Retail drugstore chain operator Rite Aid Corporation (RAD) offers various health products and services through nearly 2,450 retail pharmacies across 17 states. Shares of RAD jumped 15% last Thursday morning, thanks to the company’s strong fourth-quarter operating results. Its pharmacy sales rose 12% year-over-year, driven by an increase in prescription sales and same-store sales. Moreover, investor optimism surrounding RAD’s better-than-expected fiscal 2023 outlook could be a boon for the stock.

However, RAD’s stock has given up its gain and is now trading 4.4% lower than where it closed on Wednesday night, before Q4 earnings were released.  Although the healthcare services provider reported guidance ahead of analyst expectations, its wider-than-expected net loss driven by non-cash impairment charges could significantly deter investors.

Moreover, as the drugstore operator’s Elixir business continues to struggle due to a decline in insurance membership and client loss, and COVID-19 immunizations decline with time, the company’s revenue-generating prospects could be negatively impacted. 

Here’s what could influence RAD’s performance in the upcoming months:

Uncertain Growth Potential

The consensus revenue estimate of $24.46 billion for fiscal 2022 represents a 1.8% increase year-over-year. But the company’s revenue is expected to decrease 4.1% from the prior-year quarter to $23.45 billion next year. Analysts expect RAD’s EPS to decline 131.6% in the current quarter ending May 2022 and 60% in the current year. Also, its EPS is estimated to decline 466.7% next year. Additionally, the company’s EPS is expected to decline at 3.7% per annum over the next five years.

Mixed Financials 

RAD’s retail pharmacy segment revenue rose 7.8% year-over-year to $4.43 billion in the fourth quarter ended February 26, 2022. But its pharmacy services segment revenues declined 9.4% from the year-ago value to $1.69 billion. Moreover, its adjusted EBITDA under this segment came in at $3.7 million compared to $35.2 million in the prior-year period. Furthermore, RAD’s net loss from continuing operations stood at $538.5 million, up 438% year-over-year. This was primarily due to higher facility exit and impairment charges. Also, it reported cash and cash equivalents of $39.72 million, compared to $160.9 million in the prior-year period.

Positive Developments

This month, Beyond Meat, Inc. (BYND) entered into a partnership with RAD to introduce Beyond Burger and Beyond Meatballs at nearly 2,000 stores nationwide. This strategic relationship will allow the drugstore retailer to offer additional options to its customers and cater to their demand for various products.

In February, the company launched the Rite Aid Rewards, a customer loyalty program to allow members to engage and earn points through promotions and purchases. This loyalty program will enable RAD to attract more customers by providing personalized offers.

Stretched Valuation

In terms of forward EV/EBITDA, RAD is currently trading at 14.04x, which is 14.5% higher than the industry average of 12.27x. Its trailing-12-month Price/Book ratio of 3.95x is 28.8% higher than the industry average of 3.07. Also, RAD’s forward EV/EBIT ratio of 169.76x is 902.3% higher than the industry average of 16.94x. s

POWR Ratings Reflect Uncertain Prospects

RAD has an overall rating of C, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. RAD has a C grade for Quality. The stock’s trailing-12-month gross profit margin of 20.8%, which is 39.1% lower than the industry average of 34.1%, is in sync with this grade. 

The company has a Stability grade of C, consistent with its relatively high beta of 1. In terms of Value grade, RAD has a C. The stock’s higher-than-industry EV/EBIT ratio is consistent with the grade.

In addition to the grades I’ve highlighted, one can check out additional RAD ratings for Growth, Momentum, and Sentiment here. RAD is ranked last of the four stocks in the A-rated Medical – Drug Stores industry.

Bottom Line

Robust growth in pharmacy sales and optimism surrounding an upbeat fiscal 2023 outlook has recently caused RAD’s shares to surge. However, the pharmacy chain operator continues to face challenges in its Elixir pharmacy business due to a decrease in membership. Moreover, its ballooning losses could make investors nervous about the stock’s prospects. Thus, we think investors should wait for it to fare better financially before investing in the stock. 

How Does Rite Aid Corporation (RAD) Stack Up Against its Peers?

While RAD has an overall POWR Rating of C, which equates to a Neutral rating, check out this other stock within the same industry with an A (Strong Buy) rating: CVS Health Corporation (CVS).

RAD shares were trading at $7.17 per share on Monday afternoon, down $0.05 (-0.69%). Year-to-date, RAD has declined -51.19%, versus a -7.17% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

More Resources for the Stocks in this Article