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Investment Overview for Rite Aid (NYSE:RAD)
Rite Aid's share of retail prescriptions filed in the US: We currently forecast Rite Aid' share of the total prescriptions filled in the US to gradually increase to 8.5% by the end of our forecast period from the current level of 8% due to under performing stores being replaced by new ones at better locations and the growing popularity of Wellness store format. There could be a 15% downside to the Trefis price estimate if its share of retail prescriptions continue to stay at the current levels of 8% over our forecast horizon.
OTC Drugs and Other Merchandise Revenue per Square Foot of retail drugstore space: We currently forecast the revenue from OTC Drugs and Other Merchandise per Square Foot of retail space to increase from $143 in 2011 to $165 by the end of our forecast period. There could be a 15% downside if this figure is lower and reaches only $150 by the end of our forecast period.
Rite Aid is the third largest drugstore chain in the US, having stores at 4623 locations across the U.S. It sells both prescription and non-prescription drugs as well as other retail merchandise(cosmetics, convenience foods etc.).
Prescription drug sales are the biggest source of value for Rite Aid, accounting for close to two-thirds of its total value.
Large drugstore network
Rite Aid has the third largest network of retail drugstores with 4623 stores across the U.S.
Prescription drugs is the most important division
Prescription drugs sales constitute the main revenue source for Rite Aid and contributes to around two-thirds of the stock value.
High debt burden
Rite Aid has steadily and consistently improved its front end same-store sales over the last eight quarters and has been narrowing its losses. The sustained performance improvement has been aided by the Wellness loyalty program, store upgrades and the closure of highly under-performing stores. The company reported its first profitable quarter in Q3 FY 2013 and should reduce its debt over the coming quarters. Interest payments related to high debt have been eating up the company's already weak cash flows and constrain investments.
It has closed two rounds of refinancing in 2012 to make sure it timely addresses its upcoming debt maturities. The recent refinancing activity and the stabilization in operating trends with consistent improvement in same store sales have helped stabilize its outlook. Rite Aid's current assets to liabilities ratio, a measure of its liquidity, stands at 1.6 which indicates that the company has time to take care of its debt.
In fiscal 2012, Rite Aid raised capital investments for its existing stores to further boost its comps and profitability. It makes sense considering that its performance metrics like prescriptions filled at each store and revenue per unit area are 30-40% lower compared to larger peers CVS and Walgreen and have room for improvement.
Increasing demand and utilization of prescription drugs in the U.S.
The U.S. has an aging population and as older people contribute to a larger proportion of expenditure on drugs, this will lead to an increase in the prescription drugs market in the US.
The 2010 US health reform legislation is expected to increase prescription drug sales, as over 30 million uninsured Americans will gain coverage and the US government increases outlay on prescription drugs driven by an expansion of Medicaid and Medicare Part D plans.
Wellness+ card-based loyalty program
Rite Aid rolled out its Wellness+ card-based loyalty program in April 2010 making substantial investments in 2011. It provides benefits to cardholders based on the accumulation of points for front end and prescription purchases.
As of February 2013, the program had over 25 million active members, accounting for 79% of front end sales and 68% of prescriptions filled. Wellness+ members have higher basket sizes than non-members and a much higher rate of prescription retention. The wellness+ program has helped Rite Aid to increase its sales since its launch. Rite Aid plans additional investments in the program and has also rolled out Bronze member tier and Load2Card features in January 2012.
Efforts to increase share in the US retail prescription market
Rite Aid plans to gradually increase the amount of capital allocated to the purchase of prescription files. The amount has been significantly raised from $24.2 million in 2011 to $75.0 million in 2012. The trend is expected to continue and will improve its market share.
Accelerating sales of generic drugs to positively impact margins
Sales of lower priced generic drugs are expected to increase faster than the sales of branded drugs. This growth will be supported by the fact that patents for a large number of branded drugs will expire in the near future. Expansion of generic drugs in the US market will impact retail pharmacy gross margins as they have lower cost but higher margins compared to branded drugs. On an average, gross profit dollars are approximately 50% higher on generic drugs than on the branded drugs.
Store remodeling and closure of under-performing stores
The number of RiteAid retail drugstores in the U.S. declined from over 5,000 in 2008 to 4623 in February 2013 as Rite Aid started liquidating its unprofitable stores. We expect the trend to continue over the next couple of years as Rite Aid continues to evaluate store's performances and closes under-performing stores.
In order to improve the same store sales, Rite Aid is remodeling its stores. It has remodeled ~800 stores to its new Wellness Format which has a unique merchandising display and targets remodeling of its entire chain over the next 5 years.
Segmentation strategy: Wellness, Save-a-Lot and Value Format stores
Rite Aid is building a segmentation strategy, experimenting with different store formats that are better tailored to meet the needs of the particular market that the store is in. They include Wellness, Save-a-Lot and Value formats.
During fiscal 2011, it entered into a ten store pilot with Save-a-Lot, a subsidiary of SUPERVALU, Inc. The co-branded Save-A-Lot/Rite Aid pilot stores have a full grocery shop including meat, produce, dairy, traditional drugstore offerings and a full service pharmacy. The format has presented encouraging results on the front end sales in its pilot phase with doubling or tripling of revenues. Rite Aid is likely to expand this format.
It has also piloted a value store format with lower front end prices and more focused front end sku selection to better compete in markets where pricing is the main competitive differentiator.
Revenues are also expected to improve in the Wellness format stores with remodeled stores, an expanded selection of organic foods, personal care products and homeopathic medicines. These stores will also have expanded clinical pharmacy services, including diabetes care specialists and medication therapy management experts.
Expansion of immunization services
In 2011, Rite Aid tripled the amount of immunizing pharmacists to 7,400, expanded its immunization services to over 3,000 stores and administered 675,000 flu shots. In 2012 the company administered 2 million flu shots and plans to take the number even higher in the fiscal 2014.
Increasing penetration of private brands
In 2011, Rite Aid began the roll-out of new private brand architecture consolidating them in three separate tiers and improving private brand penetration over the previous year. They have already converted 1000 SKUs in 2011, 2,900 in 2012 and followed up by enhancing the package designs of seasonal private brand items in 2013. These are expected to improve same store sales and improve gross margins. Rite Aid brand penetration for the third quarter 2013 was 18.1%.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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