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Rite Aid Corporation (RAD) Stock Isn’t Worth the Headache

The prospect of a RAD stock buyout is still on the table, but it's not guaranteed

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In mid-March, I penned some thoughts about struggling drug store chain Rite Aid Corporation (NYSE:RAD), mostly deciding it wasn’t going to be able to recover unless Walgreens Boots Alliance Inc (NASDAQ:WBA) successfully bought it. With that deal increasingly looking like it was not happening, RAD stock simply wasn’t worth the trouble.

A lot’s changed since then. Namely, Walgreens effectively gave the Federal Trade Commission a deadline to make a decision on the proposed merger, and Rite Aid posted quarterly earnings that weren’t disastrous. That is, it beat top- and bottom-line estimates.

Still, to say Rite Aid is on the mend and doesn’t need the Walgreens deal is a considerable stretch.

Still Not Much to Like

On the off chance you’re not familiar with the backstory, Walgreens first announced its intent to buy Rite Aid in late 2015, initially offering $9 per share of RAD stock. The deal would not only expand Walgreens’ footprint, it would mean the modernization of Rite Aid’s stores, not to mention let Walgreens into the pharmacy-benefits management arena where rival CVS Health Corp (NYSE:CVS) is carving out a nice-sized piece of the market for itself (as the business of pharmaceuticals increasingly becomes a vertically-oriented one).

The FTC balked, for a handful of reasons, not the least of which is that it’s presently understaffed and needs at least one more voting commissioner to help make — and legitimize — the decision. Even then though, the remaining two of the five commissioners involved in the decision have already made it clear the FTC is concerned about culling too much competition.

Walgreens proposed solution: Sell as many as 1200 Rite Aid stores to rival Fred’s, Inc. (NASDAQ:FRED), maintaining meaningful competition in all key markets.

The FTC is reportedly more open-minded with that plan on the table, though it’s still anything but a sure thing. And if it doesn’t happen, yes, Rite Aid and therefore RAD stock are still both in trouble.

Fast forward to April 25, and Rite Aid reported a breakeven on sales of $8.5 billion for the quarter ending at the end of February. Analysts had modeled a loss of two cents per share of RAD stock and revenue of $8.265 billion.

The market reacted bullishly to the news. RAD stock is up 7% since the fiscal fourth-quarter report, bringing a much-needed end to the 54% rout since the end of 2016. That’s when traders began recognizing the Walgreens/Rite Aid pairing may never happen. Its fiscal Q3 earnings report from December wasn’t exactly inspiring either.

Before you step into RAD on assumptions that things can’t get any worse, and can only get any better from here if Walgreens Boots Alliance somehow convinces the FTC to approve the union of the two companies, just don’t. Here’s why.

Aside from the fiscal Q4 beat, there’s not much else praise-worthy about the recently completed quarter. The company earned six cents per share in the same quarter a year earlier, and same-store sales fell a pretty hefty 3%, extending a long-standing streak in shrinking margins despite modest revenue growth.

A second look at Rite Aid reveals that not much has changed in the meantime in terms of operations that would improve profitability.

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