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Rite Aid Corporation (RAD), Walgreen Company (WAG): Two Drugstores, Two Destinies

For the past several months, I have been warning investors about the dangers of investing in Rite Aid Corporation (NYSE:RAD). Rite Aid Corporation (NYSE:RAD)’s shares have surged ever higher since late last year, but the company’s fundamentals have started to take a turn for the worse.

RAD Chart

Rite Aid 1 Year Price Chart, data by YCharts

Over the past several months, it has become increasingly clear that Walgreen Company (NYSE:WAG) — Rite Aid Corporation (NYSE:RAD)’s largest competitor — is winning back the market share it lost last year during its dispute with Express Scripts Holding Company (NASDAQ:ESRX). The two drugstore chains reported monthly sales for May this week, and the results confirmed this underlying trend. Walgreen is continuing to bolster its position as the leading drugstore chain in America. Rite Aid Corporation (NYSE:RAD), by contrast, looks to be sliding back into its loss-making ways.

Rite Aid (RAD)Prescription count is key
Both Rite Aid and Walgreen Company (NYSE:WAG) generate most of their revenue from prescription drug sales. The best way to measure prescription market share changes is “same-store prescription count.” This measures the percentage change in the number of prescriptions filled in stores that have been open for at least a year. Same-store prescription count is a good proxy for the overall health of a drugstore, because it isn’t affected by store openings or closings, or by changes in the mix of name-brand versus generic drugs.

Since Express Scripts customers were unable to fill prescriptions at Walgreens for most of 2012, Rite Aid and CVS Caremark Corporation (NYSE:CVS) saw steady gains in prescription count. During the first quarter of Rite Aid Corporation (NYSE:RAD)’s FY13 (covering March-May of 2012), same store prescription count increased by 3.0%. During Q2FY13 (covering June-August), same store prescription count increased 4% at Rite Aid. These prescription count gains led to improving profitability, and ultimately allowed Rite Aid to post its first full-year profit since the Great Recession.

However, Walgreen Company (NYSE:WAG) has been working hard to regain customers since reaching a new agreement with Express Scripts Holding Company (NASDAQ:ESRX), which went into effect last September. It took a while to build momentum, because once somebody switches drugstores, it can be a headache to switch back. However, in the past few months, Walgreen’s efforts have really paid off.

In the month of May, Walgreen Company (NYSE:WAG) reported that Express Scripts customers continued to return to its stores, driving a 7.1% increase in same-store prescription count. This was right in line with the pace from March and April; for the full March-May quarter, Walgreen achieved a 7% increase in same-store prescription count.

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