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Rite Aid (RAD) Is Good Medicine

|About: Rite Aid Corporation (RAD), Includes: RAD

Rite Aid (NYSE:RAD) is Good Medicine

Demand for pharmaceuticals will likely increase as Baby Boomers age and healthcare reform kicks in. The drugstore industry, currently about $250 billion in the U.S., will likely rise as a result and Rite Aid (RAD, $3.43, down $0.01) stands to benefit.

 

The retail drugstore chain based in Camp Hill, Pennsylvania operated 4,615 stores in 31 states and the District of Columbia as of June 20, 2013. It is one of the largest drugstore chains on the East Coast and the fifth largest drugstore chains in the U.S. The company makes most of its money from the sale of prescription drugs, but it also sells non-medical items such as cosmetics and greeting cards.

Founder Alexander Grass' father ran a business manufacturing hats and caps but died when Grass was 9. Since the business had a lot of debt, the family was left with little income in the middle of the Great Depression. After the family moved to Miami Beach, Florida in 1936, Grass worked a number of small jobs, including at a local drugstore. In early 1945, he joined the Navy to help out in the war effort, but the war ended before he even finished boot cap. He was discharged in August of 1946, and went on to obtain a law degree from the University of Florida Law School in 1949 using the G.I. Bill to help pay for school.

After marrying, he moved back to Pennsylvania to pursue a legal career in tax law with the Internal Revenue Service, but a scandal within the IRS thwarted that plan. Imagine that, a scandal at the IRS.

He started working for Lehrman & Sons, his father-in-law's grocery distribution company in Pennsylvania. Grass helped increase sales at the business by adding more appealing programs and replacing most of the sales force. Noticing a lack of stores selling competitively priced health and beauty products in Pennsylvania, he launched Rack Rite Distributors as a subsidiary of Lehrman & Sons in 1958. The subsidiary rented and stocked racks of non-grocery items for grocery stores. In 1962, Rack Rite opened its first store, Thrif D Discount Center, in Scranton, Pennsylvania as a health and beauty aids store but no pharmacy. This store would become the birthplace of Rite Aid.

In its first year, the store had sales of more than a quarter-million dollars, far exceeding expectations. After opening the third Thrif D Discount Center store, the retail stores were making more money than the other two businesses combined. At that point, Grass decided to focus mainly on the retail health and beauty aid business. By 1965, the Thrif D chain had 21 outlets, and added a pharmacy in their 22nd store. In 1968, the chain changed its name to Rite Aid after the name of their lead product. Its parent company, Lehrman & Sons, reorganized and became Super Rite Foods, a subsidiary of Rite Aid. Rite Aid then went public on the American Stock Exchange at $25 a share. With increased profits from prescription sales, the chain moved to the New York Stock Exchange in 1970.

In 1969, it purchased rival chain the Daw Drug Company, which doubled Rite Aid's size. By 1981, it operated 267 locations in 10 states and was the 3rd largest drugstore in the United States. In 1983, its revenues exceeded $1 billion annually. Also that year, it spun off Super Rite Foods. A 420-store acquisition along the east coast and an acquisition of Ohio-based drugstore Gray Drug expanded Rite Aid to over 2,000 stores in 1987. Through many more acquisitions, it became the number one drugstore in the country in store count and the number two drugstore in terms of revenue in 1995. That year, Alexander Grass retired as chairman and chief executive.

Martin Grass, son of Alexander Grass, became CEO and Chairman. Martin Grass pursued a strategy of rapid expansion and acquisition, but ended up hurting the chain and the brand. He was fired by the company in 1999, after he was connected to a $1.6 billion accounting scandal that nearly destroyed the company. He was convicted of overstating Rite Aid's earnings during the 1990s and sentenced to eight years in federal prison.

In an attempt to turn the company around, Rite Aid partnered with General Nutrition Companies (NYSE:GNC), which makes vitamin and mineral supplements, in January 1999, bringing GNC mini-stores within Rite Aid pharmacies. Such stores saw a boost in sales. Rite Aid operated 1,726 GNC mini-stores as of February 28, 2009 and plans to open an additional 626 stores by December 2014.

In August 2007, Rite Aid acquired approximately 1,850 Brooks/Eckerd Stores throughout the United States. In December of that year, it was reported that Rite Aid had record-breaking losses that year, despite the acquisition of Brooks and Eckerd chains. The following fiscal quarter saw an increase in revenue but a sharp fall in net income. Shares fell over 75% between September 2007 and September 2008, partly due to the Credit Crisis.

