Analyst predictions can weigh heavily on a stock's performance. But when someone goes so far as to suggest that a business may be in danger of going under, all investors should be careful to take a second look. This month, George Hill of Deutsche Bank (DB 1.60%) downgraded pharmacy retailer Rite Aid (RAD -20.53%), suggesting that the company could go out of business.
But what do Rite Aid's financials have to say? Last week's release of fourth quarter numbers (for the period ending Feb. 26) issued troubling guidance, which further spooked investors.
Let's take a look at the company's recent earnings report to see exactly what shape the business is in. Is Rite Aid in real trouble? Or could it could make for an attractive contrarian investment?
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A look at the company's Q4 results
Rite Aid released its fourth-quarter numbers last week after Deutsche's scathing downgrade. The retailer's quarterly net loss of $389.1 million was noticeably large and 21 times greater than the $18.5 million loss reported in the same period year the prior. The full fiscal year also saw a staggering increase in net loss from continuing operations, dipping from $100 million in fiscal 2021 to be $538.5 million in the most recent year.
However, this dramatic loss was largely due to impairment-related expenses of $341.6 million. Impairment refers to when a business writes off worthless goodwill, or intangible assets like the value of a company's brand name and customer base. The good news here is that when you factor out the roughly $100 million benefit Rite Aid got a year ago due to gains on assets, the company actually comes out ahead better than it did a year ago. Revenue of $6.1 billion in Q4 also grew by 2.5%.
As for the guidance, Rite Aid projects that for fiscal 2023 its revenue will be between $23.1 billion and $23.5 billion. That's down by roughly 5% from the $24.6 billion it reported this past year. The pharmacy retailer also anticipates that profit on adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) will fall within $460 million and $500 million, below the $505.9 million it reported for fiscal 2022.
Rite Aid is making efforts to reduce its costs this year by closing 145 unprofitable stores; the company has more than 2,400 retail locations that span 17 states. Through additional cost-cutting measures, Rite Aid plans to save $170 million during the fiscal year. It also anticipates that it will generate positive free cash flow.
Is the company going to go out of business?
Based on these results and guidance, there isn't anything to suggest that Rite Aid could be in danger of going under soon. The company may have a lot to fix, but the fact that management is looking to close stores is actually a good indicator that Rite Aid is getting leaner. Shutting down unprofitable stores can help its bottom line and make the stock a better investment in the long run.
A look at the company's balance sheet, which shows $3.4 billion in current assets versus $2.9 billion in current liabilities, suggests that Rite Aid will is able to keep its head above water. Even more promising is the fact that the company had $1.9 billion in liquidity at the end of the 2022 fiscal year. The anticipation of positive free cash flow is another encouraging sign for the business.
Should you invest in Rite Aid?
Although Rite Aid doesn't appear to be going out of business, there's still plenty of risk involved in investing in the stock today. Its gross margins are low at around 20% of revenue, which means that investors should only hope for razor-thin profits -- at best. Meanwhile, there isn't much growth on the horizon to make investors hopeful for a big turnaround, nor is there a dividend. There's simply no compelling reason to buy the stock right now other than to go against the grain and hope that this becomes the next big meme stock.
Without a clear catalyst to help turn the business around by generating strong sales numbers or a significantly improved bottom line, the best option is to avoid Rite Aid. There are plenty of other growth stocks out there that don't carry nearly as much risk as this stock does.
