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Rite Aid Corporation (RAD): Does This Drugstore Have More Upside?

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Rite Aid (RAD)Rite Aid Corporation (NYSE:RAD) is one of the nation’s largest drugstore chains, operating drugstores in 31 states across the U.S. and in the District of Columbia. Rite Aid Corporation (NYSE:RAD) continues to rally despite its declining same-store sales for April. In fact, Rite Aid’s share price has more than doubled since the beginning of the year, outperforming both Walgreen Company (NYSE:WAG) and CVS Caremark Corporation (NYSE:CVS). Walgreen has advanced 34.8%, while CVS Caremark Corporation (NYSE:CVS) has gained 20.6% year-to-date as of May 21.

Operational improvement

Rite Aid Corporation (NYSE:RAD) continues to be successful with its “wellness store” format, which features an enhanced selection of wellness products and services, as well as personalized guidance by Rite Aid wellness ambassadors.

In May, Rite Aid announced that Buffalo, N.Y. is the first market in which a majority of stores have been converted to “wellness-store” format. With the new wellness-store format, more products can be offered with easier accessibility and dedicated wellness ambassadors can bridge the gap between pharmacists and customers. Rite Aid had converted nearly 800 stores to the wellness format, with around 1,300 wellness ambassadors working to provide more personalized services.

Rite Aid Corporation (NYSE:RAD) also unveiled a new Riteaid.com website, redesigned to offer a more personalized experience to online customers. Overall, management continues to focus on more customized, higher quality services to patients and customers to strengthen the customer relationship, increase the customer retention rate, and better meet the changing needs of customers and patients.

Fundamental improvements

Rite Aid Corporation (NYSE:RAD) is still highly levered on its balance sheet, with $129.4 million in total cash and $6 billion in total debt as of March 2. By reducing the company’s net debt by $250 million and extending the maturity of nearly all of its debt to 2017, Rite Aid is becoming more flexible financially.

With two consecutive quarters of profit, analysts expect Rite Aid to generate $25.2 billion of revenue for 2013 with an EPS of $0.14. Rite Aid continues to surprise to the upside, as it has delivered four positive earnings surprises in the last four quarters.

Competition

Let’s compare Rite Aid Corporation (NYSE:RAD) to other pharmaceutical retailers, including Walgreen Company (NYSE:WAG) and CVS Caremark, as well as the industry average to see where it stands.

Rite Aid Walgreen CVS Caremark Industry Average
Market Cap $2.56 billion $47.51 billion $71.87 billion N/A
Revenue Growth (3 Year Average) -0.4 4.2 7.8 5.5
Operating Margin, %, ttm 2.6% 4.8% 6.1% 5.2%
Net Margin, %, ttm 0.4% 2.9% 3.3% 2.8%
ROE N/A 12.5 10.6 11.3
P/E 24.1 22.3 18.3 19.5
Forward P/E 6.7 14.5 13.1 14.6

Source: Morningstar and Google Finance

Walgreen is the nation’s largest drugstore chain. In March, Walgreen expanded its supply agreement with AmerisourceBergen Corp. (NYSE:ABC), one of North America’s largest pharmaceutical-services companies. Walgreen and Alliance Boots also received the required regulatory clearances for their equity investment in AmerisourceBergen Corp. (NYSE:ABC) on May 17.

Walgreen Company (NYSE:WAG) can negotiate better prices in bulk for drugs while having easier access to more specialized drugs by working with AmerisourceBergen Corp. (NYSE:ABC), which will help Walgreen boost its revenue and lower its costs in the long-term.

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