Rite Aid Heading the Wrong Way

| About: Rite Aid (RAD)

On Monday, Rite Aid Corp. (NYSE:RAD) announced a seventh straight monthly decline in same store sales. Sales at stores open at least one year declined by 1.8%, with front-end sales (non-prescriptions) the worst performer falling 2.3%. The front-end has been Rite Aid’s stumbling block for quite some time, and a number of new generic drugs have not helped matters in RADthe pharmacy side either. In general, drug store chains have been a resilient segment of the retail sector, but that has not been the case with Rite Aid.

The company has attempted to stabilize the stock through reducing costs and closing stores that perform poorly, as the company has shut down 114 stores so far this year and now operates a total of 4,801 stores. These cost cutting measures have allowed the company to beat analysts’ estimates in the past three quarters–albeit all quarters were losses– but you have to wonder how much longer Rite Aid will be able to trim the fat. Total revenue has been hurt by the store consolidation falling about 3% in the first four weeks of December to $2.09 billion which is worse than overall declines in the first three quarters of fiscal 2010, and may be a bad omen for the rest of the fiscal fourth quarter. Drugstores

By contrast, the other major players in the drug store industry Walgreen (WAG) and CVS Caremark (NYSE:CVS) are both trading higher today. The results of Rite Aid suggest that both WAG and CVS are gaining market share over their smaller competitor. Simply put, it seems that they are out executing Rite Aid for the past year or more. For example, Walgreen is attracting customers to their stores through today’s announcement that all of their locations now carry the H1N1 vaccine meanwhile Rite Aid lags behind with just over a quarter of their stores able to match that offering.

At Ockham, we have recently downgraded Rite Aid to Overvalued because the declining fundamentals make us unenthusiastic about the stock, even at these relatively low prices. The company has quite a bit of debt and is not expected to turn a profit in at least the next fiscal year. It is easy to see why the company has a relatively large percentage of float currently sold short as the company is literally retreating fundamentally. There is one caveat though, Rite Aid could become a takeover target in the future as the price is pretty low and the debt, while high for RAD, would not be too much of an obstacle for a larger company too swallow. Rite Aid could prove an interesting name for a retailer looking to enter or bolster their share of the pharmacy market.

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