We have maintained our long-term Neutral recommendation on Rite Aid Corporation (RAD). Headquartered in Camp Hill, Pennsylvania, the company is the third largest retail drugstore in the U.S. based on revenues and number of stores. With 4,714 stores, the company operates in 31 states across the country and in the District of Columbia.
A recent trend in the U.S. is a growing demand for generic drugs. Generic (non-brand) drugs are less expensive but generate higher gross margin. The company is expected to expand its generic drug portfolio in order to boost its top-line as well as market share. Besides, Rite Aid has an edge over its competitors as it is the third largest retail drugstore in the U.S.
Moreover, strong top-line performance and lower operating expenses boosted Rite Aid to post a better third-quarter 2012 results. The quarterly loss of 6 cents per share not only improved from the prior-year loss of 9 cents but also outpaced the Zacks Consensus Estimate loss of 12 cents.
The company also registered a marginal revenue growth of 1.8% from the prior-year period. Consequently, Rite Aid now expects net loss in fiscal 2012 to be in the range of 37 cents to 50 cents per share, instead of 40 cents to 56 cents forecasted earlier.
Further, in an effort to expand its pharmacy and clinical services, Rite Aid has applied additional resources such as Wellness+ program for diabetes and Flu Immunization program. These programs will enable the company to increase its customer base as well as long-term profitability.
In addition, the company took several cost-cutting initiatives including centralized indirect procurement of drugs, reducing supply chain costs, reducing debt, etc., which will certainly benefit the company to boost its bottom-line.
However, in the United States, pharmacy sales growth has slowed down due to longer FDA approval process, drug safety concern, loss of individual health insurance resulting from unemployment and an increase in the use of non-brand drugs, which are less expensive but generate higher gross margin. These factors may undermine the company’s future growth prospects and profitability.
Additionally, Rite Aid is a highly leveraged company (with approximately 162% debt-to-capitalization ratio in fiscal 2011), limiting cash flow availability and its ability to obtain additional financing. The debt burden from the Brooks Eckerd acquisition has increased interest expense, which has been weighing upon its bottom-line. This has put the company at a competitive disadvantage relative to its competitors with less indebtedness.
Furthermore, Rite Aid’s generic drug sales are negatively affected by Wal-Mart Stores Inc.‘s (WMT) strategy of entering the retail generic drug market. Due to Wal-Mart’s broad array of manufacturers in India, Israel, and the U.S., the mass merchant can offer generic drugs at a discounted price compared with the average $10 generic drug co-pay.
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