It’s Still Too Risky to Bet on Rite Aid Stock

RAD stock is coming off its best seven-day stretch in five years, but it's not likely to matter for Rite Aid

Struggling pharmacy retailer Rite Aid (NYSE:RAD) has shown surprising signs of life recently, as RAD stock has rallied an impressive 40% over the past seven trading days. That’s a big rally in a short amount of time. Indeed, it’s the biggest seven-day rally RAD stock has staged in the past five years.

It's Still Too Risky to Bet on Rite Aid Stock
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Does this recent strength imply that the worst of the secular decline in Rite Aid is over? Is RAD stock finally ready to rebound?

I don’t think so. It’s worth contextualizing this rally. Sure, the stock is coming off its best seven-day stretch in over five years. But, the Rite Aid stock price today is simply where it was a month ago.

In other words, this big rally happened on the heels of a big selloff, and in the big picture, it doesn’t look all that significant. It also doesn’t help that there isn’t much fundamental or optical support for this rally. The valuation remains fairly unattractive without fundamental upside drivers. As such, I think the big seven-day rally in Rite Aid stock is more likely to fizzle out than to persist.

To be sure, at some point, Rite Aid stock could become a buy with multi-bagger potential. But at the current moment, that bull thesis lacks clarity. So long as it continues to lack clarity, I think the safest place to hangout here is on the sidelines.

Rite Aid Has Secular Challenges

When it comes to Rite Aid, I think what you have is the pharmacy version of GameStop (NYSE:GME) or J.C. Penney (NYSE:JCP). That is, just as GameStop and J.C. Penney failed to adapt to digital consumption trends and have subsequently lost relevance in the video game and mall retail worlds, Rite Aid has similarly failed to adapt to digital consumption trends and has subsequently lost relevance in the pharmacy world.

The story is pretty simple. E-commerce happened. When e-commerce happened, everything changed. Consumers shifted from physical to digital shopping. Some retailers changed with the times — in the pharmacy world, see Walgreens (NASDAQ:WBA) and CVS (NYSE:CVS) — and have since thrived as omni-channel retailers. Both Walgreens and CVS have seen their pharmacy market shares grow from 2010 to 2018.

Other retailers didn’t adapt. See Rite Aid, who didn’t refresh stores to be tech-savvy or build out a robust e-commerce business. Not surprisingly, Rite Aid’s pharmacy market share has dropped from 6.2% in 2010, to 2.6% in 2018, while it has gone from a top three pharmacy retailer in 2010, to being nudged out of the top five by the likes of Walmart (NYSE:WMT) and Kroger (NYSE:KR).

The unfortunate reality here is that there isn’t much visibility to Rite Aid gaining relevance anytime soon. The balance sheet is cash-strapped and debt-heavy, and cash flows aren’t consistently profitable, so the company is operating with two hands tied behind its back for the foreseeable future — meaning that store refreshes and e-commerce expansion aren’t coming soon.

In other words, Rite Aid has secular challenges that aren’t going away any time soon. Until they do, it’s tough to see Rite Aid stock rallying in a meaningful way from here, especially considering the stock trades at a not-that-cheap 7-times forward EBITDA multiple.

Rite Aid Stock Could Turnaround … But Not Yet

As I’ve argued before, Rite Aid stock could turnaround in the event that its distribution partnership with Amazon (NASDAQ:AMZN) introduces Rite Aid to a new and valuable shopper demographic.

The thesis here is simple. Rite Aid shoppers skew old and poor. Amazon shoppers skew young and rich. Amazon’s new partnership with Rite Aid will inevitably bring some Amazon shoppers through Rite Aid’s doors. Most of those shoppers probably haven’t been inside a Rite Aid store in ages, if ever.

Most will probably look at the outdated stores, be uninterested, pick up their Amazon.com order, and promptly leave. Some may actually like what they see when go into Rite Aid, meaning some of these new, young and rich shoppers may actually start shopping at Rite Aid stores somewhat regularly.

That will provide a meaningful lift for Rite Aid’s sales, and this lift should last for several years.

All in all, the Amazon partnership gives Rite Aid a unique opportunity to win over a demographic that has long forgotten about Rite Aid. If the company appropriately capitalizes on this opportunity, RAD stock could turn into a multi-bagger from here.

But, we don’t know if that will happen. Until the data suggests that this is indeed happening, the turnaround thesis in RAD stock will lack conviction and clarity.

Bottom Line on RAD Stock

At the current moment, there are two ways to look at the price action in RAD stock. One, Rite Aid stock is coming off its best seven-day stretch in over five years, and is ready to turnaround. Two, Rite Aid stock is exactly where it was a month ago, and is stuck in a secular downtrend.

I think the latter perspective holds more credibility and has more support. As such, for the foreseeable future, I think it is best to avoid RAD stock.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.  


Article printed from InvestorPlace Media, https://investorplace.com/2019/09/its-still-too-risky-to-bet-on-rite-aid-stock/.

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