Rite Aid Worth $1.55: Ready To Fire Up Earnings This Week

Rite Aid (NYSE:RAD), the third largest drug retailer in the U.S., is expected to continue narrowing its losses when it announces its Q1 results this week. The company suffers from high debt and weak cash flows, but has consistently improved its same store sales over the last six quarters, boosted by the success of key initiatives like Wellness+ loyalty program and store remodels. It competes with its larger rivals Walgreen (NYSE:WAG) and CVS Caremark (NYSE:CVS).

See our complete analysis of Rite Aid

Sixth Consecutive Quarter of  Same Store Sales Growth

Based on Rite Aid’s monthly sales reports, Q1 same store sales increased 2.5% over the prior year period with 2.7% higher front-end comps and 2.4% higher pharmacy comps. The comps growth was primarily driven by a 3% increase in the number of prescriptions filled by an average Rite Aid store, and also benefited from additional traffic due to the Express Scripts-Walgreen impasse. The comps have consistently improved for the past six quarters which helped the drug retailer narrow its losses in 2011.

The sustained performance improvement has been aided by the Wellness loyalty program, store upgrades and the closure of highly under-performing stores. However, the company is yet to report a profitable quarter ever since it acquired Brooks and Eckerd drugstores in 2007 and suffers from high debt. Interest payments related to high debt have been eating up the company’s already weak cash flows.

High Debt Burden But Outlook Stable If Metrics Continue To Improve

However, it has closed two rounds of refinancing this year to make sure it timely addresses its upcoming debt maturities. The recent refinancing activity and the stabilization in operating trends with consistent improvement in same store sales have helped stabilize its outlook. Rite Aid’s current assets to liabilities ratio, a measure of its liquidity, stands at 1.8 which indicates that the company has time to take care of its debt.

In fiscal 2012, Rite Aid raised capital investments for its existing stores to further boost its comps and profitability. It makes sense 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 and have room for improvement. We expect Rite Aid to benefit from the growth in drug retail space, especially given the aging U.S. population and expanded insurance coverage for 30 million more Americans post the 2010 health reforms. These are expected to significantly expand prescription expenditure over the coming years.

We have a $1.55 Trefis price estimate of Rite Aid stock, at 25% premium to the current market price.