From Bad To Worse: Is Rite-Aid Corporation (RAD) Stock Set To Recover?

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Rite Aid Corporation (NYSE:RAD) has broken investors’ hearts all year. RAD stock, in fact, is probably 2017’s single-best definition of the concept “value trap” — a stock that looks cheap due to its assets and yet it trades ever-lower.

From Bad To Worse: Is Rite-Aid Corporation (RAD) Stock Set To Recover?

The story of Rite-Aid’s various merger attempts with Walgreens Boot Alliance Inc (NASDAQ:WBA) is by now old news. RAD stock slumped from $8 to below $3 as the Federal Trade Commission limited Walgreens’ ability to close a deal to acquire Rite-Aid whole, or a large portion of its stores.

At that point, in late June, many folks, myself included, thought the worst had passed. In August, I wrote not to give up on Rite Aid stock, which appeared then to be the right move, as RAD stock rallied as much as 20% in September.

However, the value trap has kicked in again. Just when things appeared to be improving, Rite-Aid dropped an unpleasant earnings report on the market. Investors reacted swiftly, kicking RAD stock to new lows below the $2.00 level, not seen since early 2013. At this point, is there still a case for RAD stock, or is it time to throw in the towel?

Earnings Whiffed

Right off the bat, Rite Aid’s earnings report confused many people. This is because it reported net income of 16 cents a share, but an “adjusted” loss of a penny per share. For a two-buck stock, that’s a massive difference. Unfortunately, for RAD stock, the adjusted loss is the correct one.

The reported net income figure was bolstered due to the merger break fee the company received from Walgreens. Rite Aid got $325 million in much-needed funds from WBA as compensation for the merger failing. But that will come as cold comfort to shareholders who now face life owning an independent company that is struggling.

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The quarterly results are hard to spin in a positive light, as there are negative numbers everywhere. Starting out on the top line, revenues declined for the quarter by 4%, dropping to $7.7 billion. This is in line with same-store sales, which slipped a similar amount. Retail sales were off by about 1%, while pharmacy declined almost 5%. Rite Aid’s pharmacy sales were dragged by a severe tailwind from new generic drug introductions, which took away almost 2% of sales compared to the prior year.

EBITDA, arguably the most important figure for Rite Aid, plunged from more than $300 million to just $213 million, primarily driven by the weakness in pharmacy. While investors tend to focus on earnings, EBITDA is of pivotal importance for Rite Aid, since it determines how much cash flow Rite Aid has available to cover its debts. With the stock breaching $2, it’s clear that some market players are starting to think Rite Aid could go bankrupt. Management needs to shore up this EBITDA figure as quickly as possible to put these concerns to rest.

What Now for RAD Stock?

At the time that Walgreens recast the deal to include fewer RAD stores, it appeared to be a positive. Rite Aid seemed to be keeping many of its better locations, while selling off weaker stores. The deal has just closed, so this quarter doesn’t reflect this potential bullish catalyst yet. We’ll see once Rite Aid starts reporting off its smaller base if its remaining stores offer better performance or not.

In any case, Rite Aid needs something to turn the tide and it is making moves to try to do so. The quarterly results showed a business in clear decline on all fronts. I’ve worried that management might be distracted from running the core business, due to the ongoing legal and regulatory headaches associated with the Walgreens merger process. This con to RAD stock has in fact played out.

At the time of this writing, Ian Bezek owned WBA stock. He had no positions in any of the other aforementioned securities. You can reach him on Twitter at @irbezek.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


Article printed from InvestorPlace Media, https://investorplace.com/2017/10/bad-worse-rite-aid-rad-shares-finally-set-recover/.

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