Is Rite Aid's Tempo Lowered by Cautious Outlook?


On Jul 2, 2014, we issued an updated research report on drug store retailer Rite Aid Corp. (RAD) after the company’s soft start to fiscal 2015.

Rite Aid posted disappointing results for the first quarter of fiscal 2015, wherein its top-line improved year over year but profits declined steeply from the comparable year-ago quarter. The company’s earnings of 4 cents per share for the first quarter declined 55.6% from the prior-year earnings of 9 cents primarily due to high cost of drugs and lower reimbursement rate. However, quarterly earnings were in line with the Zacks Consensus Estimate.

Revenue rose 2.7% year over year to $6,465.5 million and surpassed the Zacks Consensus Estimate of $6,430.0 million. Top-line growth was driven by improved comparable-store sales (comps). Comps in the quarter rose 3.1% due to rise in pharmacy sales.

However, at the earnings call, the company reiterated its lowered earnings forecast for fiscal 2015 which reflect anticipated reductions in generic drugs purchase price for the rest of the year. Rite Aid, which competes with Walgreen Co. (WAG), expects its fiscal 2015 earnings per share to be in the range of $0.30–$.0.40 as against the earlier forecast of $0.31–$0.42. Adjusted EBITDA for fiscal 2015 is expected to range from $1.275–$1.350 billion compared with $1.325–$1.4 billion guided earlier.

As a result, this Zacks Rank #4 (Sell) company has witnessed substantial downward estimate revisions for the upcoming quarter as well as for fiscal 2015 and 2016, over the last 30 days. The Zacks Consensus Estimate for second-quarter fiscal 2015 declined 12.5% to 7 cents per share, while estimate for fiscal 2015 fell nearly 8.3% to 33 cents per share over the last 30 days. For fiscal 2016 too, most of the estimates were revised downward over the same time frame with the Zacks Consensus Estimate falling 6.3% to 45 cents per share.

Though the diminished forecast for the year is disappointing, we remain impressed by the company’s sustained focus on enhancing pharmacy and clinical services through the recently initiated Rite Aid Health Alliance and its Wellness+ customer loyalty program, as well as the remodeling of its wellness stores. We believe that such measures will enable the company to broaden its customer base and boost top- and bottom-line performances.

Key Picks from the Sector

Better-ranked stocks among drug store retailers include CVS Caremark Corp. (CVS) and Herbalife Ltd (HLF), both carrying a Zacks Rank #2 (Buy).

Read the Full Research Report on RAD
Read the Full Research Report on CVS
Read the Full Research Report on WAG
Read the Full Research Report on HLF

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