It’s been a long ride down for shares of Rite Aid (NYSE:RAD) over the past several years. Back in 2017, the split-adjusted price of Rite Aid stock was north of $170. Today, RAD stock trades hands around $7. That is a 95%-plus decrease in Rite Aid stock price in less than three years. For comparison purposes, the S&P 500 is up more than 30% over that same stretch.
In other words, Rite Aid’s track record isn’t great, and the company hasn’t given investors any reason to believe that this huge multi-year downtrend will reverse course anytime soon.
Last quarter, Rite Aid’s revenues and earnings both missed expectations, with revenues that were flat year-over-year, margins that were down year-over-year, and a net loss that more than doubled year-over-year.
But, while Rite Aid’s numbers haven’t given investors any reason to believe a RAD stock recovery is around the corner, Rite Aid bulls have found strength from an unusual source: Amazon (NASDAQ:AMZN), the former Rite Aid and physical retail killer that recently added Rite Aid to its sprawling delivery network.
That’s great news for RAD stock. Indeed, it’s the type of news that could put an end to this stock’s multi-year sell-off.
At the same time, it’s also the type of news that could be just hype. And, because Rite Aid stock has been such a big loser for so long, investors have given up on hope. Instead, investor sentiment is significantly depressed. Thus, until the Amazon catalyst actually shows up on the income statement, the sell-off in RAD stock will persist.
Amazon Could Save the Day for Rite Aid
In the big picture, Amazon could save the day for Rite Aid, and spark a huge turnaround in RAD stock.
The bull thesis is pretty straightforward. Amazon is increasingly looking to expand its shipping network at a low cost. To that end, Amazon is partnering with existing brick-and-mortar retailers to turn those brick-and-mortar retail locations into Amazon delivery locations, or places where Amazon shoppers can pick up their Amazon.com orders.
Amazon recently added Rite Aid to that delivery network. That means that millions of Amazon shoppers will presumably start going to Rite Aid stores to pick up their Amazon.com orders.
Of those millions, a few hundred thousand will probably buy a candy bar on the way out. Maybe even a few million do. That should provide a nice bump to Rite Aid’s revenues.
But, more important, those millions of Amazon shoppers are consumers who normally don’t go to Rite Aid stores. Rite Aid’s core shopper base is 55 & up and makes less than $40,000 a year.
Amazon.com shoppers, on the other hand, skew young and rich. That young and rich cohort has a lot of spending power, and they will have a lot of spending power for a long time. Yet, most of them aren’t going to Rite Aid stores because they haven’t had a reason to.
The bull thesis is that of these millions of young, rich Amazon.com shoppers who go to Rite Aid stores to pick up their Amazon.com orders. A handful will go into Rite Aid stores, and like what they see – maybe it’s something as silly as the Thrifty ice cream (which is very good, by the way). Those young, rich shoppers stick. They start going to Rite Aid stores more.
Rite Aid starts winning the marginal dollar share in this important cohort. Long term revenue, margin, and profit trends improve. RAD stock bounces back.
This Is a “Prove It” Situation
The aforementioned Amazon-inspired bull thesis on RAD stock sounds really good. But, it also lacks tangibility simply because it hasn’t materialized yet.
That’s a problem for Rite Aid. If the tables were flipped, and this was Amazon stock we were talking about (you know, the stock that’s up 150% since the start of 2017) then investors wouldn’t need tangibility to believe the bull thesis. Amazon’s track record is good enough to warrant belief before tangibility materializes.
That isn’t the case with Rite Aid. As opposed to being up 150% since early 2017, RAD stock is down 95%. Investors here need tangibility to believe the bull thesis. Without it, you won’t get the sustainable bulk buying necessary to put RAD stock on a winning course.
As such, until this catalyst appears on the income statement via improved revenue and profit trends, RAD stock likely won’t reverse course.
Bottom Line on Rite Aid Stock
Rite Aid has unique breakout potential from today’s depressed levels. But, that breakout potential also comes with a lot of risk. As such, before buying into the RAD stock turnaround, investors are probably best off waiting for confirmation of this turnaround through improving financial trends in the next earnings report.
As of this writing, Luke Lango was long AMZN.
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