Rite Aid: Still A Buy

| About: Rite Aid (RAD)

Rite Aid (RAD) recently reported strong second-quarter results; it posted earnings of $33 million, as compared to a loss of $39 million a year ago. The reasons behind this robust growth include various measures, the company undertook to attract new customers and retain existing ones. With this, it has posted profits for the fourth successive quarters in a row.

Customer loyalty program- Retaining the customers

Our previous article discussed the dispute between Walgreen (WAG) and Express Scripts, which resulted in some Walgreen customers switching to its competitors. One such Competitor is Rite Aid, which benefited from this dispute, and gained traffic in its stores. Going forward, Rite Aid is adopting various customer loyalty programs and marketing campaigns to retain these new customers.

  • Its long-run customer loyalty program, Wellness+ now constitutes more than 40 million members and is about retaining customers and encouraging them to spend more. This was a key growth factor for the company's sales last year. Wellness+ members contributed 78% of front-end sales. Further, Rite Aid is planning to invest in a system update for Wellness+. This will help it connect better with customers. We believe Wellness+ will continue to be a key factor in the sales going forward.
  • Medicare part D is an annual federal program that provides various insurance coverage plans for the people above 65 as well as young disabled people. This program will start on October 7, and will run through December 7, during which, people will enroll themselves, and select from various plans in accordance with their medical requirements. Choosing the right insurance plan is critical for customers, so Rite Aid will offer its Medicare Advices to customers to help them select the appropriate Medicare part D for their needs.

With the adoption of various customer retention strategies, Rite Aid expects to retain approximately 75% of its customers.

Its biggest competitors, Walgreen and CVS Caremark (NYSE:CVS), are also accelerating their customer loyalty programs.

CVS Caremark is running its ExtraCare loyalty program, which has approximately 70 million active subscribers that accounted for 84% of the total front-end sales.

Along with this, its MinuteClinic Expansion will also help CVS retain customers. MinuteClinics are the small clinics available in CVS stores that conduct walk-in checkups for its customers. MinuteClinic is currently available in 678 stores, and the company plans to operate 1,500 MinuteClinics by the end of 2017. It will add a total of 150 new Clinics to its operations by the end of this year.

On the other hand, Walgreen lost 1.9% of its customers from the fourth quarter of 2012. To retain its customers, Walgreen is promoting its Balance reward program, which includes approximately 75 million members. Accompanied with this promotion, it is including a health clinic in its stores, just like CVS's MinuteClinic, to provide additional services to its customers. These strategies will attract new customers and retain them. The companies' loyalty programs pose a huge risk to Rite Aid's customer retention plan.

Improving bottom line for the company

Despite Rite Aid having more than $6 billion in debt, its bottom line is expected to improve due to the company's debt restructuring plans. It has been witnessing EBITDA improvements for 11 consecutive quarters.

Under its debt restructuring plan, it is adopting two strategies, debt repayment and refinancing. It recently refinanced $2.4 billion of its debt. This refinancing will save approximately $49 million annually, and is expected to impact earnings by $0.04 per share this year.

Secondly, it repaid $250 million of debt with its strong free cash flows in 2013, and is expected to repay approximately $700 million in 2014. This will reduce Rite Aid's debt obligation, leading toward less interest payments.

Since it will be repaying its debt along with the savings from refinancing, Rite Aid has re-estimated its earnings in the range of $0.18 to $0.27 for this fiscal year, up from the previous estimation of $0.01 to $0.16.

Bottom line

Rite Aid has shown an incredible earnings surprise by beating the analyst estimates, and with its debt restructuring strategies, we expect its bottom line to improve. Look at the strong future potential and growth fundamentals; we recommend this stock to be a buy.

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

Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Shweta Dubey, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

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