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Why Rite Aid Shares Are Tumbling 10% Today

By Todd Campbell - Sep 17, 2015 at 2:15PM

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Rite Aid reported fiscal second quarter earnings and full fiscal year guidance that is disappointing investors.

Source: Wiki Commons user specious

What: After reporting fiscal second quarter earnings that fell shy of estimates and cutting its earnings outlook, shares in Rite Aid Corporation (RAD 5.21%) slumped by 10% earlier today.

So what: In Rite Aid's most recently completed fiscal quarter, the company racked up sales of $7.66 billion, up 17.5% year-over-year, that was better than analyst projections of $7.57 billion. However, increased spending on remodels, acquisitions, and interest led to Rite Aid delivering EPS of $0.02 in the quarter, which was below the $0.04 industry watchers were expecting.

During the fiscal quarter, sales at stores open at least one year improved by 2.1%, led by a 2.8% increase in pharmacy revenue. Sales of products purchased in the front end of the store were roughly unchanged, improving by 0.3%.

The same store sales growth isn't surprising given that Rite Aid updates investors on this metric monthly; however, more surprising was the drag on EPS from Rite Aid's growth initiatives, including expenses related to Rite Aid's $2.9 billion acquisition of the pharmacy benefit manager EnvisionRx, remodels to its newer Wellness format, and the opening of additional healthcare clinics.

Exiting the quarter, Rite Aid is lowering its fiscal full year net income forecast to between $125 million and $195 million from its prior outlook for between $150 million and $230 million. As a result, Rite Aid expects its income per diluted share to total $0.12 to $0.19 this year, down from projections for between $0.14 to $0.22 exiting fiscal Q1.

Now what: A few years ago Rite Aid was a turnaround story, but now that the company has improved its balance sheet and exited poor performing locations, management is increasingly turning its attention back to initiatives that can fuel future growth.

Those moves include last year's acquisition of the RediClinic healthcare clinic chain, ongoing investments in its stores to boost sales and margin, and a leap into managing drug programs for healthcare players via EnvisionRx.

Although I expect that these growth initiatives will drag down profit in the short term, I also believe they offer far greater profit potential down the road than what could have been expected if Rite Aid had continued its cost-cutting ways.

Because the sell-off today appears to be tied to the short term impact of Rite Aid's investments, I think investors who can tolerate any risks tied to its remaining debt load and potential for future quarterly misses ought to consider stepping in and buying shares on this drop for long-haul portfolios.

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