$RAD/ Rite Aid's stock has been in freefall mode ever since its merger with Walgreens Boots Alliance fell through in late June, and subsequently metamorphosed into an asset sale. The unimpeded stampede out of this embattled drugstore-chain stock, though, may be way overdone at this point, for a couple of reasons.
A pharmacist hands a bag containing a prescription to a customer.
IMAGE SOURCE: GETTY IMAGES.
First off, Rite Aid is walking away with roughly $5.5 billion from its asset sale with Walgreens. That's a nice chunk of change that can be used to both help the company get out from underneath its crushing debt levels and remodel its remaining stores to install attractive features such as the Wellness layout.
Another key issue is that Rite Aid can now buy generic drugs sourced through Walgreens at cost for a period of 10 years. This arguably under-appreciated aspect of this asset sale should help the company improve margins in a meaningful way. Generic drugs, after all, have steadily made up a larger and larger percentage of total U.S. prescriptions over the past decade, and this trend is expected to continue as more branded drugs lose patent protection.
But Rite Aid is still in a difficult position. The company lacks the size necessary to negotiate from a position of strength with third-party payers regarding prescription drug prices, and this divestiture of around half its stores certainly doesn't help with this touchstone issue.
But this sizable influx of cash should at least help it delever, regroup, and perhaps return to growth as a more efficient operation overall. So if management plays its cards right, Rite Aid could conceivably transform into an outstanding comeback story.
