Rite Aid Corporation (NYSE:RAD) appears to be making progress with its turnaround efforts, as surprisingly strong same-store sales allowed RAD to exceed analysts’ average profit estimate.
Same-store sales are a key measure of a retailer’s health, and RAD’s better-than-expected gain suggests the drugstore chain is gaining some operational momentum. For the fiscal fourth-quarter, RAD said same-store sales rose 4.5%. Wall Street analysts were looking for sales growth of 3.6%.
The manner in which RAD eclipsed estimates shows Rite Aid stock remains a legitimate way to play rising spending on healthcare, as the healthy same-store sales beat was driven by prescription drug sales that surprised to the upside. Pharmacy same-store sales gain 5.7%, while front-end sales increased a modest 2%.
RAD same-store sales were clipped by the introduction of new generic drugs, but solid growth in the number of prescriptions filled — up 3.5% year-over-year — more than offset the damage. And make no mistake: Pharmacy results are critical, as 68% of total revenue came from the back of the store.
Total revenue increased 3.8% — driven by same-store sales growth — to $6.8 billion. That matched analysts’ average forecast, according to a survey by Thomson Reuters.
On the bottom line, RAD’s adjusted pre-tax earnings came to 12 cents a share, beating Street estimates of 7 cents. (Net income soared to $1.79 a share from 6 cents a share last year because of a $1.6 billion tax benefit.)
RAD Rides the Healthcare Wave
Rite Aid earnings made the income statement a lot prettier this year, but its transformation into a so-called retail healthcare company still hinges on its leap into the business of being a pharmacy benefits manager.
Back in February, RAD bought a national PBM called Envision Pharmaceutical Services for $1.8 billion in cash and $200,000 worth of stock. Having its own PBM gives RAD a place at the same table as CVS Health Corp (NYSE:CVS) when negotiating with pharmaceutical companies over prices for prescription drugs. If RAD can offer cheaper prescriptions, foot traffic and same-store sales will inevitably benefit.
The bottom line is that between the sales momentum and acquisition of a PBM, Rite Aid stock hasn’t looked this promising in a long time — and the market knows it. RAD has looked like a “hold” for a long time, but it’s become much more appealing recently. Indeed, Rite Aid stock is up 15% over the past month, a period in which the broader market has barely budged.
The technicals on RAD stock are much improved, too. A strong start to 2015 allowed shares to describe a golden cross in January, and that has proven — so far — to be a good buy indicator.
That said, Rite Aid stock is pricier than its two biggest rivals. Part of the premium valuation probably stems from the progress its making in its ongoing transformation. It can also be explained by the Street’s hot long-term growth forecast.
A pricey valuation probably makes RAD stock unsuitable for hardcore value investors, but for everyone else, shares might just be getting started.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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