Rite Aid Corporation (NYSE:RAD) has a new lease on life. Now that the sale of stores to Walgreens Boots Alliance Inc (NASDAQ:WBA) has begun, Rite Aid has the cash flow it needs to reduce a crushing debt burden and RAD stock has bounced off its lows as a result.
The only thing left to decide is if Rite Aid will have a second act as a regional drug store or if it destined to sell itself off. Rite Aid has time for either option, and either would hugely benefit RAD stock.
Store Sales Have Helped RAD Stock
In a previous article, I wrote that the pessimism on RAD stock was overdone and recommended a buy. It fell for a few weeks following that call until it rallied after Wallgreens started acquiring its stores in markets that Rite Aid wants to exit. With a debt level four times its market cap, this sale gives RAD much-needed capital it can use to pay down its massive debt load. Rite Aid will also have lower debt-service payments, which will improve the cash situation. Perhaps the credit rating will also improve, which will allow them to lower the interest costs of existing debt.
Once Walgreens started acquiring Rite Aid stores, confidence returned to the stock. The RAD stock price went from a low of $1.38 to almost $2.25 per share within two weeks. It has since retreated and stabilized near the $1.80 level. Still, cash coming in and underperforming stores going out, bodes well for RAD stock. Best of all for Rite Aid, its remaining stores have an estimated worth of almost $6 billion. This figure is about three times the current market cap for Rite Aid stock.
Rite Aid Improves Itself Amid Tough Competition
Moreover, with the sale, the company has made changes that should improve customer experiences. With its presence on both coasts, Rite Aid becomes more of a regional play. Rite Aid remains the largest drugstore chain in its core region, the East Coast. Operating mostly in a region where the company remains strongest should help. Also, the store is boosting its online presence, which should at least prevent the chain from falling further behind.
Despite the improved financial situation, deep problems remain. The company continues to face formidable competition — and not just from Walgreens or CVS Health Corp (NYSE:CVS). Many retailers, such as Wal-Mart Stores Inc (NYSE:WMT), Costco Wholesale Corporation (NASDAQ:COST) and Kroger Co (NYSE:KR), compete directly in the pharmacy business. Most of these stores offer more variety than Rite Aid. Despite some improvements, what remains of Rite Aid looks more like an acquisition target than a company that’s going to come back and prosper.
Speculation Continues on Who Would Acquire Rite Aid
Since the Justice Department blocked a complete acquisition of Rite Aid, the question of who would purchase the remaining stores remains unanswered. Some believe a private equity firm will take them over. Others have speculated that Amazon.com, Inc. (NASDAQ:AMZN) will buy Rite Aid for its licenses to sell prescription drugs.
Amazon previously acquired drug wholesaler licenses in 15 states. However, the e-commerce giant recently canceled its application to acquire a similar license in the state of Maine. Rite Aid currently operates stores in Maine. Most analysts have written off the possibility that Amazon would be interested in Rite Aid. However, by purchasing Rite Aid, Amazon would take over those wholesale licenses. Rite Aid could also provide a brick-and-mortar option for its customers, much like Whole Foods Market is doing in the grocery business. Either way, the sale of stores, the improved cash situation, and the in-store improvements have bought time to find the right suitor.
Final Thoughts on RAD Stock
Whether Rite Aid makes a comeback or whether it gets acquired, RAD stock should benefit in either case.
With the partial sale of the company to Walgreens, Rite Aid now has the cash to reduce its debt and interest payment burdens. And the cash buys the company time to decide whether to try to revive its brand or sell itself off.
However, with stores said to be worth three times the stock’s current market cap, a sale remains the more likely and more profitable option. No matter what happens, conditions remain favorable for a surge in RAD stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.