If you were hoping that Rite Aid (NYSE: RAD) sandbagged when it reduced its full-year same-store sales guidance last month, September's monthly numbers were disappointing. Rite Aid's 1.5% increase in monthly comps was unfortunately in line with the 1.5% to 2.5% increase that management guided for FY 2016 in their latest conference call. There's been a clear deceleration in growth since the spring. The question we have to ask, then, is this: Should Rite Aid investors (and investors in competitors Walgreens Boots Alliance (NASDAQ: WBA) and CVS Health (NYSE: CVS)) be worried by that slowing growth?
Before I answer that, let's look at the numbers.
While you can see the slowdown in both front-end and back-end (pharmacy) same-store sales, what's really scary is that front-end year-over-year comps actually turned negative in September, something they haven't done since April.
Management claims the slowdown is due to a host of factors, particularly lapping a strong 2014 fueled by millions of new customers from Obamacare's Medicaid expansion. If that's the main culprit, the slowdown will be industrywide, so we should expect to see similar decelerations from Walgreens and CVS when they report later this month.
Slowing growth is never good -- but each of these three stocks has a good reason why you shouldn't be worried.
Walgreens: stronger growth, broader exposure
Even if there is a slowdown in U.S. sales, Walgreens is well-insulated due to its stronger growth path and its international footprint. Last quarter, comps grew by 6.3% -- so even if it experienced a slowdown on par with Rite Aid's (about a 1.5 percentage point deceleration in comp guidance at the midpoint), it'd still be growing quite nicely.
And then there's international exposure from Walgreens' acquisition of Boots Alliance completed earlier this year. While U.S. retail sales still made up the vast majority (71%) of Walgreens' revenue last quarter, the international footprint gives the company a nice chance to balance any slowdown in the U.S. with European growth.
CVS: most revenue not at risk
If you're looking at CVS' piddly same-store sales growth of 0.5% last quarter, the 7.8% decrease in front-end same-store sales is... well, troubling. Of course, that's all because of revenue loss since CVS went tobacco free last fall. Still though, looking at those topline numbers, you'd think CVS might be vulnerable to a sales slowdown.
But here's the kicker: The majority of CVS Health's revenue, surprisingly, doesn't come from its retail stores -- most of it comes from the pharmacy benefits manager (PBM) it operates, which contracts with health plans and insurers to provide drugs to their members. While it's a lower-margin business than the retail pharmacy side, it can also provide a needed cushion whenever consumer spending turns negative.
Rite Aid: diversifying rapidly
Rite Aid's management has been working hard to expand the business beyond the historic retail pharmacy model. Rite Aid has invested heavily in other opportunities, purchasing the PBM company EnvisionRx for $2 billion earlier this year to take advantage of increased U.S. drug spending. (If that sounds like a move to copy CVS' business model, that's because it probably was.)
Rite Aid is building retail clinics in its stores to try and catch up to CVS and Walgreens, which both have extensive networks already in place. Rite Aid is also converting its stores to the new Wellness format (currently 41% of stores have been remodeled). Stores that go through the wellness remodel have seen a 3.5 percentage point lift in same-store sales, which explains management's eagerness to roll out the new format across the entire chain.
Focus on what actually matters
Monthly sales don't really matter that much in the long term. They can be indicative of broader issues with a company and its brand, or -- like appears to be the case here -- they can be the result of a macro tailwind that is generally slowing down. What matters for all of these companies, and particularly Rite Aid, is what they're doing to juice growth and simultaneously to diversify away from having all of their eggs in one basket. All three companies appear thus far to be doing that effectively -- so even if CVS and Walgreens report sales growth slowdowns, the investment theses for all three remain intact.
