Rite Aid Corporation (RAD) May Be Headed Downhill Again: Walgreen Company (WAG), Express Scripts Holding Company (ESRX)

For much of 2012, troubled pharmacy chain Rite Aid Corporation (NYSE:RAD) seemed to be pulling itself up by its bootstraps. It benefited from a dispute between Walgreen Company (NYSE:WAG) and Express Scripts Holding Company (NASDAQ:ESRX) that forced many former Walgreens patrons to fill their prescriptions elsewhere. Furthermore, the company saw improved sales at stores that it remodeled to a new “wellness” format. In Q3, these sales drivers culminated in Rite Aid’s first quarterly profit since 2007.

However, Walgreen Company (NYSE:WAG) and Express Scripts Holding Company (NASDAQ:ESRX) finally settled their long-running dispute last summer, and Walgreens stores rejoined the Express Scripts Holding Company (NASDAQ:ESRX) network on Sept. 15. Moreover, at the same time the company rolled out its first loyalty program, called “Balance Rewards”, as part of a push to win customers back from Rite Aid and CVS Caremark Corporation (NYSE:CVS) . While it’s too early to be sure, it appears that Walgreen’s resurgence is squeezing Rite Aid again. Rite Aid has a heavy debt load of roughly $6 billion and is much smaller than Walgreen and CVS — two major competitive disadvantages. Rite Aid is therefore a very risky investment and should probably be avoided.

Rite Aid Corporation (NYSE:RAD)Sales momentum tapers off
Rite Aid Corporation (NYSE:RAD)’s strong Q3 earnings were the result of 1.1% same-store-sales growth in the front end (non-prescription sales) and a 3.6% increase in prescription count in comparable stores. (Overall, same-store sales decreased 1.5% because of the introduction of new lower-cost generic drugs.) However, performance was strongest early in the quarter, before Walgreen Company (NYSE:WAG) had a chance to win back Express Scripts Holding Company (NASDAQ:ESRX) customers.

Q4′s performance could have been much worse, if not for the bad U.S. flu season. Front-end sales decreased 1% in December while prescription count increased 4.4%, including a 170-basis-point gain from sales of flu shots and flu-related prescriptions. January was even stronger, with the front end up 4.2% (2.4% attributable to flu treatments), and prescription count up 5% (3.4% resulting from flu-related prescriptions). However, Rite Aid’s momentum dissipated with the end of flu season. With no flu-related tailwind in February, front-end sales dropped by 1.3% and prescription count increased by a meager 0.3 %.

Turnarounds are expensive
Rite Aid Corporation (NYSE:RAD) once again faces two stronger competitors in Walgreen Company (NYSE:WAG) and CVS. Convenience is a key competitive advantage in the drugstore industry, giving larger chains such as Walgreen and CVS an edge. I’m skeptical that Rite Aid will be able to successfully fend off this competition in light of its fading sales momentum and weak balance sheet. A case in point is the rollout of the “wellness” format stores. While these stores outperform the company average, Rite Aid Corporation (NYSE:RAD) has been remodeling stores at a rate of only 110 to 120 per quarter. At that rate, it will take roughly a decade to convert all stores to the new format. However, Rite Aid’s weak balance sheet and limited cash flow make it difficult for the company to invest more aggressively in its stores. Ultimately, Rite Aid’s weaknesses outweigh its strengths and make it a poor long-term investment candidate compared with Walgreen and CVS.

The article Rite Aid May Be Headed Downhill Again originally appeared on Fool.com.

Fool contributor Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends Express Scripts and owns shares of Express Scripts.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Burger Kings: The 10 Most Expensive Burgers in the World

The 10 Most Ethnically Diverse Countries in the World

The 10 Most Exclusive Credit Cards in the World

The 10 Most Expensive Cruise Ships in the World

The 10 Fastest Supercomputers in the World

The 10 Best Countries for Doing Business 2015

6 Most Expensive Fruits In The World

10 Worst Airlines in the World

The 10 Biggest Tax Havens in the World to Stash Your Money

The 15 Most Murderous Countries in the World

10 Largest Colleges in the World: Bigger Isn’t Always Better

Comedians in Cars Getting Coffee: The 6 Comedians Seinfeld Needs to Interview

Easy Money: The 10 Most Successful Investors in the World Today

The 10 Most Deadly Diseases in the World Today

The 5 Most Expensive Luxury Motorhomes in the World

20 Largest Stock Exchanges in the World

6 Richest Painters In The World 2014

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!