Year over year result
While front-end sales showed negative growth, Rite Aid performed well in all other areas. The company reported an increase in comparable sales for the fifth consecutive month. After experiencing losses for five consecutive fiscal years from 2008-2012, Rite Aid reported positive net income in fiscal year 2013. The company's turnaround to profitability can be attributed to the successful customer loyalty program, Wellness+.
Wellness program: The game changer
Rite Aid runs a customer loyalty program known as Wellness+, under which returning members receive rewards based on their prescription purchases. The company has over 25 million active members, defined as members who have used their Wellness+ card at least twice over the preceding 26 weeks. In the last fiscal year, Wellness+ members accounted for 79% of front-end sales and 68% of prescriptions filled.
In July, Rite Aid launched a loyalty program targeting senior adults known as Wellness65+. Since then, almost 1 million senior adults have registered in the Wellness65+ program. The U.S. Census Bureau projects the number of adults aged 65-74 to grow 51% to 32 million in between 2012 to 2020. Moreover, the number of U.S. residents above the age of 75 is expected to grow at the rate of 20% to 22 million in between 2010 to 2020. This projection looks favorable for the retail prescription market as rising old age population would lead to increased number of prescriptions.
In order to retain senior customers, many drugstore chains initiated customer loyalty programs, but Rite Aid offers a higher-discount senior customer loyalty program in the prescription market when compared to other players like Walgreen (WAG) and CVS Caremark (CVS). Rite Aid offers a flat 20% discount to its senior customers on the first Wednesday of every month under the Wellness65+ program. Walgreen runs a customer loyalty program named Balance Rewards and offers special discount to seniors provided they are members of the American Association of Retired Persons, or AARP. Under this, members can avail a $5 reward, only after accumulating 5000 points. A member is required to make a purchase of at least $25 in order to earn 5000 points. In case of CVS Caremark, there is no different reward scheme for senior customers and they are rewarded as per the company's symbolic ExtraCare program. Under the program, the company issues its customers a 2% reward on the amount of purchases, provided the customer makes a minimum $25 purchase. These rewards, known as ExtraBucks, are issued in the customer's account and can be used to offset future purchases.
Overall, the rising senior population seems promising for Rite Aid's business model. Considering its customer loyalty program, I expect senior adults to continue enrolling in the Wellness65+ program, thus generating better revenue in the coming years.
Is the future bright?
Rite Aid generates maximum revenue from prescription sales. In fiscal year 2013, prescription drugs accounted for 67% of Rite Aid's total sales. However, in 2012, Rite Aid's market share in the prescription market was only around 6.4%, much lower than Walgreen's 15.5% and CVS Caremark's 22.8%. The total pharmacy sales in the U.S. amounted to $276.5 billion in 2012. Furthermore, Pembroke Consulting estimates that the total prescription sales of U.S. drugstores will reach $350 billion by 2015. Thus, the implied compounded annual growth rate, or CAGR, of the retail prescription market is expected to be 8.17% from 2012 through 2015. Assuming, Rite Aid's market share also grows in line with the overall market, I expect Rite Aid to generate around $28.35 billion from prescription sales by the end of 2015.
Moreover, the total number of retail prescriptions in the U.S. is expected to rise from 3.85 billion in 2013 to 4 billion by 2015. Assuming the same methodology that was used to calculate Rite Aid's market share in 2015, I expect the company to fill 324 million retail prescriptions by the end of 2015. However, Rite Aid's future earnings would depend heavily on its capability to grow its market share in line with the overall retail prescription market.
On September 19, 2013, Rite Aid raised its fiscal year 2014 guidance for adjusted EBITDA, net income, and EPS, backed by better than expected results for the first two quarters of this fiscal year. Rite Aid's revised guidance reflects the company's optimism about its performance for the remainder of the fiscal year.
Below, I have compared Rite Aid with Walgreen and CVS Caremark.
Return on assets
Rite Aid clearly seems to be more favorable than its peers. Its price-to-sales, or P/S, ratio is 0.18 and is much lower than Walgreen's 0.78 and CVS Caremark's 0.63. In terms of efficiency, Rite Aid emerges as the clear winner with highest return on assets among its peers. Also, the price-to-earnings, or P/E, ratio of Walgreen and CVS Caremark is 23.2 and 18.23 respectively, much higher than Rite Aid's P/E of 16.05. Thus, Rite Aid looks to be currently undervalued with respect to its peers. Keeping above discussed fundamentals in mind, I think Rite Aid offers a good investing opportunity.