How Impressive Is Rite Aid Corporation (RAD)’s Earnings Increase?

Under pressure?
To some extent, Rite Aid executives may also be trying to manage expectations on Wall Street. The company’s stock has tripled since December, and with lots of moving parts — i.e., changes in the brand-name/generic mix, changes in reimbursement rates, market share changes, etc. — it’s probably prudent to give conservative guidance.

Nevertheless, these factors all present very real challenges for Rite Aid. While generic-drug introductions can provide a short-term lift to margins, ultimately insurance providers will try to take back most or all of that incremental margin in order to lower their own costs.

Rite Aid also faces particular challenges as the smallest of the three major pharmacy chains. Walgreen and CVS Caremark Corporation (NYSE:CVS) already offer much broader pharmacy networks than Rite Aid and have ample capital to expand onto Rite Aid’s turf, whereas Rite Aid is shrinking. This process could lead to a growing cost gap that would hurt Rite Aid’s long-term competitiveness.

What to look for
Going forward, the key for investors lies in Rite Aid’s ability to manage the expected margin pressure later this year while maintaining market share vis-a-vis Walgreen and CVS Caremark Corporation (NYSE:CVS). If Rite Aid can weather this storm and beat its guidance, that would be a good signal that its recent earnings improvements are sustainable.

However, I am still fairly skeptical that this will happen. Rite Aid seems to be losing market share to Walgreen and CVS again, and this process could accelerate as Walgreen continues to win back Express Scripts Holding Company (NASDAQ:ESRX) customers. I would need to see solid earnings results for the rest of this fiscal year to believe that the Rite Aid turnaround is the “real deal.”

The article How Impressive Is Rite Aid’s Earnings Increase? originally appeared on Fool.com.

Fool contributor Adam Levine-Weinberg is long Oct 2013 $2.5 Puts on Rite Aid. The Motley Fool recommends Express Scripts. The Motley Fool owns shares of Express Scripts.

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