Rite Aid Turnaround Stumbles, Sours Sentiment on RAD Stock

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Rite Aid (RAD) really looked like it was turning things around about three months ago, but the latest quarterly results put RAD stock back firmly in the “hold” camp.

rite aid rad stock priceAfter all, RAD missed Wall Street earnings estimates and cut its profit outlook. The Rite Aid stock price predictably plummeted on the news, but with its turnaround having taken a step back, it’s hard to call shares a bargain (especially at 27 times forward earnings.)

The bottom line is that it looks like whatever progress RAD made in both its retail operations and gaining investors’ confidence in the earlier part of the year has been at least partly undone by this disappointing quarter.

And it’s not like we haven’t seen this movie before. It seems like every time the drugstore chain shows signs of progress with its turnaround, it coughs up a hairball. Even worse, RAD is struggling at a time when the macroeconomic backdrop is unusually favorable.

No wonder RAD stock has been so volatile, whipsawing between $4.50 and $9 a pop over the last year. Try as it might, it can’t consistently take advantage of industry tailwinds.

Take rising spending on healthcare, throw in the consolidation of drugstore operators with pharmacy benefits managers, and stocks like RAD should be slam dunks. Just look at rival CVS Health (CVS), which transitioned from dowdy drugstore chain to integrated healthcare delivery company. The market has been eating this story up, sending CVS stock to nearly a 40% gain over the last 52 weeks.

RAD has the blueprint, but it doesn’t quite have the execution, and that’s a great way to get market sentiment moving against you quickly. Heck, three months ago, the company’s turnaround was looking almost splendid. Same-store sales — that key measure of a retailer’s health — were surprisingly strong and RAD stock crushed Wall Street’s profit estimate.

RAD Takes a Step Back

Cut to today and both same-store sales and earnings per share missed Street estimates by wide margins. Worst of all, RAD slashed its profit forecast. That market always hates that.

If you’re a Rite Aid stock bull, you can explain away the profit miss and forecast cut fairly easily. They stem from RAD’s acquisition of pharmacy benefits manager EnvisionRx, which is a widely regarded as a wise — and necessary — move.

That RAD screwed up its initial projections for the acquisition isn’t very reassuring, but at least the bottom-line woes are a result of following a credible strategic plan to buy growth.

The same-store sales situation is less reassuring. The last time around, RAD managed to beat same-store sales estimates by wide margins despite the introduction of new lower-margin generic drugs. In the most recent quarter, however, new generics caught up to the chain, causing same-store sales to rise just 2.9% vs. a forecast for 3.8%.

RAD’s core retail turnaround remains bumpy, and any premium for acquisition-fueled growth — or RAD’s potential as a takeout target — looks to be more than covered by the share-price premium. (While Rite Aid stock trades hands at a hefty 27 times forward earnings, CVS fetches just 18.)

Rite Aid stock ain’t cheap. It’s going to be a while before the transition to an integrated health and wellness company really benefits the bottom line. Although RAD is making the right moves at the right time, it’s been a case of two steps forward, one step back. It wouldn’t hurt to wait for more visibility before committing new money to this name.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2015/06/rite-aid-rad-stock/.

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