What's next for Rite Aid Corporation (RAD 25.83%)? After starting 2014 with a bang, shares of the big pharmacy retailer have declined over the last three months. My long-term outlook for Rite Aid is optimistic, but there are several potential speed bumps for the stock in the near term. Here are three reasons that Rite Aid shares just might fall even more.
1. Transition timing
Rite Aid announced an expanded distribution agreement with McKesson in February. This deal was one reason that Rite Aid's management provided a strong earnings forecast in April. However, things haven't gone quite as well as expected with the transition.
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John Standley, Rite Aid's CEO, knew from the outset that the first few months of shifting cost management to McKesson wouldn't yield as big of a benefit to his company as it would later. However, Standley and the executive team at Rite Aid anticipated cost savings to help the bottom line relatively quickly. Those savings are taking longer to materialize than they expected.
Rite Aid announces second quarter results on Sept. 18. One big question to be answered then is whether or not the presumed advantages from the McKesson deal picked up steam over the last few months. In June, Standley said that "savings will build during the second quarter." If his forecasted timing is still off, Rite Aid's earnings could be negatively affected -- and so will its stock.
2. Reimbursement reality
Profits weren't as strong as expected last quarter in large part because of lower reimbursement from payers. This continual reimbursement pressure is the reality that pharmacies must face. The best way of coping with the pressure is to negotiate lower drug costs, particularly for generic drugs.
The McKesson transition issues already mentioned certainly didn't help Rite Aid in the company's first quarter. That wasn't the only challenge, though. Rite Aid counted on availability of generic Nexium to help offset the lower overall reimbursement rates. That seemed to be a reasonable expectation earlier this year, but Ranbaxy Laboratories encountered problems securing FDA approval.
Reimbursement rate pressure certainly didn't wane during the last few months. And Ranbaxy is still trying to win approval for its generic version of Nexium. The short-term reality for Rite Aid resulting from the reimbursement challenges could make hopes of a quick resurgence in the stock only a fantasy.
3. Market mayhem
You won't have a hard time finding predictions of doom and gloom for the market. Some say stock valuations are too frothy. Others look at charts and divine that a big pullback looms. Are they right? I don't know for sure -- and neither do those making the bearish calls, for that matter.
But the overall market could turn downward. If it does, Rite Aid's stock could still fall even if the company does everything right. A rising tide may lift all boats, but an ebbing one often lowers all boats as well.
Falling forward
There's a common theme with all three of the above reasons why Rite Aid's shares could fall. They're all temporary issues.
Sure, Rite Aid's transition with McKesson could take longer to bear fruit than anyone expected. I don't doubt, though, that the distribution deal will ultimately prove beneficial. While reimbursement pressures won't end, Rite Aid's current limitations in dealing with those pressures won't last forever. Nexium will eventually be available in generic form. So will other drugs that drive Rite Aid's costs. The stock market might go down, dragging down Rite Aid's stock in the process. But it will go back up -- just as Rite Aid will.
I mentioned earlier that my long-term outlook for Rite Aid is positive. There are several factors, including demographic trends and the company's Wellness store expansion, that seem to bode well for the stock over the next several years. Rite Aid's shares might fall even more than they have since June. Forward-thinking investors, though, should consider taking advantage of any further price declines to reap higher rewards down the road.
