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Rite Aid plunges after slashing full-year outlook

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Rite Aid Corp. (NYSE: RAD) wallowed in the red Thursday morning, after the drugstore chain disappointed Wall Street with its second-quarter earnings and full-year guidance.

Rite Aid said its quarterly loss narrowed to $116 million, or 14 cents per share, while revenue dwindled 2.7% to $6.3 billion. Same-store sales dipped 1.1%, while gross margin contracted from 27.4% to 26.7%.

While the loss was slimmer than analysts expected (consensus forecasts called for a 16-cent deficit), Rite Aid's outlook for the rest of the fiscal year overshadowed its second-quarter results. The retail chain said it now expects to lose 48 cents to 74 cents per share in 2009, with revenue ranging between $25.7 billion and $26.2 billion. Previously, RAD was projecting a narrower full-year loss of 33 cents to 59 cents per share on revenue of $26.3 billion to $26.7 billion.

Traders were quick to punish the stock, sending Rite Aid shares to a loss of more than 14% at their intraday nadir of $1.67. However, the low-priced security has gained 529% year-to-date, and Thursday's pullback simply brings the stock back in touch with support at its 10-week moving average. This intermediate-term trendline has guided RAD higher since late March.

If short sellers decide to take profits in light of the post-earnings plunge, the effects of short-covering support could also help RAD find a floor. Short interest accounts for 2.63% of the equity's available float, or roughly three times its average daily trading volume.

Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.

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Last updated: November 27, 2009: 06:21 AM

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