This Is the Bet That Rite Aid Corporation Stock Has Become
Three weeks ago, I penned some thoughts on struggling drugstore chain Rite Aid Corporation (NYSE:RAD). I suggested RAD stock was only buyable if and when it began drawing more customers into its stores and inducing them to buy more goods at higher prices. The impending deal with Walgreens Boots Alliance Inc (NASDAQ:WBA) will certainly put more cash in the company’s coffers. And it will give Rite Aid fewer stores to try to fix. But Rite Aid’s problems aren’t repaired with a mere restructuring.
Still, I saw a glimmer of hope if Rite Aid Corporation played all of its cards right for the next several quarters.
I’m now again inclined to think the RAD stock price is going to slide lower in perpetuity. With a smaller footprint, Rite Aid is increasingly more unlikely to become more competitive with Walgreens and CVS Health Corp (NYSE:CVS). And there are rumors Amazon.com, Inc. (NASDAQ:AMZN) will get into the prescription business. If that happens, there just isn’t room for a third-rate, brick-and-mortar player on the drug landscape.
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No Room For RAD
While I would normally lay out the evidence and then draw a clear conclusion, I’m not going to do that. Instead, I’m going to begin with the end in mind. The evidence is easier to digest if you know where it’s going.
My point: There’s not enough room for Walgreens and CVS and Rite Aid and Amazon in the business. The sickly runt is going to have to go. Given its inability to produce anything beyond paper-thin margins for years now, that runt is Rite Aid.
And the grim reality got a whole lot more interesting a few days ago. As it turns out, Amazon may already have wholesale pharmaceutical distribution licenses in at least 12 states. Though owning the licenses doesn’t inherently mean Amazon will get into the prescription-by-mail business, it’s unlikely an organization would seek this type of regulatory permission without an intent to utilize it.
And that’s hardly the only reason the RAD stock price may be doomed to continue its march towards oblivion.
RAD Faces Deadly Threat From Amazon
Giving credit where it’s due, it was Leerink Partners analyst David Larsen who spelled it out last week. He explained “WBA, CVS, and RAD are seeking to capture share by accepting lower reimbursement rates from plans and PBMs, thereby putting downward pressure on WBA’s gross margin.” He went on to say “We believe that CVS is taking the right steps to capture volumes, after a difficult 2017. In 2018 and beyond, we would expect these deals to cause WBA’s retail prescription volume growth rate to slow, and we would expect WBA’s response to be to continue to lower reimbursement rates in an effort to capture volumes.” Though Larsen offered up the comments as part of a downgrade of Walgreens, the underlying reasons for the WBA downgrade still apply to Rite Aid. Indeed, Larsen’s omission of Rite Aid from the bulk of the discussion points to Rite Aid’s irrelevancy.
The Leerink analyst also underscored the risk Amazon poses to all the players in the drugstore group, noting “We believe (Amazon.com) will be entering into the market within the next few years.”
Given Rite Aid’s ongoing struggle without Amazon in the picture, Amazon’s entry into the mix may well be a death knell for Rite Aid no matter how much better it gets at retailing.
The Last Bastion of Hope for RAD Stock Owners
There is one interesting possibility that has surfaced that die-hard fans and followers of RAD stock have latched onto. There are whispers that Amazon could acquire what’s left of Rite Aid. That would leverage the drugstore chain’s existing footprint as a foray into the business. Amazon similarly worked its way into the grocery business via its deal to buy Whole Foods Market. As Dana Blankenhorn opined in September, “While Rite Aid may be viable on its own, Amazon could do great things with it.”
Anything short of that deal, though, and Rite Aid simply looks too far gone to salvage. It’s simply not very good at retailing. Amazon could impose sweeping changes on that front the way it did with Whole Foods because that’s what Amazon does. And Amazon doesn’t need Rite Aid to be a profit center. It only needs Rite Aid to be a customer data-gathering hub, and a means of promoting everything else Amazon does.
Rite Aid, however, isn’t in the same position.
Whatever the ultimate outcome is, RAD stock still looks practically impossible to own as it stands right now as anything other than a buyout speculation.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.
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