Anyone who has followed Rite Aid (RAD 10.19%) over the past few years knows the company has had its fair share of struggles, the biggest of which was digesting its $2 billion acquisition of rival pharmacy Eckerd.
Trouble integrating Eckerd's stores and managing the debt taken on to finance the 2008 deal caused a string of painful money-losing years that resulted in Rite Aid's shares sinking below $1 in 2010.
However, thanks to an aggressive plan to close stores and restructure debt, Rite Aid is back in the black. And after years of sitting on its hands while competitors CVS (CVS -0.13%) and Walgreen (WBA 1.33%) have branched more deeply into the health-care supply chain, Rite Aid is finally able to start committing to growth again.
Rite Aid inked a deal earlier this month to buy RediClinic, a Texas chain of retail health-care clinics. Since that deal kick-starts Rite Aid's retail clinic business, let's take a closer look at what the acquisition may mean for investors.
Chasing the leaders
CVS and Walgreen pioneered the pharmacy retail clinic concept, launching hundreds of clinics within their stores over the past few years. While both have made big inroads into this emerging care solution, CVS is the dominant player.
CVS operates more than 800 MinuteClinic retail sites nationwide, including 74 new clinics opened in the fourth quarter alone. As a result, CVS' MinuteClinic sales grew more than 10% in the last three months of 2013 despite tough comparisons from the prior year tied to a particularly busy flu season.
Those MinuteClinics are winning business away from primary care doctors and emergency rooms by targeting easy-to-address services such as flu shots, immunizations, blood pressure testing, and, more recently, care for chronic disease.
The combination of convenience -- clinics mirror the hours of the stores -- and pricing is being embraced by payers eager to avoid expenses tied to high-cost health care. As a result, about 85% of CVS MinuteClinic total sales last year were paid by employers and health insurance, rather than paid directly by patients.
Since health care payers are increasingly recommending retail clinics as a viable alternative for members, CVS and Walgreen, which operates 400 clinics and plans to open 100 more this year, are benefiting from a new revenue stream and from increased foot traffic that is boosting prescription volume and front-end sales.
Rite Aid's RediClinic strategy
CVS and Walgreen may have a head start, but that doesn't mean Rite Aid can't steal away market share. Especially if the company can leverage the RediClinic brand across multiple retailers.
Currently, all 30 RediClinics are found in H.E.B. grocery stores in Texas. In fact, Rite Aid doesn't now operate stores in the state.
That suggests that Rite Aid has two opportunities to grow RediClinic. It can launch clinics in its own stores -- it plans to open 70 new RediClinics in the next year and a half -- or it can roll them out at regional grocers using the store-in-store concept.
Since Rite Aid doesn't operate stores in key retirement markets such as Texas and Florida, the ability to scale RediClinic as a stand-alone brand in those markets could be critical to the company's long-term growth plans.
According to Rite Aid's fiscal fourth-quarter conference call, the company is open to pursuing both options.
"The real opportunity with RediClinic is to, I think, one, bring it to Rite Aid stores, and two, to continue to support their business like they've done with their very good partner down in Texas," said CEO John Standley.
Fool-worthy final thoughts
CVS expects to operate more than 1,500 MinuteClinics in 35 states by 2017, while Walgreen's deep pockets and huge store footprint should mean that it will continue to grow over the next few years, too. That means Rite Aid has a lot of work to catch up, but it also means that there's still plenty of room to grow.
