Rite Aid Stock Picks Up On Q1 Performance

Rite Aid (NYSE:RAD) has continued its streak of improving sales and profitability as last quarter marked the sixth consecutive quarter of improving comps. It has also raised its fiscal 2013 guidance. The results were well received by investors which led to a 10% increase in the stock. With close to 4,700 drugstores, Rite Aid competes with its larger rivals Walgreen (NYSE:WAG) and CVS Caremark (NYSE:CVS) and has come a long way from its compromised sales and fiscal position after the acquisition of Brooks and Eckerd drugstores in 2007.See our complete analysis of Rite Aid

Sixth Consecutive Quarter of  Same Store Sales Growth

Last quarter, Rite Aid’s same store sales increased 2.5% over the prior-year period, consisting of a 2.7% increase in front end sales and a 2.4% increase in pharmacy sales, despite 326 bps negative impact from new generic introductions. The drug retailers performance metrics have continued to improve over the last one year and Rite Aid filled 3% more prescriptions per location during the quarter over last year, including traffic that resulted from Express-Walgreen dispute. Aided by the Wellness loyalty program and store upgrades, these comps have consistently improved for the past six quarters which has helped the drug retailer narrow its losses.

Rite Aid’s Weakest Stores Dragging on Performance

In April 2011, Rite Aid management underscored that 3,000 of its 4,700 stores were good stores with key metrics like sales performance, prescriptions per store and front-end sales per unit area of retail space approaching levels comparable to peers like Walgreen and CVS. It is the bottom 1,700 stores that are drag down the overall metrics. Apart from the roll out of Wellness loyalty program last year, Rite Aid has been gradually relocating and remodeling its stores as well as liquidating under-performing stores in order to lift these metrics, which has significantly improved its profitability.

However, the company suffers from high debt and related interest payments have been eating up the company’s already weak cash flows, which caps the capital available for investing into further improving the profitability of its under performing stores. The recent conclusion of two rounds of debt refinancing this year have helped Rite Aid improve its liquidity to make sure it timely addresses its upcoming debt maturities.

We believe that proper debt management coupled with consistent improvement in same store sales should help stabilize Rite Aid’s performance and future outlook in an industry which is looking at significant boost in prescription expenditure from aging U.S. population and expanding insurance coverage.

We are in the process of revising our $1.55 Trefis price estimate of Rite Aid stock.