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Even After Recent Gains Rite Aid Stock Is Still Underweight

Brad Moon

Investors have been avoiding drug store chain Rite Aid (NYSE:RAD) for years. Rite Aid stock was at its heights in 1999 when it started the year at over $1,018. With the current RAD stock price at $7.13 it’s hard to imagine just how badly things went wrong for the company.

Maybe Amazon Will Wake up Rite Aid Stock, but It's Too Risky Right Now
Maybe Amazon Will Wake up Rite Aid Stock, but It's Too Risky Right Now

Source: Ken Wolter / Shutterstock.com

Even the start of 2017, when RAD stock topped $173, seems like golden days, although the company was still in trouble back then. Since the end of August, RAD put together a rare rally, growing some 38% between August 27 and September 6. It also jumped on the Monday session, up over 15%.

Does that mean it’s time to consider a RAD investment?

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The consensus is no. And here’s why:

Rite Aid’s Glory Days Are Clearly Well in the Past

In 1995, Rite Aid was the largest American drug store chain by number of locations and second in sales. But it’s been downhill since then. By 2017, its prescription revenues gave it just a 3.8% share of the American market. That was a 17.1% drop over the previous year. Rite Aid is still the third largest drug store chain in the U.S. — the fourth largest if you count Walmart (NYSE:WMT) — but it’s struggling.

The consumer migration toward e-commerce has hit many retailers. Still, Rite Aid has performed particularly poorly at making the online transition. Seeing the writing on the wall, in 2015, the company attempted to negotiate a merger with rival Walgreens (NASDAQ:WBA). Unfortunately, that deal fell apart in 2017.

Instead, Walgreens bought 2,186 Rite Aid stores. This gave Rite Aid a $5.2 billion cash infusion but cut its store count in half. And this resulted in RAD stock tanking.

Since 2015 when the company floated the idea of a  Walgreens merger, the RAD stock price has plummeted 95%.

Even if you look at year-to-date performance, Rite Aid is down nearly 50%. The Wall Street Journal’s analyst poll has RAD stock firmly in underweight territory. Specifically, three of five analysts recommending investors sell any RAD shares and the other two suggesting they hold.

InvestorPlace’s Will Ashworth sums it up pretty succinctly:

“Unless you’re into owning ‘cheap trash’ stocks that have been mercilessly beaten down over the past few years, RAD stock is not a name I would buy at this point.”

Don’t Expect Q2 Earnings to Lift RAD Stock

Rite Aid is expected to report its second quarter of fiscal 2020 earnings results on September 26. Don’t expect a repeat of Q1 — or at least a complete repeat — this time around. The company pulled a rabbit out of its hat in June to offset the pounding RAD was taking on results.

The last time Rite Aid released an earnings report was on June 26. That was a continuation of the bad news story for investors, and even worse than expected. Revenue of $5.37 billion was down slightly compared to the previous year. However, earnings per share were nowhere near expectations.

While analysts had been looking for modest adjusted earnings of 2 cents per share, instead RAD announced an adjusted loss of 14 cents per share. In afterhours trading, the markets hammered Rite Aid stock, dropping over 10%.

Amazon Was No Panacea for Rite Aid Stock

The following day, Rite Aid stock surged, gaining over 20%. The reason behind the sudden rush to buy RAD was all about Amazon (NASDAQ:AMZN).

The day after those brutal Q1 earnings dropped, Amazon announced its new Counter service. This would allow customers to pick up their packages at local retailers: no lockers required, simply walk up to the counter.

And the first partner picked by Amazon for the new Counter service was Rite Aid. Customers would be able to pick up Amazon packages at 100 Rite Aid stores at launch. By the end of this year, that number should grow to 1,500.

The anticipation that thousands of Amazon customers would be walking into Rite Aid stores — and quite possibly buying a few things at the struggling retailer while they were there — temporarily breathed new life into RAD stock. It hit $9.24 in July, marking 30% growth since the day it delivered those terrible Q1 earnings.

However, the investor optimism didn’t last.

Until the rally that started at the end of August, it’s been a mostly downward slide for Rite Aid stock. Q2 earnings on September 26 seem unlikely to keep the streak going (assuming it lasts that long).

And remember: unlike when the company reported its Q1 earnings, it’s very doubtful there’s another Amazon-level surprise announcement waiting in the wings.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

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