Rite Aid, Right Focus

Jun. 4.13 | About: Rite Aid (RAD)

Retailing, especially in the drug industry, has become very competitive. From the giants to box stores, internet, mail-order, traditional, nutrition shops and even dollar stores, there is no shortage of strong rivals.

The environment of payers has also changed. Rising drug medical costs are pressuring industries, governments and recipients. All are pushing for cost reductions as an aging population and incidence of illness is driving demand for services ever higher.

Yet with all these challenges, many have done well, and Rite Aid (NYSE:RAD) managed to eke out a small profit of $0.12 per share compared to prior year losses of ($0.43) in 2012 and ($0.64) in 2011. RAD's overall revenues seem stable for last three years. Sales distribution by category seem steady as well.

Definitely there are huge opportunities in their financials with a great deal of work ahead. They are highly leveraged with a year-end outstanding debt of $6B and a shareholder deficit of $2.5B. This could seriously affect their future profits - and not just from the carrying costs. It will challenge further their capacity and their ability to stay competitive.

What then are the positives for Rite Aid? Management seems to be addressing its balance sheet with net cash provided by operations more than double its best in 3 years. ($819M in 2013 vs. $395M in 2011).

They have been revamping locations at measured costs. Acting on store presentations will improve sales mix and also yield additional revenues at better margins. Not only will the new, fresh look attract new clients, it will drive internal traffic, helping to capture more sales and past better profit offerings. This will help address its relatively lower profit margin with respect to other U.S. drug retailers.

Company Ticker Price Market Cap P/E Gross Margin Profit Margin
Rite Aid Corp. RAD 2.94 2659.41 26.73 28.82% 0.47%
Walgreen Co. WAG 47.76 45252.12 21.32 29.04% 2.91%
CVS Caremark Corporation CVS 57.58 70500.38 17.88 18.66% 3.30%
GNC Holdings Inc. GNC 45.03 4427.35 18.61 38.26% 10.08%
Click to enlarge

Source: Finviz.com.

An even greater opportunity exists in growing their services, medicinal OTCs, health and beauty aids and personal care. This appears already to be their current focus via their wellness and loyalty program. Their greater emphasis on services and private label should also yield better margins.

Summary

Demand is clearly there, from an aging population and the general public, for better health. Even with current retailing pressure, Rite Aid is on the "right corner" in a growing market sector with many excellent locations and improved marketing.

Actions of management seem very positive and a very strong start. With lots of hard work ahead for RAD, investors may wish to begin to consider it in proper balance.

Disclosure: I am long RAD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.