Rite Aid Corp (fka RADCQ)

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Will Rite Aid's Turnaround Offer More Upside?

By Investopedia | April 10, 2015 AAA |


Saddled with debt from prior acquisitions and facing slipping sales tied to the great recession, Rite Aid (NYSE: RAD) investors worried that the company was teetering on the brink of bankruptcy just a few years ago.

Those worries now appear to have been overblown given that cost cuts, a debt restructuring, and rising demand tied to aging baby boomers and health insurance reform has returned Rite Aid to profitability. Since Rite Aid recently reported its fiscal year end results, let's take a closer look and see if investors could be in for more good news.

Delivering growth


Rite Aid's renaissance continued during last year with the company reporting that its sales grew 3.9% to $26.5 billion in fiscal year 2015. That growth came thanks to same store sales growth at the back and front of its stores.

During fiscal year 2015, pharmacy sales at stores open at least one year grew by 5.8% and front end merchandise sales increased by 1.2%. The pharmacy performance was driven by increasing script volume, led by rising demand tied to Medicaid expansion.

Since Medicaid expansion kicked off in 2013, an additional 11.2 million people have become enrolled in the program, many of whom live in states in which Rite Aid operates stores. That's led to rising Medicaid prescription volume, which has more than offset headwinds tied to Medicaid's lower drug reimbursement rates.

As a result, Rite Aid reports that rising sales lifted its adjusted earnings per share during to $0.39 in fiscal year 2015, up from $0.23 last year.

Investing in the future


The fiscal year 2015 performance marks the third consecutive year of profitability and the first year in which the company's strategy shifts from contraction back to expansion.

One of Rite Aid's biggest transformations over the past few years has occurred in its store footprint.

After becoming too concentrated in certain markets following its Eckerd acquisition, the company continues to close stores. Last year, the number of Rite Aid locations dropped by 17 to 4,570 stores, and for comparison, Rite Aid operated 4,667 stores in fiscal year 2012.

In addition to eliminating overlapping locations, the company is also reinvigorating its remaining locations by remodeling them to its Wellness format -- a format that has proven to be incredibly successful.

During the fourth quarter, front-end same store sales growth in Wellness remodeled locations was 3.48% better than in non-Wellness remodeled stores, and pharmacy script growth was 2.26% higher than in non-Wellness locations.

To capitalize on that, the company bumped up spending on remodels, and as a result, 1,634 stores, or 36% of Rite Aid locations, have been upgraded to the Wellness format.

Rite Aid is also leaping back into acquisitions that could drive sales higher.

Last April, the company entered the in-store healthcare clinic market by acquiring RediClinic, a Texas-based operator of 30 clinics in H.E.B. supermarkets.

RediClinic gave Rite Aid a proven model it's leveraging to shorten its learning curve, allowing it to roll out healthcare clinics more quickly within its own stores. So far, Rite Aid has already opened 24 RediClinics in its own stores, including locations in Philadelphia, Baltimore, Washington, D.C., and, most recently, Seattle. By the end of the current quarter, Rite Aid expects to operate 35 RediClinics in Rite Aid stores and although that remains a fraction of the number of clinics operated by rivals, it still marks a significant step in the right direction. In fiscal year 2016, Rite Aid expects that it will open an additional 50 in-store clinics.


Rite Aid also moved into the pharmacy benefit management business in February when it announced that it will be acquiring EnvisionRx. That deal is costing Rite Aid roughly $2 billion, but it will give Rite Aid more buying power and greater opportunities to tie in its services with healthcare payers, such as insurers and employers.

Investing in growth isn't cheap


The company plans to spend $650 million in fiscal year 2016, including $105 million on new stores and relocations, $225 million on Wellness remodels, and about $100 million on other programs, such as prescription file buys.

Last year, the company opened its first new store in five years, and this year Rite Aid expects to open 11 new stores. Rite Aid also plans to relocate 33 stores and remodel 400 stores, as well as shutter 40 underperforming stores in a bid to improve profitability.

Those investments, alongside favorable demographics that are sparking prescription volume, has Rite Aid guiding for total fiscal year 2016 sales of between $26.9 billion-$27.4 billion. That should allow the company to deliver net income of between $190 million-$275 million, or between $0.19-$0.27 per share, net of income tax expense. That's a wide range, but Rite Aid should be able to narrow it as the year progresses.

Looking ahead


There are some pretty solid tailwinds that should help Rite Aid deliver growth over the coming years, but the company does pose some risk.

In order to finance its EnvisionRx acquisition, it issued $1.8 billion of 6.125% guaranteed unsecured notes that mature in 2023. That means Rite Aid's interest expense is going to head higher, unless it can offset that increase by refinancing or paying down other preexisting debt.

Assuming the EnvisionRx deal goes off without a hitch, the company will update its guidance for 2016 this fall to include any positive or negative impact tied to its integration. That could provide a tailwind or headwind that investors ought to be aware of. Also, investors should recognize that even after adding in expectations for income tax expense, the company's fiscal year 2016 guidance of between $0.32-$0.45 isn't overly impressive versus fiscal year 2015. For that reason, Rite Aid could have some volatility again this year, but long term investors might want to consider any sell-off as an opportunity to buy.


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