Boots Alliance, Inc.
$42.15 (2.90%) $1.19

*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 service.

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 05/24/2022.

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.