In recent years, Rite Aid (NYSE:RAD) stock has done little more than fight to survive. The Camp Hill, Pennsylvania-based pharmacy chain has long struggled against its peers and has failed at multiple attempts to sell itself to a competitor. This resulted in shareholders approving a 1-20 reverse stock split in April to avoid delisting. However, this did little to stem the tide.
The company temporarily boosted optimism when it joined the Amazon (NASDAQ:AMZN) delivery network. However, excitement over the deal quickly faded. Plus, a change in the CEO position has failed to stem the drop in the RAD stock price. Without a deeper partnership with Amazon, I see little reason to buy Rite Aid stock.
Amazon Deal Brought Only Temporary Relief
The Amazon deal initially sparked hope as it would increase foot traffic into Rite Aid stores. There’s some logic to this argument. As our own Will Ashworth argues, the Amazon return program at Kohl’s (NYSE:KSS) led to a 9% rise in foot traffic and an 8% revenue increase in stores which supported the return program. But will that be enough?
I think some also hope this will lead to an Amazon purchase of Rite Aid itself. Such optimism has brought disappointment before. An attempt by Walgreens Boots Alliance (NASDAQ:WBA) to take over the company led instead to the sale of 1,932 Rite Aid stores to the pharmacy chain. Albertsons also tried to buy Rite Aid. This proposed union also fell through after RAD shareholders balked.
Moreover, the Amazon deal failed to cure the ills of Rite Aid stock. Within a month, RAD stock had fallen to levels it saw before the Amazon announcement. Also, the recent ascendancy of Heyward Donigan to the CEO position has not stemmed the decline.
Rite Aid Can No Longer Compete
As a result, the RAD stock price now stands at about $5.60 per share. Certainly, Amazon and online sales have changed the dynamics of the pharmacy business for Rite Aid and its peers. Standalone pharmacies have long dealt with competition from both grocers and major retailers.
Now with the threat of online competitors, margins feel more pressure than ever. This probably explains some of the reasons why CVS (NYSE:CVS) entered the insurance business and built in-house clinics.
Rite Aid cannot follow suit. Just as the company needs to make significant changes to survive, RAD finds itself with both falling revenue and profits. Unfortunately, as a $300 million company with $6.4 billion in long-term debt, it has no financial room for such a pivot.
Put simply, RAD stock has become the Sears Holdings (OTCMKTS:SHLDQ) or the JCPenney (NYSE:JCP) of pharmacies. Rite Aid has evolved into the type of business that consumers do not need in today’s world.
The fact that its typical customer is over 55 and earns under $40,000 per year does not bode well for its future. Moreover, competition forces it to sell what it does offer at thin margins. Unless and until Amazon or another major online retailer can make Rite Aid relevant, I see a dim future for RAD stock.
The Bottom Line on RAD Stock
Only a deeper partnership with Amazon can save Rite Aid. The changing retail pharmacy landscape has fundamentally changed Rite Aid’s business. Unlike Walgreens and CVS, it lacks the necessary resources to improve its business and remain relevant. Debts remain too high, and numerous suitors have passed on what remains of Rite Aid.
If results at Kohl’s serve as an indication, Rite Aid stores will see more foot traffic and revenue. However, this does not change the fact that consumers can find anything Rite Aid offers elsewhere and probably at a lower price.
If Amazon took over the stores entirely, perhaps the company could still play a significant role in today’s pharmacy business. Barring that scenario, the time has come to think of Rite Aid stock as the next Sears.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.