Rite Aid: The Right Direction

Mar. 5.14 | About: Rite Aid (RAD)

Rite Aid (NYSE:RAD) was the right trade in 2013 as it had one of the best performances of any company in the NYSE. Shares of Rite Aid rallied nearly 300% as investors poured into the stock after posting a host of surprising and encouraging figures, including their first profit in what had been six years.

I distinctly remember the day I decided to purchase shares of Rite Aid. I heard a news flash that Rite Aid had posted a profit for the first time in over 20 quarters. This sounded like a great entry point for the stock that once traded at over $48 per share. At the time of my investment, RAD was trading at a steep discount at only $1.20 per share. Now, it has been just shy of a year from my purchase point and Rite Aid shares find themselves trading at $6.77 as of 3/4/14.

So what exactly prompted Rite Aid to fall from its glory days? At one point, Rite Aid traded at $48 but that was in 1999. The stock got as low at $2.30 in 2000 and then had subsequently rallied to $9 by 2001. Before the recession became a reality, Rite Aid was trading at just under $7 in 2007. However, in mid 2009 Rite Aid found its shares at a pathetic $.22 per share. Rite Aid was essentially left for dead and with good reason. It was clear the recession had gotten to the heart of the business. There was an abysmal purchase of Eckerd drugstores for $3.4 billion in 2006. Throw in poor management, an array of outdated stores, less consumer spending, and intensified competition from rivals CVS Caremark Corporation (NYSE:CVS) and Walgreen Co. (WAG), and this spelt utter disaster for Rite Aid. In just three years Rite Aid saw its market cap plummet from approximately $6 billion to just over $220 million. Investors wanted absolutely nothing to do with this left for dead stock. Who would have invested in RAD at $.22 when it couldn't seem to get any worse? A genius.

Investors seemingly had no morale and there was massive deterioration in stock price but Rite Aid managed to turn its game around and see a 3000% increase in its stock price. Multiple factors played into this truly amazing turn around. The economy inevitably got stronger, consumer spending rose, and fears of an extended recession wore off. Additionally, Rite Aid began to really cut loses, they strategically closed underperforming stores and they put remodeling initiatives into some of its older or outdated stores. However, quite possibly the most important factor and biggest benefit for Rite Aid was the increases they saw in generic drug sales and prescriptions. This all the while maintaining lower production and operating costs.

The arguable turning point for Rite Aid was when it posted a surprise profit - when the majority of analysts were calling for a loss. After six gruesome years of mounting losses and the accumulation of debt seemingly piling up, Rite Aid stopped the bleeding and cut the losses. The surprise profit of $125 million, $.13 per share, in April of 2013 proved to be a monumental day in the future of Rite Aid as they fixed the drawn out injury with a band aid of its own. The 3000% performance in share price from the 2009 lows to the current performance speaks for itself.

Just last month CVS Caremark made a controversial decision to stop selling all tobacco items at all locations. It remains to be seen if Rite Aid or Walgreen will follow in the footsteps of CVS. Yet, it may be wise for Rite Aid to keep selling tobacco as it will potentially open up even more foot traffic to its stores. The consumers who used to stop at CVS to purchase a pack of smokes and possibility a few other basket items may indeed now turn to rival Rite Aid for their quick purchases. Rite Aid has the very real possibility of serious advantage here.

Rite Aid has been doing serious work to re-image its outdated stores. This remodeling initiative is resonating with the public and it is possible Rite Aid is adding to its customer count by the day. In the past, my mother was never fond of Rite Aid. It wasn't until they recently completed remodeling and celebrated a re-opening that began shopping consistently at Rite Aid. Needless to say, she is now a loyal customer at the local Rite Aid.

Undoubtedly Rite Aid is doing a fabulous job turning its business around and is certainly doing a fine job finally giving its shareholders the value they deserve. Rather than filing for bankruptcy, Rite Aid proved how resilient and strong it truly is when it battled out of a possible worst case scenario. A quick look at the one year chart will easily prove the recent and positive support behind Rite Aid. At this point, Rite Aid is doing just about everything right. The true turnaround, earnings growth, and stock performance speak for itself and you may want to consider going for the ride down Ride Aid's future path.

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.