Buy Rite Aid Ahead Of Earnings

| About: Rite Aid (RAD)


Can Rite Aid emerge out a its period of declining comparable same-store sales?

The company has to convince investors that this ongoing restructuring efforts can add long-term value.

Management deserves credit for turning things around as quickly as they have.

On April 10, drugstore giant Rite Aid (NYSE:RAD) will announced fourth-quarter and full-year 2014 results. Expectations have grown, given the fact that the company is coming off its first year of profitability in five years. Investors are eager to learn if the trend can continue.

Profits are expected dip slightly. But the Street seems in-tuned with management's restructuring plans, including several store re-modeling initiative. But with efficient cost management and strict attention to detail, Rite Aid has nursed its business back to health, including posting five consecutive quarters profit growth.

All told, management deserves credit for turning things around as quickly as they have. And the company has assured investors that its long term goals remain intact. But Thursday's results should yield all the evidence investors need.

The Street will be looking for 5 cents in earnings per share. Meanwhile, for the full fiscal year, analysts are expecting earnings of 21 cents per share. Likewise, revenue is expected to surpass last year's mark by 1% and arrive at $6.54 billion for the quarter. For the full fiscal year, analysts are looking for revenue 0f $25.43 billion.

It's worth noting, however, that third-quarter revenue declined 2% year over year to $6.36 billion. This followed a 1% increase in the second quarter. By contrast, in the most recent quarter, rival CVS (NYSE:CVS) reported a nearly 5% revenue increase. Sales jumped from $31.4 billion to $32.8 billion.

Unlike Rite Aid, CVS benefited greatly from strong comparable-store sales, which increased 4% year over year. CVS management benefited from higher prescriptions and growth in its pharmacy business. All of which served to offset lower front-end sales.

Not far behind was Walgreens (WAG), which posted a 5% jump in revenue from $18.6 billion to $19.6 billion. Although the company missed slightly on earnings, revenue was nonetheless strong. As with CVS, Walgreen's strong revenue number was the effect of a 4.3% jump in comparable-store sales. Can Rite Aid keep up?

Management has ambition of steering the company towards a focus of health and wellness. From my vantage point, the main driver for Rite Aid's stock will be the extent of management's cost-cutting measures and how quickly they can advance the business to more efficient status.

Analysts believe the company is heading in the right direction. As of this writing, 60% of analysts who cover the company has a buy rating on the stock. And we believe that the company is well-positioned to reap the rewards of strong growth in the pharmaceutical industry. Not to mention the potential impact of the Affordable Care Act, which is expected to affect more aging Americans.

With the stock trading at just 17 times 2015 estimates, we like Rite Aid's long-term potential. Assuming the on-going efficiency benefits will boost the bottom line this year and next, we project these shares to reach $10 to $12 in the next 12 to 18 months.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Wall Street Playbook's retail sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.