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1 Key Reason the Rite Aid Rally Should Continue

By Tamara Walsh - Mar 6, 2014 at 9:46PM

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Shares of Rite Aid Corporation continue to march higher amid optimism about the company's future. But how much higher will the stock climb in the year ahead?

Rite Aid Corporation ( RAD 0.17% ) has been on a tear lately, with the stock climbing more than 33% year to-date. Shares of Rite Aid were swapping hands near the stock's 52-week high on Wednesday, with shares priced at $6.74 apiece in mid-day trading. While the stock took back some of those gains today to trade around $6.61, that's still a refreshing change of pace from where Rite Aid traded last April at around $1.70 per share.

Nevertheless, the question on many investors' minds now is whether shares of Rite Aid have more upside from here. Let's take a closer look at what has been driving the stock higher in the past year, and what investors can expect from Rite Aid in 2014.

Choosing the rite path
Rite Aid's decision to renew its longtime partnership with drug distributor McKesson ( MCK -0.79% ) is one of the more recent catalysts fueling the stock's price gains. Earlier this month, Rite Aid said it would extend its partnership with McKesson through 2019. McKesson will provide the sourcing and distribution of brand and generic drugs to Rite Aid stores during this five-year period.

Rite Aid is confident that the arrangement will create supply-chain efficiencies, as well as help the pharmacy retailer provide better service to its customers. Investors seem to agree with this verdict. The stock jumped more than 5% on this news last month. Fellow Fool Daniel Jones is confident that strategic partnerships such as this are the key to Rite Aid's future success.

The drugstore chain has done a phenomenal job of turning its fortunes around during the past year. In fact, fiscal 2013 marked one of the best years in Rite Aid's 50-year history, as the company was able to return to profitability. To get there, Rite Aid's management aggressively closed underperforming stores, and focused on transforming the company into a wellness destination. Rite Aid operated 4,587 locations as of March, down from 4,623 stores a year ago.

With the chain's recovery on track, let's look at one key reason its stock should continue to move higher in the quarters to come.

Taking care of customers
One catalyst going forward is the company's push to offer more pharmacy services outside of prescription refills. Rite Aid was able to grow its immunizations program as much as 60% in fiscal 2013, as the company administered nearly 2.4 million flu shots. This is important because immunizations like flu shots often carry profit margins of up to 50%, according to the Wall Street Journal. On top of this, administering flu shots gives Rite Aid the opportunity to sell customers on its other health-care services, such as diabetes screenings. Additionally, Rite Aid now offers Medication Therapy Management services, which it hopes will help attract more customers that are 65-years and older who suffer from multiple chronic conditions such as heart disease, arthritis, and diabetes.

More than 800 Rite Aid stores have now been remodeled into Rite Aid Wellness centers. This strategy appears to be paying off. The retailer announced today that pharmacy same-store sales increased 3.1% last month, while total drugstore sales in February spiked 2.4%, to $2.5 billion. Looking to the year ahead, the company plans to continue reinvesting in its store base by converting another 400 locations to the Wellness format in 2014.

Ultimately, by reformatting its store layouts around health and wellness, Rite Aid is transforming people's perception of its brand. If these turnaround efforts are able to drive more traffic to its stores, the rally in Rite Aid's stock could also continue.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Rite Aid Corporation Stock Quote
Rite Aid Corporation
RAD
$12.00 (0.17%) $0.02
McKesson Corporation Stock Quote
McKesson Corporation
MCK
$218.66 (-0.79%) $-1.75

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