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Could it really be true? Are we really looking at a 20% pop in Rite Aid (RAD) stock? The stock has had an awful run in the last five years, just sitting around as dead money -- hovering around $1.00 a share for a while with periodic bounces to $1.50 or $1.75, only to fall again. Even after today's meteoric pop, the stock still needs to triple to get back to its pre 2008/2009 market crash levels of $6.50. Well, now there is some evidence that RAD is on its way back to making shareholders money once again. Why? Well RAD has reported its second-straight quarterly profit and first annual gain in six years.

Earnings

RAD' stock is up 20%, or 35 cents a share hitting a new annual 52-week high price of $2.15. Volume is nearly four times the average about 2 hours into trading with 39 million shares trading hands. The average volume in around 10 million. How good was the quarter? Well the company earned over $124 million equating to a gain of 13 cents per share in the last quarter. What's more is that this is a complete turnaround from the comparable year ago quarter that saw a loss $164 million or 18 cents per share. One important year over year comparison to note is that revenue fell over 9% in this year's quarter to $6.45 billion compared with lasts years $7 billon. Still, this was a top and bottom line beat as analysts were expecting a loss of $0.02 per share with $6.4 billion in revenue. For the year RAD earned $107.5 million, or 12 cents per share, on $25.4 billion in revenue.

Generic Drugs Drive Profits

This year's quarter was however shorter than last which impacted revenue, but there were some weaknesses. Revenue from stores open at least a year (which is a reliable retail indicator that controls for volatility in stores that newly opened or closed) decreased nearly 2%. The number of prescriptions filled at stores open at least a year rose around 3% in the quarter but there was still a 3.1% decline in pharmacy revenue. This is primarily due to the increase in generic drug sales. While there were more generic drugs sales (which are much cheaper than brand name), this led to revenue declines. However, this helped the company turn a profit. Although revenues are less, the profit margin is actually wider on these sales. The increase in generic prescriptions is not unique to RAD, as major competitors CVS (CVS) and Walgreen (WAG) have also noted similar trends.

Looking Ahead

Rite Aid currently has operations in over half the United States. It operates 31 states and the District of Columbia, but are still much smaller than CVS and WAG. Further, the space is seeing competition from grocery store pharmacies as well as major big box pharmacies such as Wal-Mart (WMT) and Target (TGT). These businesses are slowly taking some market share from the major pharmacy chains. This has not impeded RAD's long-term plans to reshape the its business. RAD has closed hundreds of under-performing stores that were seeing decreasing volumes and reduced same store sales in the last five years. Some of the newer stores have much larger pharmacy waiting areas and private consultation rooms. Further, some of the newest stores have a nutritional focus with large stocks of organic food, natural personal care products and shelves full of vitamins and supplements. The company plans to add another 400 plus of these new style pharmacies this year. For this year RAD is guiding net income to range between 4 and 20 cents per share with revenues of $24.8 billion to $25.3 billion in revenue. Analysts expect less, on average, with earnings coming in at 4 cents per share on $25.17 billion in revenue.

Conclusion

It seems RAD is taking the necessary steps to ensure its survival and return to growth. The rise in generic drug sales will likely continue and I expect this to feed the bottom (though not the top) lines. Further, RAD's realization that many consumers are interested in the use of supplements, vitamins and all natural products should help attract retail sales. The closing of non-performing stores, while an upfront expense will save money years out as the rebuild and move into new market places. Further, with analysts on the low end of RAD's fiscal year expectations, I suspect to either see increased analyst estimates over the year, or possibly RAD continuing to beat numbers. So why is this a bitter pill to swallow? Well, I own a very small position and raised some capital by selling $2.00 April 19 covered calls before earnings. It seems some of my stock may be called away … and given RAD's performance and future growth potential, I may have to buy some back at a higher price.

Source: Swallowing The Bitter Rite-Aid Pill