Tuesday, March 13, 2012

Rite Aid: Smart or Lucky?

Well, hit me on the head and call me shorty! Good ol’ Rite Aid (NYSE: RAD) is showing signs of life.

Same store pharmacy sales are growing, the company is getting a bit trimmer, debt is (slowly) being paid off, and the stock price has doubled since October.

They have a long way to go to achieve actual business health, but I see a low risk of outright bankruptcy. Rite-Aid’s $6+ billion debt load remains a big deterrent to any potential acquirer … unless Walgreen (NYSE: WAG) gets very, very desperate.

Read on for my take on their reanimation. What do you think: Are they lucky or smart?

GROWING

Rite Aid’s same store prescription revenue growth has historically lagged both CVS retail (NYSE: CVS) and Walgreen (NYSE: WAG). In 2011, same store growth turned positive. And in 2012, Rite Aid is way ahead of Walgreen. CVS no longer reports monthly data, but its quarterly growth remains above Rite Aid. (Click to enlarge the chart.)

I see at least three explanations for this turnaround:
  • By finally closing underperforming stores, the overall average growth rate has improved. (See below.)
  • Rite Aid is picking up Express Scripts customers who are leaving Walgreens. (This hypothesis appears consistent with the increase during the past 5 months.)
  • Wellness+ is increasing prescription business.
I’m a bit skeptical of #3, especially since only 3 out of 10 wellness+ members even fill prescriptions at Rite Aid. (Last November, the company disclosed that 68% of wellness+ members only shop the store's front end.)

SHRINKING

About two years ago in What's Next for Rite-Aid, I suggested that Rite Aid needed to drop 1,000 stores and focus on being a super-regional player.

Well, they are getting a bit smaller. They are dropping about 50 stores per quarter. Total store count is down by 475 since the 2007 Brooks/Eckerd deal. They can shrink faster if the commercial real estate market improves, because the company’s non-cancelable leases could have significant value for other retailers if rents are below market.

The chart above is an amusing contrast to this January 2008 10-Q gem: "We will also continue our store development program with plans to open nearly 1,000 new and relocated stores over the next five years." Whoops!

AND STILL BORROWING

Rite Aid’s mountain of debt remains a big problem, although its obligations continue to be pushed further into the future. Here’s a look at Rite Aid’s debt profile as of last November.

I discuss one of these major bond offerings in Rite-Aid Postpones Judgment Day (Again). Last month, the company refinanced another $481.0 million in principal due 2015 into bonds due 2020. See Rite Aid Completes Offering of Senior Notes Due 2020. Like other junk bond issuers, Rite Aid is benefiting from the Fed’s ultra-low interest rate policy.

Don’t call it a comeback. They’ve been here for years.


6 comments:

  1. Nice try, but you can't polish a turd. I predict that RAD will go under within 5 years due to MACs.

    ReplyDelete
  2. Smart or Lucky?  As you always say .."it depends."  On the one hand they are really executing on the closure of non-performing stores (ie. stores located directly behind a Walgreens/CVS).  On the other hand, these past few months have been a truly lucky gift from Walgreens.  It will be very interesting to see what will happen to same store sales when (if) Walgreens and ESI reconcile.  RAD still has a long way to becoming a diversified pharmacy service provider, and their annual EPS projections are still negative through 2015 (at least).  With $6B in debt, I don't think they are out of the woods yet.

    ReplyDelete
  3. Dave MarleyMarch 13, 2012

    I think they dodged a bullet (for
    now) with some help from WAG. My prediction was for Chapter 11 in 2012 or for
    Wal-Mart to acquire and convert all the real estate to Wal-Mart express. If the
    FED ever raises rates, RAD is screwed…..of course I’m biased, I have one ½ mile
    away and have been praying for it’s demise for 3
    years.

    ReplyDelete
  4. Big story broke the day after this post: Banking on a Walgreen-Rite Aid Merger

    Looks like another vote for lucky!

    ReplyDelete
  5. ConsultantMarch 15, 2012

    The retail drugstore industry needs Rite Aid as they still help somewhat to keep things competitive between companies, not to mention providing jobs for tens of thousands of people throughout the US.  Outside of this the debt unfortunately goes all the way back to the 1999-2000 scandal when the company literally went into the toilet.  I still believe that part of their solution would be to reward the store employees with a piece of the company based on improved store performance.  You know, a bonus where they share financially from the store's positive P&L.  An incentive such as this has worked in many other retail settings.  I feel strong about this because it remains extremely difficult to walk into a Rite Aid and walk out thinking you just had a positive shopping experience - wait times are way too long; pharmacy personnel are short and curt to customers; many holes on everyday staple items and long lines at checkouts.  There is a simple cure - it just has to be implemented.

    ReplyDelete
  6. Dave MarleyMarch 15, 2012

     Even better.....there WAG across the street from the RAD. One would surely close, and the customer service at the other would be so bad we would make out nicely I'm sure.

    ReplyDelete

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