On Thursday morning, Rite Aid Corporation (NYSE:RAD) posted a fourth-quarter EPS of $0.13, which beat the average analyst estimate for a slight loss. This quarterly profit — the second in a row for Rite Aid Corporation (NYSE:RAD) — allowed the company to post its first full year of profitability since 2007. This surprisingly strong performance caused Rite Aid Corporation (NYSE:RAD) shares to soar nearly 30% over the course of Thursday and Friday, to highs not seen for almost five years.
Nevertheless, Rite Aid Corporation (NYSE:RAD)’s relatively strong fiscal year 2013 results were driven by a number of one-time or short-term benefits. These items helped mask the company’s fundamental competitive disadvantages vis-a-vis larger rivals Walgreen Company (NYSE:WAG) and CVS Caremark Corporation (NYSE:CVS). While Rite Aid Corporation (NYSE:RAD) could generate impressive stock returns in a best-case scenario, the company’s poor competitive positioning creates substantial long-term risk for shareholders. Therefore, I still think investors would be wise to avoid the stock.
Strong results, modest outlook
Rite Aid Corporation (NYSE:RAD)’s profit was driven by three major one-time or short-term impacts. First, the company gained a number of new customers from Walgreen Company (NYSE:WAG)’s dispute with pharmacy benefits manager Express Scripts Holding Company (NASDAQ:ESRX). Walgreen’s stores rejoined the Express Scripts Holding Company (NASDAQ:ESRX) network as of Sept. 15, and customers are beginning to trickle back, but Rite Aid still saw a significant benefit from the dispute in fiscal year 2013. On Rite Aid’s Thursday morning conference call, executives estimated the full-year benefit at $70 million — more than half of the company’s fiscal year 2013 profit.
Second, Rite Aid — as well as other pharmacy chains — gained additional sales this quarter from a particularly bad flu season. For example, in January, Rite Aid reported a 5% increase in prescription count, with more than two-thirds of the increase attributable to flu shots and flu-related prescriptions. Last, pharmacy chains achieved higher profit margins this year due to the introduction of a number of new generic drugs, which are more profitable than brand-name drugs. Over time, reductions in insurance reimbursement rates will negate this margin increase.
Looking forward, Rite Aid expects same-store sales, adjusted EBITDA, and net income to all be roughly flat next year. Management called attention to the loss of some Express Scripts customers who will return to Walgreen’s, fewer generic introductions, and reductions in reimbursement rates as major headwinds for fiscal year 2014. If Rite Aid executives are being overly conservative with their guidance, then the stock could continue to rise. However, based on Rite Aid’s fairly uninspiring March sales results, I think the guidance for flat sales and earnings next year is very appropriate.