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Rite Aid (RAD) Up 8.9% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

A month has gone by since the last earnings report for Rite Aid (RAD). Shares have added about 8.9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Rite Aid due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Rite Aid Beats Q2 Earnings Estimates, Updates View

Rite Aid reported second-quarter fiscal 2020 results, wherein adjusted earnings from continuing operations of 12 cents per share outshined the Zacks Consensus Estimate of 8 cents. Moreover, the bottom line compared favorably with the year-ago quarter’s adjusted loss of 15 cents per share.

Notably, the bottom line benefited from lower impairment charges in the reported quarter, somewhat offset by a decrease in adjusted EBITDA. Moreover, operating efficiency in the Retail Pharmacy Segment along with higher Medicare Part D revenues and prescription count sales growth remains impressive. Management is also optimistic about the company, courtesy of EnvisionRxOptions PBM as well as health and wellness offerings.

Q2 in Detail

Revenues dipped nearly 1% to $5,366.3 million and also lagged the Zacks Consensus Estimate of $5,415 million. During the second quarter, the Retail Pharmacy segment revenues slipped 1.6% owing to lower store count, somewhat offset by higher same-store sales. At the Pharmacy Services segment, revenues edged up 1.1% owing to higher Medicare Part D revenues.

Retail Pharmacy same-store sales inched up 0.4% owing to a 1.5% rise in pharmacy sales, partly offset by a 1.8% decline in front-end sales. Excluding cigarettes and tobacco products, front-end same-store sales fell 0.6%. Pharmacy sales included an adverse impact of nearly 276 basis points (bps) from the introduction of new generic drugs. Further, prescription count at same-store sales rose 2.7%. Prescription sales constituted 67.2% of total drugstore sales. Notably, the company delivered the fifth straight quarter of same-store pharmacy sales and prescription count improvement.

Rite Aid’s adjusted EBITDA fell 9.7% year over year to $134.2 million, with adjusted EBITDA margin contracting 20 bps to 2.5%. This downturn was due to a lower adjusted EBITDA at the Retail Pharmacy and Pharmacy Services segments.

Moreover, the Retail Pharmacy’s adjusted EBITDA was hurt due to weaker front-end gross profit on account of lower front-end same-store sales and decrease in the Transition Services Agreement (‘TSA’) fee income from Walgreens Boots Alliance. The Pharmacy Services segment was hurt by to higher cost of investments toward growth, partly compensated with improvements in pharmacy network performance.

Store Update

Rite Aid remodeled 24 stores while relocated one outlet in the fiscal second quarter, bringing the company’s total wellness store count to 1,805. Moreover, it shuttered two stores, taking the total store count to 2,464 as of Aug 31, 2019.

Financial Status

Rite Aid ended the quarter with cash and cash equivalents of approximately $142.2 million, long-term debt (net of current maturities) of $3,834.6 million and total shareholders’ equity of $960.6 million.

Further, the company used cash from operating activities of $278.8 million in the fiscal second quarter.

Outlook

Rite Aid updated its outlook for fiscal 2020. This view includes the assumption of higher prescription count coupled with improvements in drug costs and SG&A expenses. Also, management expects to witness strength in pharmacy network performance in the Pharmacy Services division. However, it expects to witness a decrease in prescription reimbursement rates.

It continues to project sales of $21.5-$21.9 billion for fiscal 2020. The company projects same-store sales growth of 0-1% over fiscal 2019. Moreover, Rite Aid now anticipates adjusted EBITDA to be between $510 million and $550 million compared with the earlier projection of $500-$560 million for fiscal 2020.

Further, it now estimates a net loss of $235-$275 million, wider than the prior expectation of $170-$220 million. The company now envisions adjusted earnings in the range of flat to 56 cents per share. Earlier, it projected the bottom line between adjusted loss of 14 cents and earnings of 72 cents per share. Meanwhile, capital expenditures are likely to be roughly $250 million.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -72.22% due to these changes.

VGM Scores

Currently, Rite Aid has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Rite Aid has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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