Rite Aid Corporation Earnings: Can the Good Times Last?

On Thursday, Rite Aid (RAD 24.00%) will release its quarterly report, and investors have continued to enjoy the fruits of the drugstore chain's recovery over the past year. Yet despite Rite Aid's bounce, the big question is whether it can still hold off strong competition from Walgreen (WBA -1.33%) and CVS Caremark (CVS -1.07%) at the same time it takes care of its own financial situation and improves its balance sheet further.

Rite Aid has long struggled behind CVS and Walgreen in the drugstore niche, hampered by high debt and failing to see the growth its peers enjoyed. Yet even after many investors left Rite Aid for dead, the stock delivered impressive returns last year, and the chain's growth has surprised even many of the company's staunchest advocates. Now, shareholders want to see if Rite Aid can repeat last year's share-price gains in 2014. Let's take an early look at what's been happening with Rite Aid over the past quarter and what we're likely to see in its report.

Stats on Rite Aid

Source: Yahoo! Finance.

Can Rite Aid earnings keep growing?
In recent months, analysts have had mixed views on Rite Aid earnings, cutting a penny per share from their February-quarter estimates, but raising full-year fiscal 2015 projections by the same penny. The stock has kept climbing, though, posting a 20% gain since early January.

Rite Aid has delivered fairly solid growth numbers on a monthly basis all quarter, with a 2.9% rise in same-store sales in December, followed by 1.8% comp gains in January and 1.5% in February. Yet by March, comp growth had fallen to just 0.7%, and front-end store comps have been consistently terrible even as the pharmacy side of Rite Aid's business remains strong. Moreover, putting Rite Aid's recovery in context, the drugstore still makes less in revenue than it did in 2010, while both Walgreen and CVS have seen sales gains.

One huge long-term benefit to Rite Aid has come from the rise of generic drugs. Because of the recent patent cliff, many popular drugs now face generic competition, and that has reduced the price Rite Aid and its peers have to pay. That in turn boosts Rite Aid's gross margins, although it opens the door to tougher price competition with Walgreen and CVS, because generics give them more flexibility to use pricing power without sacrificing too much margin. You can see the net impact fall through to Rite Aid's operating margins, which have risen at a far greater pace than those of its two main rivals over the past 12 months.

But Rite Aid is looking for new ways to grow as well. Last week, Rite Aid announced it had bought patient-support and health-care analytics company Health Dialog Services, with the intention of using it to grow its new Rite Aid Health Alliance between its stores and health-care providers. With the service currently available in three cities, including Los Angeles, Buffalo, N.Y., and Greensboro, N.C., Rite Aid hopes to make it easier for customers to coordinate with their physicians -- and at the same time build customer loyalty.

One interesting issue Rite Aid will have to address is whether to keep selling cigarettes. CVS chose earlier this year to stop cigarette sales, and more than two dozen attorneys general in states across the nation have called on Rite Aid, Walgreen, and other pharmacies to follow suit, citing "a contradiction in having these dangerous and devastating tobacco products on the shelves of a retail chain that services health care needs." Rite Aid has to decide whether losing profits from tobacco will offset any potential gain from making the move, and with CVS having been the first mover, Rite Aid won't be able to get nearly as much marketing value from such a move.

In the Rite Aid earnings report, watch to see how the company positions itself to address its weak front-of-store sales results. Prescription growth has been great, but Rite Aid needs to get its whole store working better if it wants to sustain the big gains in its share price.

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