Rite Aid (NYSE:RAD) recently announced its February sales with same store sales increasing 3.1% and pharmacy same store sales growing 3.7% (y/y), despite a 242 bps negative impact from new lower-priced generic introductions. Rite Aid upgraded its successful customer loyalty program Wellness+ this January by introducing a new coupon management program, Load2Card. The Wellness Plus loyalty program, which was launched in April 2010, has been a game changer, with the company achieving four straight quarters of same store sales growth, reversing several quarters of sales decline. Nonetheless, Rite Aid still significantly lags its peers in terms of profitability, and high debt, weak cash flows and limited capital for investment could pose challenges for its future growth. Rite Aid sells both prescription and non-prescription drugs as well as retail merchandise such as cosmetics and food and competes with Walgreen (NYSE:WAG), CVS Caremark (NYSE:CVS) and Wal-Mart (NYSE:WMT).
Q4 Performance and Upcoming Annual Results
Supported by the Wellness+ loyalty program, Rite Aid’s Q4 same store sales increased 3% over the prior-year period led by pharmacy sales that improved 3.8% with 2.4% more prescriptions filled per comparable store. For the complete fiscal ending February, same store sales improved by 2% with 2.4% higher pharmacy sales and 1% more prescriptions filled by each comparable store.
Key Metrics Lag Peers
Rite Aid’s strategy is to improve its profitability by driving up same store sales and cutting costs as its current key metrics significantly trail the larger and better capitalized competitors Walgreen and CVS. For example, each Rite Aid store on average fills about 63K prescriptions per year, which is 30% lower than Walgreen’s and CVS Caremark’s stores that fill close to 90K prescriptions annually.
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.
However, the drug retailer is still highly leveraged with weak cash flows and depends on favorable credit market conditions to refinance its debt. Limited capital for investment could constrain its same store sales growth and margin expansion.
We currently maintain a $1.45 Trefis price estimate of Rite Aid stock, which is 25% below the market.