Operational improvement
Rite Aid Corporation (NYSE:RAD) continues to be successful with its “wellness store” format, which features an enhanced selection of wellness products and services, as well as personalized guidance by Rite Aid wellness ambassadors.
In May, Rite Aid announced that Buffalo, N.Y. is the first market in which a majority of stores have been converted to “wellness-store” format. With the new wellness-store format, more products can be offered with easier accessibility and dedicated wellness ambassadors can bridge the gap between pharmacists and customers. Rite Aid had converted nearly 800 stores to the wellness format, with around 1,300 wellness ambassadors working to provide more personalized services.
Rite Aid Corporation (NYSE:RAD) also unveiled a new Riteaid.com website, redesigned to offer a more personalized experience to online customers. Overall, management continues to focus on more customized, higher quality services to patients and customers to strengthen the customer relationship, increase the customer retention rate, and better meet the changing needs of customers and patients.
Fundamental improvements
Rite Aid Corporation (NYSE:RAD) is still highly levered on its balance sheet, with $129.4 million in total cash and $6 billion in total debt as of March 2. By reducing the company’s net debt by $250 million and extending the maturity of nearly all of its debt to 2017, Rite Aid is becoming more flexible financially.
With two consecutive quarters of profit, analysts expect Rite Aid to generate $25.2 billion of revenue for 2013 with an EPS of $0.14. Rite Aid continues to surprise to the upside, as it has delivered four positive earnings surprises in the last four quarters.
Competition
Let’s compare Rite Aid Corporation (NYSE:RAD) to other pharmaceutical retailers, including Walgreen Company (NYSE:WAG) and CVS Caremark, as well as the industry average to see where it stands.
| Rite Aid | Walgreen | CVS Caremark | Industry Average | |
|---|---|---|---|---|
| Market Cap | $2.56 billion | $47.51 billion | $71.87 billion | N/A |
| Revenue Growth (3 Year Average) | -0.4 | 4.2 | 7.8 | 5.5 |
| Operating Margin, %, ttm | 2.6% | 4.8% | 6.1% | 5.2% |
| Net Margin, %, ttm | 0.4% | 2.9% | 3.3% | 2.8% |
| ROE | N/A | 12.5 | 10.6 | 11.3 |
| P/E | 24.1 | 22.3 | 18.3 | 19.5 |
| Forward P/E | 6.7 | 14.5 | 13.1 | 14.6 |
Source: Morningstar and Google Finance
Walgreen is the nation’s largest drugstore chain. In March, Walgreen expanded its supply agreement with AmerisourceBergen Corp. (NYSE:ABC), one of North America’s largest pharmaceutical-services companies. Walgreen and Alliance Boots also received the required regulatory clearances for their equity investment in AmerisourceBergen Corp. (NYSE:ABC) on May 17.
Walgreen Company (NYSE:WAG) can negotiate better prices in bulk for drugs while having easier access to more specialized drugs by working with AmerisourceBergen Corp. (NYSE:ABC), which will help Walgreen boost its revenue and lower its costs in the long-term.
CVS Caremark Corporation (NYSE:CVS), the largest integrated-pharmacy company in the United States, is a provider of prescriptions and related healthcare services. CVS Caremark’s pharmacy services are provided through its pharmacy benefit management (PBM), mail-order and specialty pharmacy divisions.
With a solid first-quarter report, management continues to expect strong free cash flow for the remainder of 2013. The company reconfirmed its free cash flow guidance of between $4.8 billion and $5.1 billion for 2013. CVS Caremark continues to benefit from the influx of new generic drugs, which drove the company’s year-over-year profit growth.
CVS Caremark also helps clients to effectively manage the fast-growing costs in specialty pharmacy, and management projects that spending on specialty drugs will grow 20% annually to $120 billion in 2016. With the solid operation and steady growth, management continues to focus on returning value to shareholders through dividends and share repurchases.
While CVS Caremark has the strongest cash flow among three companies with the highest revenue growth (three-year average) and margins, Walgreen and Rite Aid continue to improve their bottom lines with solid progress. At current valuations, including a forward P/E of 6.7, Rite Aid still has a lot of upside potential if it can continue to increase its earnings and expand its margins.
Bottom line
By improving its balance sheet and focusing on operation enhancement, Rite Aid Corporation (NYSE:RAD) continues to move in the right direction. As Rite Aid keeps generating positive earnings and expanding margins, more upside is expected for this mid-cap pharmaceutical retailer.
The article Does This Drugstore Have More Upside? originally appeared on Fool.com and is written by Nick Chiu.
Nick Chiu has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Nick is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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