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Rite Aid Corp. (RAD) stock has bounced back strongly in the past six months, rising 62%, largely in part to the company filing its first quarterly profit in a number of years and strong sales. However, the uptick in sales may be short-lived considering most of the rise came at the expense of Walgreen's (WAG) spat with Express Scripts (ESRX), when ESRX customers were forced to find a new pharmacy to fill their prescriptions. Now that WAG and ESRX are back together, RAD may well find its sales decline, as was evident when sales for the five weeks ended March 2, 2013 dropped 3.6%.

In 2012 RAD's estimated revenues on prescription sales were $17.7 billion, or 6% of the retail prescription market. Add in front-end sales, and RAD's total revenue for 2012 was $26.1 billion, up from $25.2 billion in 2011, as the company's turnaround strategy, albeit small, began to show signs of progress. RAD's yearly prescription sales were dwarfed by CVS Caremark's (CVS) $63 billion or WAG's $42.8 billion in prescription sales. To compete in a market that includes CVS and WAG, along with retailers such as Wal-Mart (WMT), Costco (COST), and Target (TGT), RAD needs to become a leaner company with stores that are up to date and inviting. And the company appears to be headed in that direction as it has already closed many underperforming stores while upgrading hundreds of others in an effort to focus on building up its existing store sales. According to RAD's 2012 10-K filing, the company's revenue breakdown consisted of 68.1% in prescription sales, 9.8% in over the counter and personal care of sales, and the rest in general merchandise and beauty products.

However, there are still glaring problems that the company needs to overcome, the biggest is its highly leveraged long-term debt, which is far too high for a company with a $1.7 billion market capitalization to interest any possible suitors. On a positive note, the company is slowly chopping away at its long-term debt, which is now finally under $6 billion.

While the company shows it is moving in the right direction by cutting underperforming stores and lowering debt, it is also troubling that RAD has not shown much growth over the past four years. Quite the contrary, the company estimates sales in its 2013 fiscal year to be in a range from $25.15 billion to $25.3 billion, which is down from fiscal 2012 revenues, where the company saw revenue growth of 3.6%. Although slowly and methodically, RAD seems to be pulling itself together; it cut its net loss for fiscal 2012 to $368.6 million or -$0.43 per share, compared to its fiscal 2011 where it saw a net loss of $555.4 million or -$0.64 per share. The revenue increase in 2012 was primarily due to better same-store sales plus an additional week in the fiscal year along with the positive impact of its wellness + loyalty program where it found members of the program accounted for roughly 70% of prescriptions filled and 75% of front-end sales. Also attributing to the sales increase was its flu immunization program and other management initiatives to increase sales and prescriptions, which offset lower pharmacy reimbursement rates and a loss of its customer base by operating fewer stores throughout the country. On a positive note, the company upped its fiscal 2013 adjusted EBITDA forecast to $1.050 - $1.075 billion from $950 - $1.025 billion.

Conclusion

Of the three large retail chain pharmacies fighting for the roughly $320 billion in pharmacy sales, RAD runs a distant third behind CVS and WAG. There is little doubt that both CVS and WAG are strong profitable companies with solid dividends. For 2012 CVS had $123.13 billion in revenues, and with earnings of $3.88 billion, or $3.03 per share, the company sees earnings continue to grow, estimating a 2013 earnings per share of $3.86 to $4.00. WAG saw fiscal 2012 net sales of $71.6 billion and net earnings of $2.1 billion with net earnings per share of $2.91. Both CVS and WAG should be strong performers in one's portfolio over the next few years.

However, RAD should not be overlooked; it operates 4,667 retail pharmacies in 31 states. RAD stock has climbed back from its December 6, low of $0.95, and closed on April 3, at $1.75 per share. With the Affordable Care Act about to be implemented, retail pharmacies will be battling it out for the millions of people who previously could not afford prescription drugs. Though the bulk of the revenue will go to CVS and WAG, RAD's revenue should also benefit from the rush of new customers. As the Affordable Care Act nears, RAD needs to attract new customers, raise store revenues, cut costs, and lower its long-term debt - and if it can do so, there should be far more upside potential than downside risk for the stock. And though I believe RAD is a long shot bet, until the company can show it is able to right its ship, RAD remains a speculative investment. But if the company succeeds in righting that ship, investors could be well rewarded.

Source: Speculative Play On Rite Aid's Turnaround May Pay Off In Profits