Seeking Alpha
Research analyst, growth, value, IPOs
Profile| Send Message|
( followers)  

Summary

  • Shares of Rite Aid are up 217% in a year.
  • Acquisition of RediClinic brings growth to in-store sales and paves way for expansion into new states.
  • Increasing same store sales and higher profit margins with branded products.

A lot has changed since the last time I wrote about Rite Aid (NYSE:RAD). For starters, shares of the retail pharmacy are up 217% since my piece one year ago this week. The surge in Rite Aid's shares has been led by a return to profitability, lower debt, and an overall boom in the pharmacy market. Despite the sharp one-year move, I see more upside for Rite Aid as it continues to enhance the guest experience and capitalize on growing trends in the industry.

Rite Aid announced the acquisition of RediClinic, a Houston-based retail clinic chain. The brand has 30 locations found in grocery stores in Houston, Austin, and San Antonio. From the press release, RediClinic has provided health care help to over 1.5 million people. The acquisition was done by Rite Aid "to expand the current footprint in Texas and, in the near future, begin to bring its expertise in delivering convenient healthcare and wellness programs to Rite Aid customers in select Rite Aid market."

RediClinics are staffed by board certified nurses and feature physician assistants as well. The clinics can provide treatment for 30 common conditions and also write prescriptions for customers. A weight management program under the "Weigh Forward" brand name is also owned by RediClinic. This investment by Rite Aid makes perfect sense and is another step in the right direction to increase its sales and win over customers by providing a complete experience.

Sometimes investors can get new information or ideas from the question and answer segment of earnings calls. The fourth quarter for Rite Aid was no different. One question posed during the call was whether or not Rite Aid would now expand into Texas with pharmacies, since the newly acquired RediClinics are all there. The answer was a tentative no with this, "The real opportunity with RediClinic is to, I think, one bring it to Rite Aid stores…"

The takeaway here is Rite Aid believes it can grow RediClinic by putting them inside their already existing retail outlets. I think it's rather bullish that Rite Aid didn't simply acquire the brand to gain a foothold in Texas and actually believes it can gain sales by implementing the brand into existing locations. Over the next 18 to 24 months, Rite Aid expects to open 70 additional RediClinics.

The 70 appears to be just a start for Rite Aid's latest acquisition. When asked how many Rite Aid stores had the potential to have a RediClinic, the response was "a lot". Each RediClinic costs approximately $200,000 to build inside. The 70 to be opened will expand on that existing partnership and also begin entering Rite Aid stores.

On the recent acquisitions, Rite Aid had this to say, "We think the addition of Rite Aid Health Alliance and RediClinics to select wellness stores will provide a powerful healthcare experience in the communities that we serve." No pricing on the deals was given, but both acquisitions cost less than $100 million together.

Wellness 65 is another Rite Aid program that is capitalizing on a trend in healthcare. The increasing baby boom population is seeing more customers aged 65 and older. This rewards style program gives Rite Aid a way to earn loyalty from this key demographic and keep them coming to their stores. At the end of the fourth quarter, Rite Aid had 1.7 million registered Wellness 65 members.

These acquisitions and new product offerings are great for Rite Aid and its customers. They are also rewarding shareholders through increased sales and better customer loyalty. The new deals will continue to support growth and should bring strong returns going forward.

Back in 2013, I wrote about the NowClinic rollout inside Rite Aid stores. That expansion centered on virtual clinics inside 9 test stores and the expansion into 58 additional locations. Rite Aid was the first retail pharmacy to offer virtual clinics, with its start in 2011. The NowClinic offers 10 minute consultations for $45. The acquisition of RediClinic shows that Rite Aid continues to improve its retail experience for customers by offering medical advice and diagnosis.

Here is a look at how Rite Aid has grown since my March 2013 article against its rivals:

March 13, 2013

Rite Aid

Walgreens (NYSE:WAG)

CVS Caremark (NYSE:CVS)

Market Cap

$1.5 billion

$39.0 billion

$63.5 billion

2013 Revenue (Est.)

$25.4 billion

$73.4 billion

$125.3 billion

Number of Stores

4626

8030

7458

April 14, 2014

Rite Aid

Walgreens

CVS Caremark

Market Cap

$6.7 billion

$61.3 billion

$85.6 billion

Number of Stores

4600

8681

7660

2014 Revenue (est.)

$26.0 billion

$75.8 billion

$132.9 billion

2014 EPS (est.)

$0.37

$3.44

$4.47

2014 P/S

0.26

0.81

0.64

2014 P/E

19.0 x

18.7 x

16.2 x

2015 Revenue (est.)

$26.2 billion

$80.8 billion

$135.7 billion

2015 EPS (est.)

$0.49

$3.92

$5.02

2015 P/S

0.26

0.76

0.63

2015 P/E

14.4 x

16.4 x

14.5 x

As you can see, all three pharmacy companies have grown their market capitalizations at an impressive rate. Highlighted in the chart above is the fact that Rite Aid still sells with the lowest price to sales multiple on both a current and forward basis. In fact, Rite Aid's multiple is half of what its rivals are, suggesting a possible mis-pricing by investors. Going forward, Rite Aid also has the lowest price to earnings ratio, as it returns to its profitable ways and is expected to post earnings per share of $0.49 in fiscal 2015.

Another key to increase sales and margins is Rite Aid's focus on its Rite Aid branded products. The company saw 19% penetration in the fourth quarter, but believes it can grow that number going forward. Rite Aid even hired a new senior manager to be in charge of branding for the company.

Fourth-quarter revenue increased 2.2% to $6.6 billion. Total same store sales increased 2.1%. Same store sales for the pharmacy segment increased 3.5% in the quarter. Rite Aid lowered debt throughout the fiscal year and ended the year with total liquidity of $1.3 billion.

The fourth quarter marked the sixth consecutive quarter of profitability for Rite Aid. This small streak is a sign of great things to come and the chain is forecasting strong same store sales growth to power profits in the next fiscal year. Fiscal 2015 guidance calls for sales in the $26.0 to $26.5 billion range. EBITDA are expected to hit $1.325 to $1.400 billion. Same store sales are expected to rise 2.5% to 4.5%. Rite Aid believes earnings per share will hit $0.42.

Investors who followed my advice a year ago have seen impressive returns. However, with a bullish pharmacy market and Rite Aid's focus on the customer experience inside its stores, I believe there is more growth ahead. Investors should consider getting in on Rite Aid at under $8 a share, as the cheapest, best growth retail pharmacy name.

Source: Rite Aid Still Offers Upside With Acquisitions And In-Store Plans