One of last year's biggest losers was also one of last week's biggest decliners. Shares of Rite Aid (NYSE: RAD) slumped 14.4% last week, tumbling along with most drugstores after Amazon.com (NASDAQ: AMZN) turned heads -- and stomachs -- after announcing that it was acquiring PillPack, a service provider that synchronizes prescriptions for patients taking various medications.
The fear here is that Amazon is taking yet another step to eat into the business of traditional pharmacies. The world's largest online retailer hired an industry vet last year to help set up a pharmacy benefits manager platform to handle the prescription needs of its growing employee base. Earlier this year it formed a partnership to come up with a solution for "transparent" healthcare at a feasible price point, something that will inevitably find drugstore operators in its crosshairs.
Image source: Rite Aid.
Rite Aid stock shed 76% of its value last year. It began last week trading marginally higher in 2018, but that wasn't the case after the Amazon-fueled sell-off. Rite Aid's rough 2017 is pretty much old hat at this point. It had a deal to be acquired in late 2017 in a transaction that was initially valued at $17.2 billion. Regulators weren't pleased with the combination, and by the time a harmonious compromise was reached it was down selling only 1,932 of its nearly 4,600 stores along with three distribution centers for $4.375 billion.
Earlier this year it announced a combination with supermarket operator Albertsons. It's a consolation hook-up that didn't please the market, but the synergies make sense in sizing up the combination. The vote on the merger happens next month, and the combination isn't a lock to go through given growing dissent. Rite Aid's deteriorating business complicates things.
Rite Aid also reported quarterly results last week, but it wasn't the stock-rattling event. The fresh financials were relatively in line with expectations. Rite Aid's fat profit during the quarter was the handiwork of the asset sale, obviously a one-time event. Rite Aid posted an adjusted net loss from continuing operations. Revenue for the quarter of $5.4 billion was flat with the prior year as a slight increase on the pharmacy services side was offset by a similar decline with its retail pharmacy segment. Comps declined 0.7% on the retail pharmacy front.
The next big event will likely be the Aug. 9 vote on the merger. It won't be fatal if Rite Aid is jilted again at the altar. The original asset sale beefed up its balance sheet, and if Rite Aid is forced to go it alone it will be able to focus on its operations as a stand-alone entity, something that it hasn't really had to do since late 2015. The market isn't sold on Rite Aid, and it's easy to see why it has fallen out of favor. However, arguing that Amazon lining up the pieces for a bigger push in this niche is going to be catastrophic for Rite Aid -- when we know that Amazon doesn't mind snapping up actual retail chains in the disruptive process -- is a bit of a stretch.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rick Munarriz owns shares of Rite Aid. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.