Rite Aid (NYSE:RAD), the third largest drug retailer in the U.S., is expected to continue narrowing its losses when it announces its Q2 results later this week. The company suffers from high debt and weak cash flows but has sustained its sales performance in Q2 according to the August sales report. The performance is backed by the success of key initiatives like the Wellness+ loyalty program and the liquidation of non-performing stores. It competes with its larger rivals Walgreen (NYSE:WAG) and CVS Caremark (NYSE:CVS).
Q2 sales performance
The company reported last week  that sales in Q2 stayed flat over the prior year period with 1.4 percent increase in front-end same store sales and 0.7 percent decrease in pharmacy same store sales. The sales were supported by a 4 percent increase in prescription count at comparable stores over the period year on year.
We believe that the sustained performance has been aided by the popularity of the Wellness+ loyalty program and the additional traffic due to the Express Scripts-Walgreen impasse. Despite the growth in sales over the past seven consecutive quarters, the company has yet to report a profitable quarter ever since it acquired Brooks and Eckerd drugstores in 2007. In addition, interest payments related to high debt have been eating up the company’s already weak cash flows.
Improving same store performance will underscore future growth
The company currently operates 4,643 stores compared to 4,697 stores in the like period a year ago. This decrease is attributable to the company liquidating its under-performing stores to improve its profitability. We believe that proper debt management coupled with consistent improvement in same store sales should help improve the company’s performance and future outlook as drug retailers look forward to a significant boost in prescription expenditure from the aging U.S. population and expanding insurance coverage. It makes sense for Rite Aid to invest more in improving profitability of its stores, considering that its performance metrics like prescriptions filled at each store and revenue per unit area are 30-40% lower compared to larger peers CVS and Walgreen.
We have a $1.50 price estimate of Rite Aid stock, at nearly a 15% premium to the current market price.Notes:
- Rite Aid Reports 0.4 Percent Same Store Sales Increase for August, Rite Aid, September 2012 [↩]