 

On April 18, 2010, the company started offering a wellness+ card program, a shopping rewards card program designed to boost loyalty. Membership was free, and benefits, when accumulating 500 points, included free health and wellness benefits as well as 10% shopping and prescription drug discounts. Members accumulate one point for every $1 they spend or 25 points for each prescription refill. Members would be automatically eligible for an expanded pharmacist consultation to give them the extra support they need to maintain their health and wellness.

The company's products can be separated into front end products and prescription drugs. Front end products include over-the-counter medications, cosmetics, greeting cards, photo processing, and other products. They have a higher profit margin than prescription drugs. In fiscal 2009, front-end products represented 32.8% of the company's revenue. But generic drugs also produce higher profit margins than brand-name drugs. As $31 billion of brand-name drugs lose patent, the company may see improved margins.

A partnership with drugstore.com in June 1999 allowed customers of Rite Aid to place medical prescription orders online for same-day, in-store pickup, an important step in its digital strategy. Rite Aid got the rights to prescriptions ordered online for pick up at a Rite Aid store, and Drugstore.com received $10 million from Rite Aid. Drugstore.com also was paid to market Rite Aid prescriptions.

In the year ending February 28, 2010, the company earned $26.2 billion in revenues, up 7.8% from the year earlier. However, its net loss grew from $1.1 billion to $2.9 billion over the same time period. Between August 2009 and February 2010, as part of cost-cutting measures, it laid off 6,500 employees, or 6% of its workforce.

In December 2012, the company recorded its first quarterly profit in more than five years, helped by growth in the number of prescriptions filled and higher comparable sales of general merchandise at its stores. The company reported net income of $60.5 million, or 7 cents a share, for the 3rd quarter ending December 1st, compared to a loss of $54.5 million, or -6 cents a share, in the same period a year ago. Analysts on average expected a loss of 3 cents a share.

Walgreen (WAG) operates the largest chain of drug stores in the US, with over 8,000 locations in the United States. CVS Caremark (NYSE:CVS) is second and Rite Aid is third. But based on pharmacy sales, CVS is #1 followed by Walgreen, Express Scripts (NASDAQ:ESRX), Walmart (NYSE:WMT) pharmacy, and Rite Aid. There has been speculation that Walmart might buy Rite Aid, but so far Walmart has declined interest. Below is the market share of the top five drugstores based on pharmacy sales.

CVS

WAG

ESRX

WMT

RAD

22.8%

15.5%

11.9%

6.5%

6.4%

On June 20, 2013, Rite Aidreported its third straight quarterly profit, as generic drugs and expense reductions continued to help the drugstore chain. It earned $91 million, or 9 cents per share, after paying preferred dividends, in the quarter that ended June 1. That compares to a loss of $30.7 million, or -3 cents per share, in last year's quarter, when Rite Aid booked a $21 million charge for lawsuit settlements. Revenue fell about 3% to $6.29 billion from $6.47 billion a year ago. Analysts expected, on average, earnings of 8 cents per share on about $6.29 billion in revenue.

The drugstore chain said that it now expects fiscal 2014 earnings of between a penny and 16 cents per share. That is down from its forecast in April for earnings ranging between 4 cents and 20 cents per share. The company still expects revenue of between $24.9 billion and $25.3 billion. Analysts expect, on average, earnings of 17 cents per share on $25.24 billion in revenue.

According to the 13F SEC filing for the 2nd quarter ended June 30th, billionaire hedge fund manager David Einhorn's Greenlight Capital, which overseas $8 billion, acquired 20.2 million shares of Rite Aid during the quarter. According to the filing, he bought shares three times:

  • 13,052,600 shares at $2.86 for a total of $37,330,000
  • 2,872,300 shares at $2.86 for a total of $8,215,000
  • 4,275,100 shares at $2.86 for a total of $12,227,000

A few weeks ago, Rite Aid released same-store sales for the month of July. For the four weeks ended July 27th, same-store sales increased 1.3% from the prior-year period. July front-end same-store sales rose 0.7%; pharmacy same-store sales rose 1.6%; and prescription same-store sales rose 0.4% from the prior-year period. Total drugstore sales for the four-week period increased 0.9% to $1.898 billion compared to $1.881 billion for the same period last year. Prescription sales at comparable stores accounted for 67.7% of those sales.

However, same-store sales for the 21-week period ended July 27th fell 1.2% from the prior-year period. Front-end same-store sales rose 0.4% while pharmacy same store sales fell 1.9%. Prescription sales at comparable stores were flat compared to the prior-year period. Total drugstore sales fell 1.5% with sales of $10.089 billion compared to $10.247 billion for the same period last year. Prescription sales represented 67.5% of those sales.

