Rite Aid Earnings Preview: Better Quarter But Stock Isn’t Cheap

RAD: Rite Aid logo
Rite Aid

Rite Aid (NYSE:RAD), the third largest drug retailer in the U.S., is due to announce its fourth quarter results on April 12. Although it will likely continue to post losses in fiscal 2012, the drug retailer has come a long way from its weakened sales position, registering improved comparable store sales and profitability over the past few quarters, supported by its Wellness+ loyalty program. The stock has gained more than 35% since the beginning of the year, with consistently improved sales and debt refinancing measures, and even crossed the $2 mark last month following the buy-out speculation by its bigger rival Walgreen (NYSE:WAG).

See our complete analysis of Rite Aid

4Q Performance

With the success of its Wellness+ and flu immunization programs, Rite Aid’s comparable sales increased 3% over the prior-year period, led by pharmacy sales that improved 3.5%-4% last quarter, despite the negative impact from generic introductions. It also filled around 2.5% more prescriptions per comparable store, which most likely also benefited from filling prescriptions for PBM Express Scripts customers that previously went to Walgreen. Rite Aid also closed down more than 50 under-performing stores during the past one year, which has also helped improve its comparable same store sales.

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Improving Trend in Key Metrics

Same-store sales growth, debt refinance, reduced selling, general & administrative (SG&A) expenses with cost-cutting and supply-chain efficiency initiatives, and the gradual closure of highly under-performing stores have all had a positive influence on Rite Aid’s results in 2011.

During the year, Rite Aid filled an average 63K prescriptions per store, up from 61K in 2010. While this is much lower compared to an average CVS or Walgreen store that filled 87-90K prescriptions per store in 2011, Rite Aid’s top 3,000 stores filled close to 81K prescriptions per store last year. It now needs to focus on its 1,700 under-performing  stores. If it continues with its steady improvements, the metric could cross 70K in the next 4-5 years and Rite Aid could achieve impressive profitability.

However, it is still highly leveraged with weak cash flows and depends on favorable credit market conditions to refinance debt and invest in comparable sales growth and margin expansion.

We have $1.45 Trefis price estimate of Rite Aid stock, which is 15% below the current market price.