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.