Investors Shouldn’t Gamble on Rite Aid Stock

RAD stock is definitely cheap for a reason

It seems like an eternity since I last wrote about Rite Aid (NYSE:RAD). It’s been so long since I produced an article about RAD stock, I had to look up my last column to refresh my memory about it. 

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As best I can tell, the last column I wrote about  Rite Aid stock was published in Sept. 2017. At the time, I called Rite Aid one of the worst retail investments available to investors. Almost two years later, it doesn’t look like much has changed. 

Investors who are considering buying the drug-store chain’s shares because RAD stock price is under $7 better like risk.  From my perspective, RAD stock is nothing but cheap trash. 

My article from two years ago suggested there were too many good retail choices to take a chance on RAD stock. Fast forward to today, and I still feel that way. Here’s why. 

What About the Amazon Deal?

Amazon (NASDAQ:AMZN) announced on June 27 that it had launched Amazon Counter in 100 Rite Aid stores. The move allows Amazon’s customers to pick up their packages at those 100 locations. By the end of 2019, it expects to have more than 1,500 Amazon Counter locations open in Rite Aid stores across the country. 

The news sent RAD stock up 21% in a single day as investors envisioned the extra sales generated by Amazon customers buying stuff at Rite Aid after picking up their packages. 

“Creating a seamless, convenient customer experience is a key element of our strategy and digital transformation,” said Jocelyn Konrad, Executive Vice President, Pharmacy and Retail Operations of Rite Aid in a statement. “Being the first store partner for Counter in the U.S. is a differentiator for Rite Aid and we believe our partnership with Amazon, that includes Locker, creates a stronger in-store experience for existing customers and new customers that come in to pick up their packages.”

Amazon wants to make buying from it as painless as possible. Programs like Counter will help it achieve this goal. 

The returns program at Kohl’s (NYSE:KSS) has been so successful for AMZN and KSS that they’ve expanded it to all 1,150 Kohl’s locations across the country. Not only that, but Kohl’s will start selling Amazon products in 200 stores, and some of the stores will feature the Amazon Smart Home Experience. 

The data from a pilot program involving 82 Kohl’s stores in Los Angeles and  Chicago found that Amazon’s returns generated a 9% increase in traffic and an 8% increase in revenue for KSS, proof that providing free returns for Amazon customers is good for retailers’ business.  

So, it was a no-brainer for Rite Aid’s management to pursue this partnership. It would have been managerial incompetence to have passed on the opportunity. 

Will the deal Boost Rite Aid’s revenue and RAD Stock Price?

It’s one thing to buy something at Kohl’s after dropping off a return; it’s another to buy something at Rite Aid after picking up a package. 

When I pick up a package of any kind, I’m excited to get it home and get it out of the box. Not only that, but because I’m fully aware of the fact that I’ve just spent cash on a product. I’m going to be less inclined to buy other things. 

However, when I’ve come in to return a package, I’ll be getting money back, making me more inclined to spend money while I’m still in the store. Not to mention that  Kohl’s products are much more conducive to spontaneous shopping than those of Amazon. 

I’m not suggesting that Rite Aid won’t benefit from this arrangement. It will. I just don’t think it will benefit nearly as much as people imagine, and that’s negative for RAD stock. 

If the deal were that attractive for drug-store retailers, I’m confident either CVS (NYSE:CVS) or Walgreens (NASDAQ:WBA) would be the ones opening the first Amazon Counter locations.

The Bottom Line on RAD Stock

Rite Aid lost $7.5 million in the first quarter on $5.37 billion of revenue. Its earnings and revenue both came in below analysts’ average  estimates. Its operating loss jumped nearly 80% year-over-year to $92.0 million. 

Although the company did say it would meet its 2019 guidance of at least $21.5 billion of revenue, its expected net loss of $170 million to $220 million should be a little too much to take for the average investor. Rite Aid is not a tech company with the next great product. It sells drugs and chocolate bars, making such a loss unacceptable. 

Like I said unless you’re into owning “cheap trash” stocks that have been mercilessly beaten down over the past few years, RAD stock is not a name I would buy at this point. It’s not even on my list of top ten retail stocks. 

But it is trading under $7. 

At the time of writing Will Ashworth did not hold a position in any of the aforementioned securities.

 


Article printed from InvestorPlace Media, https://investorplace.com/2019/07/investors-shouldnt-gamble-on-rite-aid-stock/.

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