Rite Aid’s (RAD) same-store sales growth for the month of September was rather disappointing — by far the most mediocre growth that RAD stock investors have seen in quite some time.
However, that’s only because investors aren’t looking deeper into the numbers, a classic example of what’s wrong with RAD stock lately.
Rite Aid Sales Are Better than They Appear
Rite Aid grew sales 1.8% to $2.059 billion during the month of September. This is far worse than the 3%, and sometimes 4% growth that investors have come to expect during the last year or so.
However, there are a couple things to consider about this figure.
First, Rite Aid reported sales through Sept. 26, whereas it reported until Sept. 27 last year. That extra day of reporting could have added an extra $80 million to Rite Aid’s revenue.
Furthermore, and more importantly, September marked the first month last year when Rite Aid’s sales growth really started to explode.
Up until this point, Rite Aid’s growth has been compared to months in 2014 when it was slightly positive year over year, about 1% to 3%. However, in September of last year, same-store sales jumped 5.1%, and averaged a growth rate of more than 5% through the final four months of 2014.
Therefore, 1.8% growth may not seem like much, but on top of 5.1% growth last year, it is rather significant.
What’s Going On With the Stock?
That said, the perception that Rite Aid had a down month in September can also be said about RAD stock over the last month, when it has declined 25%. RAD stock decline occurred after it reported fiscal-second-quarter earnings, but in retrospect, RAD had a solid quarter.
The problem with RAD stock right now is that investors have chosen to prioritize margins over revenue growth, not seeming to realize or consider that the company’s $2 billion acquisition of EnvisionRX caused a temporary decline in margin.
Keep in mind, EnvisionRX is growing at a remarkable rate, and is a necessary component for Rite Aid to gain long-term leverage on drug pricing and achieve sustainable growth.
However, EnvisionRX’s operating margin last year was only 1.6%, about half that of Rite Aid. Given the fact that EnvisionRX is on pace for $5 billion in revenue this year, it should have been expected that RAD’s adjusted EBITDA margin declined from 5.6% last year to 4.5% in this recent quarter.
Not to mention, RAD had to account for various one-time costs associated with the acquisition of EnvisionRX during its last quarter.
Bottom Line
Rite Aid continues to produce positive same-store sales growth, and by acquiring EnvisionRX, it gains an asset that has grown from revenue of just $1.7 billion in 2011 to an expected $5 billion this year.
RAD is a company that is expected to grow total revenue by 16.6% this year and another 9.4% next year, and trades at just 0.18 times next year’s sales versus a 0.75 times multiple for Walgreen (WBA).
Therefore, Rite Aid is growing larger, and its margins and profit will improve as synergies with EnvisionRX are realized.
As a result, Rite Aid is moving in the right direction, and soon, so will RAD stock price.
As of this writing, Brian Nichols owned shares of Rite Aid.
