RAD inches closer to profitability
WHAT IT MEANS AND WHY IT'S IMPORTANT — Thursday's results marked the fifth consecutive quarter in which Rite Aid increased its same-store sales. And at the rate it's currently going, there's a good chance the country's third-largest retail pharmacy chain soon could become profitable, even though it expected to post losses in 2013, albeit even smaller losses than in 2012.
(THE NEWS: Rite Aid announces fourth quarter, fiscal year 2012 earnings. For the full story, click here.)
At the core of the chain's strong performance lies its Wellness+ loyalty card program, not to mention initiatives like the Wellness store format. Announcing its third quarter 2012 earnings in December 2011, president and CEO John Standley appeared less than impressed with the performance of the new stores and speculated that it was the presence of Wellness Ambassadors that made a big difference. This quarter, however, the stores have seen a noticeable rise in comps, particularly at the front end.
But one significantly influential issue is the ongoing dispute between Walgreens and Express Scripts. Rite Aid — like most other pharmacy retailers — has sought to benefit from the flood of ESI patients now unable to fill their prescriptions at Walgreens, and it has been largely successful with a 3.7% improvement in adjusted EBITDA coming from ESI script transfers. Analysts expect further increases in EBITDA if the Walgreens-ESI dispute remains unresolved.
At the same time, the dispute and the ESI-Medco merger have renewed speculation about an acquisition of Rite Aid by Walgreens. Neither Rite Aid's executives nor Edward Kelly, the Credit Suisse analyst who originated the latest round of speculation, mentioned it during the retailer's earnings call Thursday, but Kelly has continued to support the idea. "[Rite Aid's] stock could benefit from continued M&A speculation as we believe a takeout by Walgreens makes sense — especially in light of the recently concluded ESRX/MHS transaction," Kelly wrote in a report following the call.
But Guggenheim Partners analyst John Heinbockel disputed the notion, having already written that such an acquisition would present too great a risk for Walgreens, considering that it could lower Walgreens' bond rating and create a headache in terms of the costs of converting stores and closing others, not to mention the Deerfield, Ill.-based chain's relative lack of experience in large-scale acquisitions and the conservatism of its board.
And overall, Rite Aid doesn't look like a chain that's trying to set itself up for acquisition. Under the leadership of Standley and chairman Mary Sammons, the company has pursued organic growth and has been reaping the benefits in the form of growing sales and smaller losses.