Rite Aid's Growth Potential Despite it Misses by $0.02

Shares of Rite Aid Corporation (RAD) have tumbled more than 6% on Thursday´s morning session after a weak sales outlook combined with downbeat earnings.

The company reported earnings per share of $0.02, which were less than the $0.13 per share obtained in the same quarter a year ago and were lower than estimates by $0.02.Further, revenue increased by 18.5% and reached $7.7 billion and was higher than analyst’s estimates of $7.6 billion.

The company is a large U.S. drugstore chain that operates about 4,700 units in 31 states and Washington, DC.

The retail pharmacy segment revenue increased by 1.9% to $6.6 billion and the pharmacy services segment revenue reached $1.1 billion.

“The second quarter was pivotal for Rite Aid as we completed the acquisition of EnvisionRx and worked as a team to accelerate our transformation into a retail healthcare company," said Rite Aid Chairman and CEO John Standley. "EnvisionRx made positive contributions to our performance as our Pharmacy Services Segment* delivered results that were in line with our expectations. We will continue to focus on key initiatives like wellness+ with Plenti, flu immunizations and Wellness store remodels to drive performance in our retail segment as we also leverage EnvisionRx's suite of services to create unique and integrated offerings in the healthcare marketplace."

For the FY16, the firm expects earnings in the range of $0.12 to $0.19 per share, on revenue of $30.8 billion to $31.1 billion. These numbers are lower than the previous projection of $0.14 to $0.22 per share, on revenue of $30.7 billion to $31.2 billion.

The company is selling at a reasonable valuation. The P/E ratio is at 4.17x, which seems low when compared to the S&P of about 21x and it is also lower than the industry median.

Rite Aid is well-positioned in the market with a 50% market share. Forward-looking, there are several catalyst should drive the company´s growth. Among those, the company has introduced a customer loyalty program called wellness+ five years ago with pretty good results. Also, in February 2015, the company agreed to acquire Envision Pharmaceutical Services for $2 billion in cash and stock. The deal is expected to boost EPS achieving cost synergies.

The stock returned 6.7% on a year-to-date basis and 20.8%in the past 12 months, showing it has enjoyed a strong performance.

Larry Robbins' Glenview Capital is the major shareholder, with a stake containing 12.55 million shares of the stock, valued at $104.8 million at the end of June.

First Eagle Investment has initiated a new position with 1,596,105 shares and John Burbank, Paul Tudor Jones and Ken Fisher have taken long positions in the stock during the second quarter by 177.6%, 24.6% and 11.1%, respectively.

Published on Sep 18, 2015
By Omar Venerio
Capital Markets, Derivatives and Financial Management Professor, Master in Finance and CFA candidate. I am an independent trader of stocks and options and passionate about the stock market.

Copyrighted 2020. Content published with author's permission.

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