Rite Aid Corp. (NYSE:RAD) has seen its fair share of pops and drops over the past couple of years, but behind it all has been steady top-line sales growth fueled in part by aging baby boomers, store renovations, and health insurance reform. That top-line trend continued in December, suggesting that Rite Aid will continue to see sales climb in 2015.
Roughly 10,000 baby boomers are turning 65 every day, and that graying of America is generating significant prescription volume growth for pharmacy operators, including Rite Aid, the nation's third-largest pharmacy retailer.
According to Rite Aid, the average person 65 or older fills two times the number of prescriptions that someone under 55 fills every year; as a result, Rite Aid is enjoying significant script volume growth that is significantly boosting the company's results.
In December, Rite Aid's pharmacy sales jumped by 7.3%. That's solid growth for a company that is operating fewer stores this year than in the year-ago period. It's particularly impressive considering that the 7.3% growth includes the -1.23% sales headwind associated with higher-priced brand drugs losing patent protection last year. Instead of paying full price for those branded medicines, patients are increasingly being prescribed their low-cost counterparts.
Rising demand for scripts is coming from aging baby boomers, but demand is also being fueled by rising enrollment in Medicaid and increasing enrollment in private plans offered through the Affordable Care Act exchanges. Last year, nearly 7 million people enrolled in insurance coverage offered through the federal and state exchanges, and an additional 9.7 million people have enrolled in state Medicaid programs since September 2013, the month before the implementation of Medicaid expansion in 25 states.
The increase in patients participating in health insurance programs hasn't proved to be a short-term bump, either. According to the latest figures released by the Department of Health and Human Services, almost 6.5 million people have already enrolled in health-insurance plans offered through the federal exchange during the second open enrollment period, which began on Nov. 15 and runs through Feb. 15. Medicaid enrollment should similarly continue to climb this coming year, given that the number of states embracing expansion has climbed to 28.
Dropping to the bottom line
Rite Aid's top-line performance may have investors thinking about owning shares in the company, but its bottom-line results have given investors reason to pause this past year.
The company has struggled to overcome a margin squeeze, which has been driven on one side by an increasing number of patients participating in government programs, which pay less per script than private healthcare plans, and on the other side by stubbornly high generic prices.
Some of the risk of that margin headwind was supposed to be offset by the company's deal to off-load its generic drug purchasing and drug distribution to drug wholesaler McKesson (NYSE:MCK), but so far results have been tepid. In the company's first and second fiscal quarters, a failure to recognize benefits from this agreement were cited as a reason behind the company's reducing its full fiscal year guidance.
Exiting the most recently completed fiscal third quarter, Rite Aid appears to be finally seeing some benefits from its McKesson deal, but investors will probably see a couple of more quarters of such success before they finally feel comfortable again.
Rite Aid's fiscal third-quarter performance and strength last month seem to indicate that Rite Aid's headaches won't stem from a lack of demand. Instead, if anything is going to weigh on Rite Aid's results this year, it will be its ability to turn sales into profit. However, there are reasons for investors to be optimistic. Rite Aid's peers are navigating the same headwinds, and arguably Rite Aid should be able to mirror their success. Importantly, the restructuring of Rite Aid's debt and its store closures have put the company in a much better financial position than it was in just a few short years ago. Since the company has returned to profitability and continues to improve its balance sheet, it has far more flexibility to modernize stores, enter new markets, and introduce new services, such as in-store healthcare clinics. Those moves could move the earnings needle significantly in the coming years, in the process taking the company's shares higher.
Todd Campbell is long Rite Aid. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned.The Motley Fool recommends McKesson. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.