While some view its failed attempt to unite with Walgreens Boots Alliance Inc (NASDAQ:WBA) as a kiss of death, others think Rite Aid Corporation (NYSE:RAD) still has a fighting chance of digging its way out of the deep hole it dug itself into. Our very own Ian Bezek, for instance, thinks RAD stock could climb back to a price of $3 per share, if not more.
The bullish arguments are well-reasoned to be sure, and absolutely worthy of discussion. When all is said and done though, the drugstore chain may simply be too far gone to salvage. Three charts explain why, visualizing everything that’s wrong with the company.
Income Statement Doesn’t Look Good for RAD stock
Take any dissection of the company’s income statement with a grain of salt, because it’s underlying components could change without warning. Still, assuming the status quo will remain the status quo, Rite Aid’s operation itself is a loser. And, if nothing changes for the better immediately, matters are only going to get worse.
The matter isn’t as simple as it may seem on the surface. Though the proposed outright acquisition of Rite Aid by Walgreens and the subsequent sale of some its units from rival Fred’s, Inc. (NASDAQ:FRED) has been abandoned for the time being, it’s more muted plan to acquire only about 2200 units instead is still on the table. That would put roughly $5.2 billion worth of cash into Rite Aid’s bank account, where it could be used to pay down debt, thus reducing Rite Aid’s quarterly interest expense. That still leaves $2 billion worth of debt on the books, but even if it wiped it all away Rite Aid would still be bleeding money. It made $110 million worth of interest payments last quarter—payments that are slowly getting bigger—versus an operating loss of $75 million for Q2.
That superficially seems like it might be just enough to establish a breakeven. But bear in mind that if and when it sells half of its 4600 stores, it also cuts its revenue in half. Granted, shedding 2200 stores would also cut out a ton of store-related operating expenses. There’s no guarantee that it’s the stores themselves that are burning through too much money.
Cash Flow Statement
Fans and supporters of RAD stock will be quick to point out some of the items sapping its operational income tally are non-cash expenses. A more relevant measure of its health is its cash flow, which is still positive.
And they’re right, technically — Rite Aid was cash flow positive last quarter, operationally as well as in terms of free cash flow. There’s a clear deterioration of both cash flow measures though, which have been net-negative for the past few quarters.
For the same reason selling stores and pocketing a big chunk of cash could hurt as much as it helps the income statement, it could be equally unhelpful on the cash flow front.
Waning Analyst Opinions
Last but not least, a concerning chart that has absolutely nothing to do with Rite Aid’s results, but rather, a history of analysts opinions on RAD stock. Since October of 2015, the pros have dialed back their opinion of RAD stock from a “Buy” to a “Hold” while dialing back their target price for Rite Aid stock from $9.77 to $2.54… and both are still trending downward.
It’s not just the weakening stances on Rite Aid that bode poorly for RAD stock, however. Perhaps even more alarming is the growing degree of disinterest in the company as an investment. Two years ago there were twelve professional stock-pickers following it. Now there are only eight, and that figure’s been seven more often that not since late last year. If the analyst community abandons its coverage, even good news will be tougher to disseminate and make a positive impact.
In other words, analyst opinions are needed to provide perspective for potential buyers.
Bottom Line for RAD Stock
There’s no doubt this story has been, if nothing else, fascinating to watch. And, there’s nothing more compelling to cheer on and nothing more American to support than a turnaround story. There’s just not one in the cards for Rite Aid though, if the three images above have anything to say about it.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.