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Rite Aid Buys Town Hill Pharmacy

Zacks Equity Research

Drugstore chain retailer, Rite Aid Corporation (RAD) recently announced that it has acquired Town Hill Pharmacy. However, financial terms of the deal were not disclosed.

The move came as a part of the company’s strategy to boost its market share in the pharmacy business. Rite Aid has been taking several initiatives to expand its pharmacy and clinical services, which includes the Wellness+ program for diabetes as well as Flu Immunization program. We believe these programs will enable the company to solidify its customer base as well as its long-term profitability.

However, liquidity remains a concern, as Rite Aid is a highly leveraged company (with approximately 176% debt-to-capitalization ratio at the end of first-quarter 2013), which limits its cash flow availability and its ability to obtain additional financing.

Moreover, the debt burden from the 2007 Brooks Eckerd acquisition has increased interest expense, which has been weighing upon its bottom line. This has placed the company at a competitive disadvantage relative to its peers who are less burdened with debts.

Earlier this month, the company announced its preliminary sales results for the second quarter of fiscal 2013. Rite Aid’s comparable store sales remained flat compared to last year, with front-end comps increasing 1.4%, offset by a 0.7% decline in pharmacy comps. Prescription count at comparable stores grew 4.0% in the quarter.

Total drugstore sales for the quarter came in at $6.208 billion, sliding down 0.7% from $6.251 billion in the prior-year quarter. Quarterly sales included a 67.5% contribution from prescription sales, while third-party prescription sales accounted for 96.5% of pharmacy sales.

Rite Aid is scheduled to report its second-quarter financial results on Thursday, September 20, 2012. The current Zacks Consensus Estimate for the quarter stands at a loss of 8 cents per share, indicating an improvement from a loss of 12 cents in the prior-year quarter.

Rite Aid, which competes with CVS Caremark Corporation (CVS) and Walgreen Co. (WAG), currently, has a Zacks #2 Rank, implying a short-term ‘Buy’ rating. However, we are maintaining a long-term ‘Neutral’ recommendation on the stock.

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