The company reports 2nd quarter earnings on Thursday, September 19th before the bell. Analysts estimate the company will earn $0.02 per share on $6.23 billion. As shown in the graphs below, analysts' revenue and earnings estimates seem easily attainable from previous quarter. In fact, the earnings estimate seems easy to beat.

 

On Tuesday, August 14th, 2,000 September 4 calls were purchased for $0.10 a contract. Expiration is September 20th. Taking the current price of $3.52, shares must rise 13.6% by the expiration date, or about 0.5% per day. Taking a look at Friday's September call options, the 3.50 and 4.00 strike prices have the highest open interest.

Rite Aid recently stated that seasonal flu shots are now available at all of its more than 4,600 pharmacies across the United States. Flu season is an annually-recurring time period characterized by the prevalence of outbreaks of influenza (flu). The season occurs during the cold half of the year. In the United States, the flu season is considered October through May, and activity usually peaks in February. Last year, the company gave out more than 2 million flu vaccines. Flu sales helped the drugstore chain post a 0.3% increase in same-store sales for the month of January. The shots were $29.99 each last year and are covered by many insurance plans, including Medicare.

 

 

 

RAD

CVS

ESRX

WAG

Market Cap ($billion)

3.20

71.95

52.61

46.15

Price/Cash

29.38

60.97

39.26

15.33

Price/Debt

0.54

7.67

3.68

7.24

Price/Assets

0.45

1.09

0.96

1.29

Debt/Equity

-2.51

0.24

0.60

0.34

Price/Sales

0.13

0.58

0.49

0.65

Price/Book

-1.36

1.85

2.18

2.44

Trailing PE

14.49

17.38

29.72

21.36

Forward PE

13.54

13.16

13.08

13.80

PEG

2.72

1.05

0.99

1.22

Price/Revenue

0.13

0.58

0.49

0.65

Gross Margin (%)

29.31

18.90

7.96

29.10

Profit Margin (%)

0.94

3.41

1.70

3.01

Operating Margin (%)

3.36

6.30

3.92

4.82

Revenue Growth (%)

-2.70

1.70

-3.90

3.20

Return on Assets (%)

7.56

7.38

4.65

6.82

Sales Growth (%)

-2.80

15.00

103.50

-0.80

Current Ratio

1.74

1.57

0.78

1.30

EV/Revenue

0.37

0.65

0.61

0.69

EV/EBITDA

7.48

8.34

10.13

10.72

Inst. Ownership (%)

56.10

85.10

86.20

63.00

Inst. Trading (%)

12.24

-0.66

-0.40

-0.88

Insider Ownership (%)

12.80

0.10

0.20

0.10

Insider Trading (%)

-39.05

20.77

-13.98

15.05

Short Interest (%)

3.04

0.89

1.47

1.80

Short Change (%)

-27.83

-12.94

4.29

2.15

Source: Numbers calculated from Yahoo Finance and Finviz.com

CVS = CVS Caremark

ESRX = Express Scripts

WAG = Walgreen

Compared to its top competitors, the stock seems undervalued, with positives (green) outnumbering negatives (red) 16 to 9. Value-wise, the stock looks cheap, with a low price/sales, price/assets, trailing PE, and EV/EBITDA. Gross margin is also very high. And institutions are buying in large amounts. Plus, short sellers are covering Why? Do they think the stock will rise?

The only big red flags are negative revenue growth, very low profit margin, very high PEG, and insider selling. Its EV/EBITDA also seems a little high for a takeover target.

 

The long-term graph shows that the price is at resistance and could head down to support. If the price breaks its 1st resistance, it will probably head to 2nd resistance at $4.89. If it breaks this too, it will likely head to 3rd resistance at $6.30.

At $3+, the stock is slightly above its high target of $3.50 made by the 6 analysts recorded by Thomson/First Call. Mean target is $2.89, median target is $3.05, and low target is $2.00. Using a scale of 1.0 as a strong buy and 5.0 as a sell, the average rating of the stock was 2.4, unchanged from a week ago.

 

Current Month

Last Month

Two Months Ago

Three Months Ago

Strong Buy

1

1

1

1

Buy

2

3

3

3

Hold

3

4

4

4

Underperform

0

0

0

0

Sell

0

0

0

0

We like the company as a longer-term investment.

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. I have no business relationship with any company whose stock is mentioned in this article.