Rite Aid Update: Stock Jumps As Company Announces Refinancing Bond Deal
Rite Aid’s (NYSE:RAD) stock jumped on Monday as the drug retailer announced plans to retire debt though a bond sale with extended maturities. It plans to retire $459 million worth of its debt due in 2015 by offering $481 million worth of notes due in 2020. With the news, the stock price jumped 10% to $1.60. However, Fitch rated the new notes as high risk. We have a Trefis price estimate of $1.45 for the Rite Aid stock. Rite Aid is still making losses, in contrast to its bigger competitors Walgreen (NYSE:WAG) and CVS Caremark (NYSE:CVS), despite improving same store sales over the past one year.
See our complete analysis of Rite Aid
Why Fitch Has a Negative Outlook on Rite Aid
- Rite Aid Stock Could Move Higher From $10
- Key Takeaways and Trends From Rite Aid’s Q2 FY’19 Earnings
- How Has Rite Aid Performed In FY 2018?
- What Are The Chances Of Rite Aid’s Recovery From Its Current Slump?
- Why Is Rite Aid’s Stock Performing So Poorly?
- Walgreens And Rite Aid Deal Is Back On Track And Both The Companies Are Expected To Gain
Fitch’s high risk rating for Rite Aid takes into account the fact that Rite Aid is still highly leveraged with weak cash flows and limited capital for investment. Its performance metrics are weak compared to its two major competitors despite a consistent improvement in same store sales over the past year.
Even though Fitch expects Rite Aid’s credit metrics to remain stable until 2014, the negative outlook suggests refinancing risk for upcoming debt maturities (a series of significant debt maturities will occur between 2014-16 worth up to $2.5 billion) as well as risks related to its capability to continue same store sales growth and margin expansion.
The Downside Scenarios That Could Pose A Risk
Rite Aid’s front-end revenues per square foot of retail space could increase from $138 in 2010 to $175 by the end of our forecast if the drug retailer continues to maintain its same store sales growth. However, there could be a 35% downside to our current price estimate of $1.45 if the revenue per square foot of retail space improvements are lower and reaches only $160 during the same period.
We currently forecast the gross margins to improve slightly from the current 26-27% levels to 28% by 2018 due to the windfall from generics. However, there could be large downside to our estimate if the gross margin drops or remains at current levels given its high leverage.
Rite Aid’s Key Metrics Trail Its Competitors
Rite Aid’s current key metrics significantly trail its larger and better capitalized competitors Walgreen and CVS. For example, each Rite Aid store averagely fills about 63K prescriptions per year, which is 30% lower than Walgreen and CVS Caremark whose stores fill close to 90K prescriptions each. Also, Rite Aid’s front-end sales per square foot of retail space is close to $140, which is 40-50% lower than Walgreen’s $290 and CVS Caremark’s $263 per square foot. Rite Aid’s top 3,000 stores fill close to 81K prescriptions per store and generate $200 per square foot. With modest free cash flows and relatively more leveraged condition, the company is highly dependent on favorable credit market conditions to refinance its debt and make capital investments to improve performance of its under-performing stores, which could further weigh on future performance and cash flows.
We currently maintain a $1.45 Trefis price estimate of Rite Aid stock.
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