Rite Aid (RAD) Down 23.5% in Three Months: Can it Rebound?

·5-min read

Rite Aid Corporation’s RAD shares plunged 23.5% in the past three months, underperforming the industry’s decline of 20.8%. The stock’s dismal run on the bourses is attributable to muted demand for COVID tests and vaccines, the adverse impact of closed stores and lower membership at Elixir. This led to sluggish year-over-year performance in third-quarter fiscal 2023.

The company incurred an adjusted loss of 14 cents per share against the prior-year quarter’s earnings of 15 cents. Revenues declined 2.3% from the year-ago quarter’s $6,083.3 million. Sluggishness in both Retail Pharmacy and Pharmacy Services segments hurts sales.

In the fiscal third quarter, Retail Pharmacy's revenues fell 0.5% due to a reduction in COVID-19 vaccines and testing as well as store closures, offset by higher acute and maintenance prescriptions. Pharmacy Services’ revenues declined 7.1% due to client loss announced earlier and reduced Elixir Insurance membership.

Also, adjusted EBITDA plunged 21.2% from the year-ago period’s level to $121.9 million. The adjusted EBITDA margin contracted 50 basis points to 2% in the quarter.

Management trimmed the adjusted EBITDA view for fiscal 2023.
Adjusted EBITDA is anticipated in the range of $410-$440 million compared with the earlier guided range of $450-$490 million, induced by the expectations of cautious consumer demand and supply-chain headwinds. Retail Pharmacy’s adjusted EBITDA is predicted between $265 million and $285 million, down from the prior guidance of $305-$335 million. Pharmacy Services’  adjusted EBITDA is projected to be between $145 million and $155 million.

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Brighter Side of the Story

Despite these downsides, increased non-COVID prescriptions, lower SG&A and continued momentum at Elixir remain upsides for Rite Aid. This, along with expansion of delivery services including benefit of zero delivery fee with an eligible prescription, pick-up and drive-through services and Buy Online Pickup In Store initiative bode well. Also, home delivery in partnership with Uber Eats, Postmates, Amazon and Instacart acted as tailwinds .

RAD boasts same-day delivery services via DoorDash and ScriptDrop as well as collaboration with Afterpay to offer the service of shop online and pay later. The company also launched its loyalty program, Rite Aid Rewards, to expand its customer base to improve customer engagement in pharmacy and front-end sales.

As part of its corporate strategy and growth plan, Rite Aid remains focused on strengthening its foothold in mid-market PBM, innovation across its retail and mail-order pharmacy channels, enhancing in-store experience by curated digital offerings, improved merchandises and rebranding its image with a new logo. The company earlier launched first three Stores of the Future and successfully concluded the acquisition of Bartell, which will help expand customer base.

The company revealed plans to lower costs via the closures of 145 unprofitable stores, reduced corporate administrative expenses and enhanced efficiencies in worked payroll, and other store labor costs. It also intends to reduce costs related to Elixir due to declining membership. These cost-reduction initiatives are expected to generate $190 million in savings in fiscal 2023.

Management also expects a recovery in the front-end margin, driven by changes in its loyalty program, greater owned brand penetration and potential expansion in the gross margin at Elixir, stemming from its new rebate arrangement. That said, it is making efforts to grow the Elixir membership and reposition its approach to the Elixir Insurance Part D business.

Rite Aid has also won a number of new Medicare Advantage health plans for 2023 from its largest Medicare Advantage client. In another development, RAD launched 546 newly designed products and expects to launch more in near term. It also remains on track with plans to open small-format pharmacies in underserved rural markets such as Indiana, upstate New York and Virginia.

Wrapping Up

All said, we believe that expanded delivery services, increased non-COVID prescriptions as well as cost-saving initiatives are likely to offset demand woes and aid this Zacks Rank #3 (Hold) company in near term.

A raised sales view for 2023 instills confidence in this stock. Management now anticipates revenues in the range of $23.7-$24 million compared with the earlier guided range of $23.6-$24 million. Retail Pharmacy’s revenues are likely to be between $17.4 billion and $17.6 billion compared with the prior guided range of $17.35-$17.65 billion. Pharmacy Services’ revenues are expected to be in the range of $6.3-$6.4 billion, which compares favorably with the previous guidance of $6.25-$6.35 billion.

Also, a Momentum Score of B bodes well.

Stocks to Consider

Here are some better-ranked stocks you may want to consider, Urban Outfitters URBN, Arhaus ARHS and American Eagle Outfitters AEO.

Urban Outfitters, a leading lifestyle product and services company, currently carries a Zacks Rank #2 (Buy). Its expected EPS growth rate for three to five years is 18%.You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for URBN’s current fiscal-year’s revenues suggests growth of 5% from the year-ago reported figure.

Arhaus, which operates as a lifestyle brand and premium retailer in the home furnishing market, carries a Zacks Rank #2 at present. Its expected EPS growth rate for three to five years is 16.1%.

The Zacks Consensus Estimate for ARHS’ revenues and EPS suggest growth of 54% and 26.1%, respectively, from the year-ago reported figures. It has a trailing four-quarter earnings surprise of 112%, on average.

American Eagle Outfitters, a retailer of casual apparel, accessories and footwear, currently carries a Zacks Rank of 2. AEO delivered an earnings surprise of 82.6% in the last reported quarter.

The Zacks Consensus Estimate for American Eagle Outfitters’ current fiscal-year’s sales and EPS suggest growth of 1.3% and 58.9%, respectively, from the year-ago reported figures.

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