Rite Aid Corporation (NYSE:RAD) has spent much of the past decade weighed down by a heavy debt load that has made competing against industry leader Walgreen Company (NYSE:WAG) very difficult. However, the company has found momentum, not to mention better results, by positioning itself as a health and wellness outlet for customers. According to a 2012 RAND Health study, wellness programs are the rage in corporate America, with half of surveyed companies offering wellness promotion programs. Likely, companies are trying to keep their employee base healthy in order to promote maximum productivity. So, can investors find value in this story?
What’s the value?
Rite Aid Corporation (NYSE:RAD) has a solid operating position as the #3 drugstore chain, trailing only Walgreen Company (NYSE:WAG) and CVS, with over 4,600 stores around the country. As with its competitors, Rite Aid Corporation (NYSE:RAD) gets most of its revenue from prescription drug sales, accounting for 68% of sales, although it does offer almost 3,000 items in general merchandise categories. Given its front-line position in the drug distribution system, Rite Aid has rebranded itself as a health store, capable of providing a range of services including prescription management, wellness advice, and non-emergency medical treatment.
In its latest fiscal year, Rite Aid Corporation (NYSE:RAD)’s financial turnaround made noticeable improvement. While the company’s sales were down marginally, its adjusted operating income increased 19.7% versus the prior year. Top-line growth was negatively affected by having fewer stores in operation, as well as comparable store declines in its prescription drug sales, an area which continues to be hurt by a shift to lower-priced generic drugs. On the upside, Rite Aid Corporation (NYSE:RAD)’s move to a wellness format in its stores, with 800 store conversions in 2012, is allowing it to sell more higher-margin, wellness-based services, including flu immunizations that enjoyed a 60% volume increase over the prior year.
Perhaps one of Rite Aid Corporation (NYSE:RAD)’s best moves was partnering with retail health giant GNC Holdings Inc (NYSE:GNC) for store-within-a-store shops that leverage GNC Holdings Inc (NYSE:GNC)’s strong brand name in the vitamins and nutritional supplements area. There are currently over 2,100 shops in Rite Aid’s national network, roughly 47% of its overall store base, with plans to roll out the format to additional stores in the future. The partnership is also a symbiotic one, creating low-cost growth opportunities for GNC Holdings Inc (NYSE:GNC). In FY2013, the wholesale segment has been GNC Holdings Inc (NYSE:GNC)’s fastest growing unit, with sales up 15.2%, as well as generating the company’s highest segment operating margin.
