Walgreen Company (WAG) Is Eating Rite Aid Corporation (RAD)’s Lunch

No contest
Walgreen and Rite Aid are both expected to report quarterly earnings later this month. Based on the two companies’ relative sales performance, Walgreen investors are likely to be much happier than Rite Aid investors when all is said and done.

Rite Aid has improved its profitability significantly over the past several quarters through margin improvements. However, the benefit from new higher-margin generic drugs is fading now, and pharmacy benefits managers are constantly cutting back on reimbursement rates. An increase in price competition from Walgreen Company (NYSE:WAG) will put even more pressure on Rite Aid’s bottom line.

Nevertheless, Rite Aid Corporation (NYSE:RAD) has little choice but to fight back with its own margin-sapping discounts. Otherwise, it will continue to lose share in the front end. That would be fatal, as front-end sales are a more reliable contributor to profitability than the prescription business, where insurers and pharmacy benefits managers have all the leverage (and take most of the profit). Bottom line: If Walgreen maintains its cutthroat strategy, Rite Aid could be in big trouble.

The article Walgreen Is Eating Rite Aid’s Lunch originally appeared on Fool.com and is written by Adam Levine-Weinberg.

Adam Levine-Weinberg is long October 2013 $2.5 puts on Rite Aid. The Motley Fool recommends and owns shares of Express Scripts.

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