On Thursday, Jan. 30, Rite Aid (RAD 12.50%) reported comparable-store sales for the four weeks of January ending on the 25th. Investors saw the metrics reported by the company as generally positive, and its shares rose nearly 6% to close at $5.67. However, upon analyzing the company's press release, it becomes apparent that shareholders should remain cautiously optimistic on the drugstore chain moving forward.

Sales were alright but far from amazing!
For the month of January, Rite Aid reported a rise in comparable-store sales of 1.8% from the same period a year earlier. This was driven primarily by a 3.2% jump in pharmacy comps and negatively affected by a 1.3% fall in front-end sales. The drop in this area came about because of a falloff in sales of flu-related over-the-counter products. Similarly, the company reported a 2.2% decline in prescription count due to a 2.4% drop in flu-related products.

All said, total drugstore sales for Rite Aid came in at $1.94 billion, 1.5% more than the $1.91 billion the company reported for the same period a year earlier. Probably the only downside reported (beyond the fall in the company's front-end and prescription sales) was the reduction in store count. Over the past year, management has closed 38 locations, bringing the company's total store count to 4,588.

Although a store count reduction might seem like a very negative sign, it's actually a positive for Rite Aid. Over the past four years, revenue at Rite Aid has fallen 1.1%, while the company's net loss of $507 million transformed into a gain of $118 million in 2012. This modest fall in revenue and improvement in net income came about from restructuring efforts as the business reduced store count by 3.3% and focused on enhancing operations. By closing underperforming locations and finding more efficient ways of doing business, management has made great progress in turning Rite Aid around.

Rite Aid still falls short!
The past four years have been decent and getting better for Rite Aid. However, the company has one problem that it doesn't seem to have a solution for; competition. Right now, both CVS Caremark (CVS 0.10%) and Walgreen (WBA -0.06%) are far larger and more powerful than Rite Aid.

Over the past four years, Walgreen has managed to grow revenue 7% from $67.4 billion to $72.2 billion. At its current sales level, Walgreen is nearly three times larger than Rite Aid, and with size comes market power. Over this time-frame, the business has grown its net income by 17% from $2.1 billion to $2.5 billion.

The main drivers behind this income growth (besides revenue) have been cost reduction and strategic investments. Despite a modest uptick in the company's selling, general, and administrative expenses, Walgreen saw its cost of goods sold decline from 72% of sales to 71% over the past four years. On top of this, management reported a $344 million gain as a result of its equity earnings from Alliance Boots, a company in which Walgreen holds a stake.

CVS Caremark has also performed quite well lately. Over the past four years, the company experienced a 25% rise in revenue to $123 billion. Although this growth has been strong, the business has had to wave goodbye to some of its profitability to grow this quickly. Between 2009 and 2012, net income at CVS has risen only 5% to $3.9 billion. The disparity between the company's revenue growth and net income growth can be mostly chalked up to a 29% rise in its cost of goods sold as the business prioritized growth over cost reduction.

Foolish takeaway
At first glance, Rite Aid's situation appears to be good and getting better. However, there are some risks for management moving forward. In addition to keeping shareholders happy by improving its business, Rite Aid must work on improving its comparable-sales metrics. Beyond sales though, Rite Aid still must compete in a highly competitive environment.

At this point in time, CVS and Walgreen are the two big fish in the pond and as they grow and become more influential, it will be more difficult for Rite Aid to improve its underlying business and grow. This does not mean that the drugstore is a bad investment, but shareholders would be wise to watch for anything that could derail Rite Aid's recovery.