Rite Aid (NYSE:RAD) recently announced its March sales with its same store sales continuing to climb. The drug retailer has come a long way from its weakened sales position two years back, but still has significant debt and lags its larger competitors Walgreen (NYSE:WAG) and CVS Caremark (NYSE:CVS) in terms of performance. The stock shot past $2 last month amid rumors of a Walgreen takeover. Rite Aid is set to announce its fourth quarter results next week.
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In March, Rite Aid’s same store sales increased 3.6% (y/y) with front-end same store sales improving by 4.6% and pharmacy same store sales by 3.2%, despite an approximate 240 basis points negative impact from new generic introductions. Prescription count at comparable stores increased 2.6% over the prior-year period, which is likely to have benefited from filling prescriptions for PBM Express Scripts customers that previously went to Walgreen. Rite Aid has closed down more than 50 under-performing stores during the past one year, which has also helped improve its comparable same store sales.
Improving Trend in Key Metrics
The consistently improving comparable sales can be attributed to the company’s focus on improving cost-efficiency and profitability by driving up same store sales, along with the gradual closure of highly under-performing stores. Nonetheless, Rite Aid has a significant way to go before it catches up with its larger peers in terms of average store performance.
An average Rite Aid store currently fills about two-third prescriptions and generates 40%-50% lower front-end sales compared to CVS and Walgreen stores. The weaker metrics are also partly because of inferior locations of stores in certain markets. With significant debt and weaker cash flows, the company depends on favorable credit market conditions to refinance debt and continue with its same store sales growth and margin expansion.
The stock has picked up over the past few months with consistently improving sales and debt refinancing measures. The stock even crossed the $2 mark last month following speculation of a buy-out by Walgreen. Read Former Walgreen CEO offers perspective on WAG-RAD merger speculation and Banking on a Walgreen Rite-Aid Merger.
We have a revised $1.45 Trefis price estimate of Rite Aid stock, at 4% discount to the current market price.