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Rite Aid Corporation (RAD) Is Running Out of Options

Wayne Duggan

Analysts are largely skeptical of the prospects of a stand-alone Rite Aid Corporation (NYSE: RAD) now that the company and Albertsons announced they mutually backed out of their proposed merger agreement.

While the breakup may have been mutual on paper, RAD stock dropped 12 percent on Thursday.

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After selling nearly 2,000 of its stores to Walgreens Boots Alliance ( WBA) earlier this year, Rite Aid is now less capable of competing on its own against its larger rivals than ever before. The Albertsons deal would have given Rite Aid investors one share of Albertsons stock and $1.83 in cash for every 10 shares of RAD stock held.

The Albertsons merger is the second potential deal to fall through for Rite Aid in recent years. Walgreens initially announced a $9.4 billion Rite Aid buyout in 2015 before abandoning the deal in 2017 due to antitrust concerns and opting to buy less than half of Rite Aid's stores for $4.3 billion.

Some of Rite Aid's largest shareholders, such as Highfields Capital Management, were not thrilled with the terms of the proposed Albertsons merger, and Rite Aid may have had difficulty getting the shareholder votes it needed to complete the deal. But with only around 2,500 stores remaining and no obvious potential buyer, Rite Aid doesn't appear to have the resources or the healthy balance sheet it needs to compete on its own.

CFRA analyst Joseph Agnese says RAD stock will likely continue to trade at a significant discount to its drugstore peers until the company can come up with a clear and viable plan.

"We believe a discounted valuation compared to peers is justified as we believe the company is at a competitive disadvantage versus its larger peers due to a lack of purchasing scale and negotiating power as prescription drug networks become more restricted," Agnese says.

"We believe RAD's EPS will remain pressured by its exclusion from health plan pharmacy networks and intense non-pharmacy competition."

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However, with the stock now trading at around $1.50 per share, Agnese says additional downside may be limited. He says Rite Aid should also potentially benefit from drug reimbursement rate stabilization and a reduction in generic drug purchasing costs, two sources of major margin pressure in recent years.

CFRA has a "hold" rating and $1.50 price target for RAD stock.

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