Please ensure Javascript is enabled for purposes of website accessibility

Is Rite Aid a Screaming Buy After Reporting Sales Figures?

By Daniel Jones – Mar 12, 2014 at 9:35AM

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

Despite Rite Aid reporting sales figures that were reasonable, the company's shares were punished by investors. Is now a great time to get in on the cheap, or does Walgreen look better?

Source: Wikimedia Commons

After reporting sales for the month of February, Rite Aid (RAD -5.41%), the world's third-largest publicly traded drugstore chain, saw its shares fall more than 1%. Although the company's performance for the month wasn't bad, it wasn't strong enough to make investors feel motivated to push shares higher. Given this investor reaction, is it safe to say that Rite Aid's upside is limited from here on out, or is now an opportune moment to jump into the fray?

Sales were reasonable but far from great!
For the month, Rite Aid reported that its comparable-store sales rose 1.5%. In its release, the company announced that the growth driver was its pharmacy segment, which saw comparable-store sales rise 3.1% compared to the year-ago period. This was, however, negatively affected by a 1.8% decline in comparable-store sales for the company's front-end operations, as sales relating to flu products dropped by 0.5%.

On a non-comparable basis, Rite Aid reported that sales for the five-week period rose more than 2% from $2.46 billion to $2.52 billion. This improvement came in spite of 36 locations being closed over the past year, which brought the company's store count to 4,587.

But how does Rite Aid stack up to Walgreen?
Now that Rite Aid reported February sales, we can understand how the company stacks up to larger rival Walgreen (WBA 1.14%). Walgreen's February comparable-store sales rose an impressive 4.5%. Unfortunately, investors weren't terribly happy with management's news and sent shares down 2.5% on the following day.

For the month as a whole, Walgreen's revenue rose 5% from approximately $5.8 billion to about $6 billion. Just as in the case of Rite Aid, Walgreen saw an increase in its pharmacy operations, but the company also had good news coming from its front-end operations. Whereas Rite Aid reported a decline in front-end comparable-store sales, Walgreen reported an increase of 2%.

Source: Rite Aid and Walgreen

Looking at the most recent quarter for each company, we see a similar trend. During its quarter, Rite Aid saw sales rise 2.2% from $6.4 billion to $6.6 billion, driven primarily by a 2.1% increase in comparable-store sales. Walgreen performed even better during this period, with revenue rising 5.2% from $18.7 billion to $19.6 billion. This, too, came about because of a 4.5% rise in the company's comparable-store sales.

Source: Rite Aid and Walgreen

Foolish takeaway
Based on the data provided by Rite Aid, it's safe to say that the company experienced a reasonable quarter but nothing that it should boast about. Yes, revenue is rising. But when you see a larger rival like Walgreen posting stronger growth, it's difficult to say smaller, underperforming rival Rite Aid is a strong prospect.

There is one caveat here that investors should consider, though. Over the past few years, Rite Aid has been struggling with significant losses. Between its 2010 and 2012 fiscal years, the company reported an aggregate net loss of $1.4 billion. In an effort to rectify the situation, management embarked on an ambitious plan to focus not so much on growth but instead on improving its cost structure.

As a result of its hard work, the company finally churned a profit of $118.1 million last year and looks to be on track to continue this trend. Whether the company can continue to improve its margins has yet to be seen, but eventually investors will want to see it maintain profitability while growing. Otherwise, improved economies of scale developed over time by competitors like Walgreen and CVS Caremark will pressure the business back into negative territory...and possibly bankruptcy.

Daniel Jones has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Premium Investing Services

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