Rite Aid's (RAD 25.83%) stock price has dropped more than 20% since the company lowered its earnings guidance in early June. This has made the pharmacy chain one of Wall Street's most volatile stocks this year.
With the company on tap to update investors on its fiscal second-quarter results Thursday, here are three points to keep in mind before rushing to buy or sell Rite Aid's shares.
Source: Rite Aid.
1. Generic bugaboo
Rite Aid had high hopes when it inked a deal that turned over its generic drug purchasing and distribution to McKesson. However, delays in getting the deal up to speed weighed heavily on the company's fiscal first quarter, forcing Rite Aid to cut its full-year earnings guidance to $0.30-$0.40 per share.
Clearly, off-loading costly inventory and distribution could prove friendly to Rite Aid's bottom line, but management's stumble in predicting when those benefits could be realized has kept investors cautious. Investors would be wise to look for any updated guidance from management on how the program is progressing.
2. Clinics, clinics, clinics
Rite Aid's decision earlier this year to buy RediClinic could give it plenty of opportunity to play catch up to CVS Health and Walgreen in providing convenient, low-cost healthcare services to customers in their stores. Both of its rivals have a massive head start, so Rite Aid won't catch up to them anytime soon. But if the company is going to turn the corner from boosting profit by cost-cutting to boosting profit from growth, it will need to ramp up programs like RediClinic.
Last quarter, Rite Aid announced plans to open 18 RediClinic locations over the next 18 months, at a cost of roughly $200,000 per location. While all eyes will be focused on Rite Aid's full-year profit guidance in the upcoming quarterly report, investors should also watch whether the RediClinic plans have changed. After all, it wouldn't be encouraging to see Rite Aid reduce the number of planned RediClinic launches in order to maintain its EPS guidance.
3. Expansion impact
One reason investors have embraced drug store chains like CVS Health and Rite Aid is because of demand growth expectations tied to the Affordable Care Act.
While ACA exchange enrollment in the first quarter was tepid, the health insurance markets signed up 8 million people during the first open enrollment period. Another 7 million people have signed up for Medicaid since last October as the program expanded in some states.
That swelling membership should provide plenty of opportunity for prescription growth. It is also likely part of the reason Rite Aid reported same-store prescription volume grew 3.7% year over year in its fiscal second quarter, leading to a 5.6% increase in pharmacy same-store sales. Since the ACA's impact could be big for Rite Aid, investors should look to see if the company provides any insight into whether drug demand built up or fell off over the course of the quarter and whether ACA-driven foot traffic contributed to it's 1.1% front-end sales growth.
Foolish bottom line
Rite Aid has already reported that fiscal second-quarter revenue totaled $6.485 billion, up from $6.25 billion a year ago. That's a pretty solid showing given that the company operates 4,572 stores, or 32 fewer stores than a year ago. We'll find out Thursday if Rite Aid kept enough of a lid on generic costs to allow for that revenue growth to fall to the bottom line; if it did, investors could regain some of their confidence in management.
