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In April I correctly surmised that Rite Aid (NYSE:RAD) stock still had some room to rise; I just didn't anticipate as large of a run. While its two major competitors-- CVS Caremark (NYSE:CVS) and Walgreen (NYSE:WAG) -- in comparison have witnessed very good stock growth, up 20% and 31% YTD respectively, Rite Aid stock has been on a tear, up over 158% YTD. The question is: Has Rite Aid righted the ship enough to continue to deliver better returns than its competitors, CVS or Walgreen?

SALES UP SLIGHTLY

On Thursday, August 15th Rite Aid reported on the four weeks that ended July 27th: Total sales rose slightly, by 0.9% to $1.898 billion, while same-store sales rose 1.3%. While this would normally be considered marginal growth, especially when compared to its competitors, any growth should be considered a positive sign for Rite Aid as the company that saw years of quarterly losses continues to turn itself around. Front-end same store sales increased 0.7%, while pharmacy same store sales rose 1.6% as prescription count for the four week period increased 0.4%. Prescription sales attributed about 67.7% of drugstore sales, while third party prescription sales were 97% of pharmacy sales.

On June 20th Rite Aid reported operating results for its 2014 fiscal first quarter that ended June 1, 2013, revenues came in at $6.3 billion, with a net income of $89.7 million or $0.09 per diluted share. Adjusted EBITDA came in at $344.8 million, or 5.5% of revenues. The results continue to show the turnaround for Rite Aid as the company reported a net income for the third consecutive quarter and increased adjusted EBITDA by more than $70 million over last year's first quarter. Interestingly, looking at comps over a 21 week period ending July 27th, there was a decrease of 1.2% year-over-year, as total drug store sales fell from $10.247 billion to $10.089 billion, but the drop can be attributed mostly to the rise in lower cost generic drugs.

Generics drug sales are going to grow over the next five years as roughly $80 billion worth of name brand drugs will lose patent protection, opening these drugs to fierce competition from the much cheaper generics. And while generics do impact the top line, they also carry a higher profit margin than branded drugs, approximately 50% higher. So as more drugs come off patent, sales will continue to drop, but profits will continue to rise.

RITE AID'S DEBT STILL LINGERS

While income is on the rise, one of the glaring issues for Rite Aid is its roughly $5.8 billion in debt, though down from the previous $6 billion. And though the company has been chopping away and restructuring, the debt it is still an anvil hanging around the neck of the company making it difficult for any potential suitor to show interest. However, the company continues its efforts to restructure the debt by lowering its interest rate and extending the maturity date. On July 2ed Rite Aid announced the completion of its debt refinancing activity, which was announced earlier in June. The company offered senior notes of $810 million, carrying a coupon rate of 6.75% and maturing in 2021. The proceeds from the offering, along with its existing cash and borrowings will be used to redeem an equivalent amount of senior notes bearing an interest rate of 9.5% that were coming due 2017. In early June, the company made a similar debt refinancing transaction involving a cash tender offer to redeem all of its 7.5% Senior Secured Notes worth $500 million with proceeds from a new $500 million second-lien term loan, along with available cash and borrowings.

DRIVING THE RETAIL PHARMACY MARKET

What might be the main engine that will drive retail pharmacies including Rite Aid over the next few years is the implementation of the Affordable Care Act (ACA) when 10 million new customers gain health insurance. It is estimated that-- at a growing rate of 5.3% annually-- by the end of 2015 total prescription revenues in retail pharmacies are expected to reach $350 billion. And while CVS and Walgreen will get the lion's share of those new customers, Rite Aid too will benefit heavily.

RITE AID'S WELLNESS STORE FORMAT IS AIMED TO ATTRACT SENIORS

If Rite Aid can continue to lower its debt and take advantage of the driving forces that should propel revenue for all the major retail pharmacies, there is no reason that the stock should not continue to grow. Along with the Affordable Care Act, the other main factor that will drive growth forward is the aging population that relies on medications to combat such maladies as hypertension, high cholesterol, diabetes, and a number of other illnesses. And based on attracting the senior client, on June 19th Rite Aid announced the launch of Wellness65+, an extension of its free customer loyalty program, Wellness+. A Wellness65+ event will be held the first Wednesday of each month at every Rite Aid nationwide where members will receive 20% off all qualifying purchases, plus there will be events such as free health screenings and other special offers. This appears to be a smart move in attracting new customers or keeping existing ones, considering that the aging baby boomers are becoming one of the fastest-growing and largest populations in the United States, and retirees spend roughly $93 billion on prescription drugs each year.

Rite Aid's CEO, Ken Martindale, commented on adding to the company's wellness program with the launch of Wellness 65+ and its goal to build loyalty and reward its best customers: "Attracting new senior customers represents a key growth opportunity for Rite Aid because seniors tend to be our best pharmacy patients. In addition, growing its senior patient base gives Rite Aid the opportunity to offer pharmacy services - such as immunizations and medication therapy management services - to a segment of the population that stands to benefit the most from the positive health outcomes these services provide."

Wellness+ and Wellness+65 fit programs were designed to enhance Rite Aid's Wellness store format, which debuted two years ago, and has expanded from a few test stores to 905 stores, with plans to convert about 300 more by the end of Rite Aid's fiscal year. The wellness store was created to enhance the customers shopping experience by giving a more wide-open, airier feel throughout the store, with a highly visible pharmacy, lower shelves for easier access, a wider variety of sections-- including more vitamin and supplement choices-- and new items such as packaged organic foods.

COMPETITON STIFF FOR RITE AID

While Rite Aid, which now has a market cap of $3.09 billion, showed modest sales and income growth, it is still dwarfed by the two larger pharmacies, CVS and Walgreen, and there is little chance of Rite Aid eating away at the market share from either of the two. CVS, which has a market cap of $71.8 billion, saw its second-quarter earnings rise 16% to $1.12 billion or $0.91 per share, up from $966 million or $0.75 per share a year earlier-- and revenue rose 2% to $31.25 billion. Walgreen, which is a $45.85 billion market cap company, saw its total July revenue from established stores rise 6.3% compared to the previous year, while total revenue for July rose 8% percent to $6.03 billion. In the 3rd quarter of fiscal 2013, revenue rose 3.2% to $18.43 billion, and adjusted EPS rose 18.1% to $0.85.

While generic sales seem to be what will drive Rite Aid's profits, the company may also feel the pressure from giant discounters like Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) that through manufacturers in India, Israel, and the U.S. are able to sell certain popular generics at $4 per prescription, which is a significant savings compared to the average co-pay of $10 for generics at Rite Aid.

CONCLUSION

Rite Aid, which has 4612 locations nationwide, runs a distant third to both CVS (with over 7300 locations) and Walgreen (with over 8000 locations). And though I don't see Rite Aid cutting into either CVS or Walgreen, that doesn't mean that the company won't take a percentage of the new customers once the ACA is implemented, and that alone should help drive the stock upward. Though I believe with the aging population, the ACA, the new Wellness stores, and cutting down the company's debt, there is more room for the stock to grow; but over the long haul I'd put my money in CVS and Walgreen. I do think, however, that good money can still be made over the next year or two with Rite Aid as the stock should continue to rise; but at this point it wouldn't be one of my long term holds.

Source: Rite Aid's Impressive Stock Run Should Continue To Gain Steam