Rite-Aid: Not the right stock for me (or anyone)

Posted Dec 18th 2008 5:20PM by Steven Mallas
Filed under: Earnings Reports, Walgreen Co (WAG), CVS Corp (CVS), Rite Aid Corp (RAD)

Rite-Aid Corporation (NYSE: RAD) is the drugstore you should avoid. You can consider CVS Caremark (NYSE: CVS). You can take a look at Walgreen Company (NYSE: WAG). Rite-Aid? It's definitely not the cure for an ailing portfolio.

The troubled pharmacy chain is no stranger to losses and its public stock sits well below a buck a share. The third quarter numbers don't look too appealing. On an adjusted basis, Rite-Aid lost $0.15 per share. That may have been better than what analysts were calling for, namely a loss of $0.17 per share, but you have to look at the overall picture. Rite-Aid is closing stores, and that will hamper sales going forward (not to mention its brand equity, as well). Some will argue that it's all part of the turnaround. Sure, turnarounds can be ugly and painful, granted, but that doesn't mean you have to participate, hoping for the best. Why hop on this low-priced equity when integration of the Brooks Eckerd assets doesn't seem to be going very well?

According to the press release, there are a few positive statistics. Management says that overall same-store sales were up 1.4%, EBITDA increased over 8%, and operational cash flow was positive over the last three quarters (by comparison, cash was used for operations in the year-ago similar period). But the guidance isn't good, and I have no confidence in this management team to improve its GAAP performance. The company has to juice its sales, but with competition from stronger foes like CVS Caremark and Walgreen, I just don't see any silver lining to the Rite-Aid story. Turnaround specialists can make whatever argument they want. As for me, I'm going to make like the galaxy in Star Wars and stay far, far away from Rite-Aid's stock...

Disclosure: I don't own any company mentioned; positions can change at any time.

Tags: brooks eckerd, BrooksEckerd, CVS, CVS Caremark, CvsCaremark, drugstores, RAD, retail, Rite-Aid, WAG, Walgreen

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Reader Comments (Page 1 of 1)

12-18-2008 @ 5:58PM

Eric M.Ray said...

Walgreens,Rite Aid,CVS are hard-working companys. In many of their distribution plants much automation has been added in year 2008 this is made them streamline their people and company. There people's productivity is way up and the people are motivated. You people (writer)just keep preaching doom and gloom get over yourself there's real people behind the door. That work hard every day and support the company they work for.

12-18-2008 @ 9:13PM

jb8947 said...

I was doing business with Rite Aid and than they moved to a different location on the other side of town so I turn to Walgreens to have my prescription filled.
I found out that Rite Aid was ripping me off for $20 per month they told me my insurance would not cover 2 of my scripts.
Well last night I pick up my my pills and when she told me what my total bill was I questioned it and said why so cheap? we went over all my new prescriptions and she said that the insurance company did indeed cover the 2 scripts. what a way to ripe off the public. I am contacting the Atty. General office in my state and also emailing Rite Aid. I am on a very limited income and $20 may not sound much to complain about but for me it would pay for something I need. It's all about greed in this country. They are not happy with what the insurance companies give them so they turn and rip off hard working and retired people.

12-19-2008 @ 2:56PM

Satyr said...

No doubt, buying into RAD is a gamble. Whether or not it will pay off is unclear at this time. If they survive the next couple of years, there is probably an opportunity to make 5x to 25x on the investment.

Will they survive? Some of the answer lies in the overall economy and some comes down to whether the new management team can execute. Keep in mind that they have restructured their debt and there are no signifcant amounts due until 2010. In other words, liquidity is not an issue.

In terms of sales growth, RAD does seem to be holding its own against the competition during the last few months. In fact, they had better SSS than Walgreen, which has not happened for as long as I can remember. Closing underperforming stores is part of the reason they have been able to accomplish this. Note that while stores have closed, total sales have not really dropped. So I don't agree with the assumption that this will hamper sales. Besides, what good are sales if the margin is negative?

Finally, I disagree with the notion that store closures erode brand equity. The two concepts are wholly unrelated. And in fact if the stores being shuttered are in poor condition or weak locations, it probably increases brand equity. Honestly, it annoys me when journalists toss terms like this around with no regard to what they actually mean.