As of now, such a deal seems unlikely. But, with Target’s stock trading 12% off its 52-week high, acquiring Rite Aid would create optimism, and allow Target to acquire $25 billion in revenue, 4,000 stores, and at a fairly good price.
A not shocking scenario
The Kroger Co. (NYSE:KR)’s sudden rise in 2013 has been unexpected by most, but a sudden boost in margins and impressive growth has led to a one-year 75% stock gain. While store traffic has played a large role in the stock’s rally, Kroger’s pharmacy is also a hidden gem.
Last year, Kroger’s pharmacy created $7.8 billion of the company’s $96 billion in sales. Therefore, Rx was more than 8% of total sales, and due to the impressive margin growth that we’ve seen from Walgreen, CVS, and of course Rite Aid, one has to believe that some of Kroger’s performance is tied to its pharmacy.
Kroger has 2,094 stores that have pharmacies, and acquiring Rite Aid could triple that number. With that said, much of Kroger’s operational approach has been to become larger and more retail focused, with more discretionary products. While acquiring Rite Aid would contradict this approach, it might give the company a more diversified approach, operating with small, medium, and large-sized stores.
Due to Kroger’s presence with pharmacy, and the ability to renovate Rite Aid stores to focus on grocery, I think Rite Aid becomes an intriguing possibility for Kroger, one that wouldn’t be shocking.
Final thoughts
The “mini-store” approach is interesting, because it can allow large companies to focus solely on best-selling products along with targeting specific customers, those who prefer smaller or dollar stores. Hence, it is a space that becomes attractive to many companies, not just the three noted, but also Cardinal Health, Safeway, Publix, Costco, etc.
In regards to Rite Aid, it is a $4.25 billion company that has $25 billion in annual sales. Thus, it is a massive company that is seeing drastic bottom-line improvements – evident by its stock performance. With that said, the government would likely be hesitant to approve a merger between Rite Aid and either of its larger competitors – as seen with AT&T/T-Mobile. However, a merger of Rite Aid with a retail company that has a pharmacy presence does seem possible, and is both a rumor, and a development to monitor in the coming year.
The article 3 Companies That Might Acquire Rite Aid originally appeared on Fool.com and is written by Brian Nichols.
Brian Nichols owns RAD and KR. The Motley Fool has no position in any of the stocks mentioned.
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