What Are The Chances Of Rite Aid’s Recovery From Its Current Slump?

by Trefis Team
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Rite Aid‘s share price is a reflection of its own weak performance that was further worsened by its poor pharmacy reimbursement rates (that dampened its margins). Also, the rumors of e-retail behemoth Amazon’s entry into the drugstore business is a further reason why Rite Aid was hit. However, its deal with Walgreens, after some initial hiccups, was announced with some changes. The new deal suggests there are chances for Rite Aid to make a turnaround in the near future.

What Are Rite Aid’s Chances Of Recovery From This Weak State?

Post the completion of the new deal, Rite Aid’s store count will be significantly lower, which should enable the company’s management to concentrate its resources on improving the performance of the remaining stores. Additionally, with the new deal, the company will have an option to procure drugs from Walgreens’ affiliates. This should enable the company to lower drug costs and improve its margins as Walgreens, with its size and volumes, is able to procure drugs at a considerably lower price than Rite Aid.

Moreover, Rite Aid still has control over EnvisionRx, its PBM business. With an increasingly aging population and rising drug prices, the PBM business is expected to grow at 7.1% annually till 2019. The company can plan to develop its growth model around Envision Rx’s operations, which are more profitable than the retail operations.

Rite Aid will receive $4.4 billion in cash for the sale of its stores, along with $325 million in termination fees. The injection of cash into the company’s operations can help it improve its leveraged balance sheet. While Rite Aid doesn’t have any payment obligations until 2019, it can utilize the cash received to repay its debt obligations. This will not only enable the company to improve its capital structure, it will also bring down its interest expenses, which will improve its bottom line. Conversely, Rite Aid could look for another suitor for its remaining stores.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Rite Aid 

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