Rite Aid's Troubles Make It A Bankruptcy Candidate

Jan. 9.12 | About: Rite Aid (RAD)

In 2011, Rite Aid Corporation (NYSE:RAD) was ranked 100th in the Fortune 500. Its revenue has stayed pretty constant over the last few years, and the company has failed to be profitable as well. To add insult to injury, CVS Caremark (NYSE:CVS) and Walgreen (WAG) have been profitable, so investors are led to believe that Rite Aid's struggles are company-specific. With over $25 billion in yearly revenues, the company has a market cap of only $1.2 billion. In this article, I explain why Rite Aid is doomed to fail and investors should avoid the stock at all costs.

On its most recent balance sheet (November 26, 2011), Rite Aid reported $148 million in cash. The book value of its assets was $7.56 billion compared to liabilities of $9.96 billion. Of this, $6.31 billion is debt. By simply looking at the balance sheet, Ride Aid does not have a sustainable business.

Rite Aid is going to have a lot of trouble with raising capital to avoid a bankruptcy. The company has only $3.4 billion in inventory, which is small compared to its debt and its brand is virtually worthless. There are plenty of profitable retailers present in the market that investors would rather put their money in. Walgreen and CVS are the first that come to mind, but there are a lot of other retailers who have what Rite Aid has, including Wal-Mart Stores (NYSE:WMT), Target (NYSE:TGT), Kroger (NYSE:KR), and Safeway (NYSE:SWY). There is no part of Rite Aid that should make any investor think there is potential in the future.

Inevitably, Rite Aid's stores will either close or be sold off to competitors. The question for stockholders is if the liquidation of Rite Aid will be able to pay off all of its liabilities. Right now, the answer is a resounding no. The company looks very similar to how Border's looked before its bankruptcy. As investors clung to hope, they soon learned that the brand is worthless and its assets were virtually worthless.

Retailing is an industry know to have almost no moats, and Rite Aid is a company with no competitive advantage. I am very sure that after the bankruptcy talk of Eastman Kodak (EK) settles down, Rite Aid will become the next big company that the media will pin as a major candidate for bankruptcy. I put a strong sell recommendation on RAD and put a target price of $0.50 on the stock.

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