To say Rite Aid Corporation (NYSE:RAD) have been on a roller coaster ride this year would be a considerable understatement. RAD stock fell from highs near $9 per share in January to a low of less than $3 this month on reports that a much-needed pairing with rival Walgreens Boots Alliance Inc (NASDAQ:WBA) probably wasn’t going to be allowed to happen.
Then on Monday of this week, Rite Aid stock gained 30% following reports that — SURPRISE! — the FTC may be more supportive of the idea than initially expected.
RAD shares followed through a little bit on that big Monday move, with most investors still well aware that the drugstore chain’s fiscal-first-quarter numbers were due early Thursday.
As it turns out, they made a bad bet. Rite Aid stock was down over 20% early this morning following a fiscal Q1 report that not only fell short of expectations, but also informed investors that Walgreens and Rite Aid essentially scrapped the deal … even before the Federal Trade Commission had a chance to say yea or nay.
For the first fiscal quarter of its accounting year, Rite Aid reported an operating loss of 5 cents per share versus a profit of 1 cent per share in the same quarter last year. Revenue of $7.78 billion compared poorly to the year-ago top line of $8.18 billion. Same-store sales fell 3.9% on a year-over-year basis.
Analysts were collectively expecting a loss of one cent per share on sales of $8.17 billion.
Walgreens-Rite Aid Merger Plans Axed
In most respects, Thursday morning’s Q1 report was secondary to the long-awaited decision from the Federal Trade Commission regarding the intended merger with Walgreens. That decision became unnecessary today, with the two companies scuttling the merger plans, and instead agreeing to the transfer of 2,186 Rite Aid stores to Walgreens for $5.175 billion in cash. Rite Aid will also receive a deal-breakup fee of $325 million from Walgreens. Most of those proceeds will be used to pay down Rite Aid’s $7.3 billion long-term debt balance.
The saga began in October of 2015, when Walgreens Boots Alliance announced its intention to acquire the smaller drugstore chain, offering $9 per share of RAD stock.
Every potential stumbling block the suitor could have bumped into, however, seems to have been found.
After a year and a half of proverbially jumping through the FTC’s hoops — including agreeing to sell a wide swath of its acquired stores to rival drugstore chain Fred’s, Inc. (NASDAQ:FRED) — in May of this year Walgreens essentially gave the Federal Trade Commission an ultimatum. That is, it sent a letter of “certified substantial compliance” to the FTC, telling the regulator it had supplied all the information it needed to supply for the agency to make an informed decision, and now the government watchdog owed it a decision.
The commission won’t have to make a ruling, however, as the two parties agreed to a much smaller deal in the meantime.
Rite Aid CEO John Standley commented on the two companies’ decision:
“While we believe that pursuing the merger with WBA was the right thing to do for our investors and customers, this new agreement provides a clear path forward and positions Rite Aid as a strong, independent, multi-regional drugstore chain and pharmacy benefits manager with a compelling footprint in key markets. The transaction offers clear solutions to assist us in addressing our pharmacy margin challenges and allows us to significantly reduce debt, resulting in a strong balance sheet and improved financial flexibility moving forward.”
RAD stock holders weren’t quite as optimistic on Thursday morning.
Looking Ahead for RAD Stock
Prior to Thursday morning’s report, the analyst community was modeling a profit of one cent per share of RAD stock for the quarter ending in August, on sales of $8.07 billion. The company earned three cents per share in the comparable quarter a year earlier, though that top line would be up 0.5% year-over-year.
For the full year, the pros had been calling for a breakeven and revenue of $32.83 billion. That sales projection is just a hair less than fiscal 2017’s tally, though a breakeven on per-share basis would be six cents less than the company earned in the prior year.
Those outlooks were based on the trajectory of numbers gathered prior to Thursday morning’s first quarter report. They’ll likely be adjusted downward in the foreseeable future.
Either way, it’s well worth noting Rite Aid is now beyond the mere cusp of swinging to a loss. Its first priority being to stop the bleeding, and it’s not entirely clear if the smaller deal with Walgreens will allow that to happen.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.