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Will Amazon (AMZN) be Rite-Aid's (RAD) Bandage?

Mitchell Moore

Rite Aid Corporation RAD posted its Q1 2020 earnings results on Wednesday, June 26, after market close. This report was disappointing with an adjusted loss of -$0.14 per share, a steep dive from our zacks Consensus Estimate of +$0.02.  Rite Aid’s sales were essentially flat from this time last year, with $5.4 billion in revenues this quarter.

Rite Aid is a Zacks Rank #2 (Buy) right now, but this could change as more analysts update their outlooks following RAD’s less-than-impressive first-quarter showing.

Why Did Earnings Fall?

Rite Aid has been in a tough spot for a few years now. The drug store chain has attempted to sell itself twice and offloaded roughly half of its locations to Walgreens WBA. Things were not much better this quarter, with adjusted net losses at $7.5 million, compared to last years adjusted profits of $1 million. Company executives cited issues with pharmacy services margins, prescription reimbursements, and corporate restructuring as reasons for its lower earnings.

Prescription reimbursement rates dropped again this quarter, which has impacted revenues for all retail pharmacies like Rite Aid, Walgreens, and CVS CVS. Margin compression in pharmacy services was also helped RAD’s earnings fall. Plus, Rite Aid had a large non-regular outlay this quarter for severance packages, as it undergoes corporate downsizing and restructuring.

Rite Aid did post a 3.7% increase in same-store prescription count this quarter, helping to offset lower revenues. Rite Aid also added 108,000 Medicaid Part D members, boosted by a marketing campaign. These new members accounted for a 1.5%, or a $23 million increase in pharmacy services revenue to $1.57 billion.

Impact

Surprisingly, Rite Aid stock did not tank after its earnings miss. In fact, RAD climbed 9.6% on market open and has continued to post gains of 20.25% total on the day. This climb is likely because investors understand that much of the loss was due to Rite Aid’s corporate and retail restructuring. And many might see further value in the company’s future earnings potential.

During the earnings call, Rite Aid’s CFO indicated that the restructuring plan is on track in terms of projected costs and timelines. He also maintained fiscal 2020 guidance, projecting EPS for next quarter between -$0.14 per share and $0.72 per share. This likely calmed investor nerves, helping show that while the company missed earnings this quarter, it is a stable business with projections for profits in the near future.

Looking Forward

Rite Aid spoke about a number of exciting developments during the earnings call that will help lead the company into the future. Recently, Rite Aid joined Anthem’s Medicaid preferred network. Anthem is the largest for-profit MCO in the country, which will increase RAD’s addressable market for pharmacy services significantly.

In Oregon and Washington, Rite Aid shelves display an assortment of CBD products. Rite Aid is running a trial of these new products in the Pacific northwest before rolling them out across the country. This could help boost revenues since CBD is a trend growing very quickly.

Amazon

Perhaps most importantly, Rite Aid announced a partnership with Amazon AMZN. Amazon began to roll out a new service called Counter that allows customers to pick up packages from secure lockers at designated locations. Rite Aid plans to put these stations in 1,500 stores by the end of the year. These pickup counters should help increase traffic at Rite Aid stores, which could help lift sales.

Rite Aid expects its Amazon partnership will generate significant business. If this happens, it might bring RAD back to profitability and raise the public image of the pharmacy chain. Rite Aid is seemingly placing a lot of trust in the Amazon partnership to bring back profitability, but at the very least it won’t hurt.

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