Drugstore chain retailer, Rite Aid Corp. (RAD) remains on our Neutral list with a target price of $3.00. Our long-term recommendation is well supported by the Zacks Rank #3 (Hold).
Rite Aid, which had witnessed declining sales and weak bottom-line results in the recent past, is now showing signs of improvement, thanks to the company’s cost reduction initiatives and the improvement of store-level performance.
Rite Aid reported a quarterly profit for the third straight quarter in Jun 2013. Moreover, the company has outperformed the Zacks Consensus Estimate four times in the trailing five quarters.
Rite Aid applied additional resources such as the Wellness+ customer loyalty program and Flu Immunization program to stimulate customers’ demand amid a challenging macroeconomic environment. The company’s Wellness+ customer loyalty program has been successful in attracting customers. This is evident from the fact that Wellness+ members in fiscal 2013 contributed to 79% of front-end sales, compared with 68% in fiscal 2012.
On the cost front, the company is focusing on generating cost savings through centralized indirect procurement of drugs and reduction in supply chain costs. We believe that these programs and initiatives will facilitate the company to increase its customer base and generate long-term profitability. Our stance is supported by Rite Aid’s strong performance in the past three quarters.
On the flip side, we remain concerned about the sustainability of profit in the long run, primarily in the absence of any major catalyst driving top-line growth.
Moreover, Rite Aid’s generic drug sales could be dented by Wal-Mart Stores Inc.’s (WMT) entry into the retail generic drug market. Due to Wal-Mart’s wide array of manufacturers in India, Israel, and the U.S., the mass merchant can offer the particular drugs at a more discounted price when compared to the prices of Rite Aid.
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