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Drugstore chain Rite Aid (RAD) reported Monday that its same-store sales fell 1.8% in December, marking the seventh consecutive month of declines. Same-store front-end sales dropped 2.3% for the period ended Dec. 26, while pharmacy sales contracted by 1.5%. Total sales pulled back 3% to $2.09 billion.
Pharmacy sales had been fairly resilient of late, but the decline in the most recent month was attributed to the introduction of a growing number of generic drugs. Additionally, the number of prescriptions filled on a same-store basis dropped by 0.2%.
RAD fell roughly 2% Monday morning in the wake of the news, but the stock seems to have found a temporary foothold above its 10-month moving average. This formerly resistant trendline has provided a floor for the shares since April 2009.
In addition to this technical backstop, a healthy amount of pessimism surrounding the stock could also help limit RAD's losses. A substantial 4% of the equity's float has been sold short, and RAD's 10-day International Securities Exchange (ISE) put/call volume ratio of 0.18 ranks in the 95th annual percentile. In other words, option players on this exchange have bought to open puts over calls at a faster pace just 5% of the time during the past year.
But, while there's already plenty of bearish sentiment priced into the shares, RAD's path higher isn't exactly clear. In the front-month series, peak call open interest of 46,091 contracts lies at the deep out-of-the-money January 2.50 strike. As the hedges related to this open interest are unwound, it could create a headwind for the stock.
Elizabeth Harrow is a senior equities 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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