Shares of Rite Aid Corp. soared Wednesday, continuing a climb that started last week when the drugstore chain reported its first quarterly profit since May 2007.
THE SPARK: Rite Aid said Dec. 20 that prescription growth and sales outside the pharmacy portion of its stores helped it earn $60.5 million, or 7 cents per share, in the three months that ended Dec. 1. That compares to a loss of $54.5 million, or 6 cents per share, in last year's quarter.
The Camp Hill, Pa., company, which has seen its performance improve over the past several quarters, said its revenue slipped about 1 percent to $6.24 billion largely due to an increase in generic drugs.
The introduction of generic equivalents to popular brand-name drugs hurts revenue for drugstores because generics cost less than their brand-name counterparts. But generics also help profitability because they come with a wider margin between the cost for the pharmacy to purchase the drugs and the reimbursement it receives.
Rite Aid said the number of prescriptions filled at stores open at least a year climbed 3.6 percent, an increase that was aided by a split between rival drugstore chain Walgreen Co. and pharmacy benefits manger Express Scripts Holding Co.
THE BIG PICTURE: Rite Aid Corp. is the third-largest drugstore chain, with 4,633 stores in 31 states and the District of Columbia. It trails both CVS Caremark Corp. and the largest drugstore chain, Walgreen.
THE ANALYSIS: Rite Aid's business has improved in several ways and investors are starting to notice, said Will Frohnhoefer, an analyst who covers the company for the brokerage BTIG.
He noted that the company, which has a lot of debt, has improved its balance sheet by refinancing and helped its stores with remodeling. The analyst also said Rite Aid has benefited from growth in Medicare coverage and the gradual closing of a coverage gap called the doughnut hole in Medicare prescription drug coverage.
"I think it's all dovetailing together in a fairly attractive way for them," he said.
Medicare is the federally funded program that provides coverage for the elderly and disabled people.
SHARE ACTION: Up 7.3 percent, or 10 cents, to $1.40 in heavy trading Wednesday afternoon, while the Standard & Poor's 500 index fell slightly. The stock has climbed 35 percent since the drugstore chain released earnings.