Rite Aid (NYSE:RAD) reports second-quarter fiscal 2020 earnings on September 26. This will be the first report since it appointed Heyward Donigan as its new CEO.
It also comes at a time in the company’s history where it faces weak earnings and crushing debts as it fights to survive in a changing marketplace. In hearing the report, traders will likely focus on clues as to the company’s future rather than news of the past.
Outlook the Likely Focus of the Report
For its second quarter, analysts expect a profit of seven cents per share. This would come in much higher than the 20-cent-per-share loss it reported in the same quarter last year. They also forecast revenues of $5.41 billion, down from $5.42 billion in the same quarter the previous year. While a profit amid falling revenues does not hurt RAD stock, analysts still project a loss of 2 cents per share for the current fiscal year.
Consequently, investors will likely watch this report for the company’s outlook. Especially, they will key in on hopes for a change in strategy by Ms. Donigan.
The company recruited her as its CEO in August. As a 30-year veteran of the healthcare industry, Rite Aid has enlisted the talent needed to rescue itself. So far, bringing on Ms. Donigan has sent the RAD stock price higher. That suggests some have hope that a turnaround remains possible. However, saving any organization from such a situation is a tall order for even the best leader.
Plus, Rite Aid stock continues to face massive change in the retail pharmacy business. Competitors such as Amazon (NASDAQ:AMZN) and other e-commerce outfits have changed the face of retailing. Walgreens Boots Alliance (NASDAQ:WBA) and CVS Health (NYSE:CVS) may benefit from larger economies of scale and less burdensome debt loads, but even they feel the effects.
Consequently, they must find new ways to entice customers to visit their pharmacies or interact with the business. Both retailers have offered visits with a healthcare professional inside their stores. CVS went so far as to go into the insurance business by purchasing Aetna.
Rite Aid Faces Long Odds
Sadly for bulls, Rite Aid’s debt load prevents management from making similar moves. As a company with a market capitalization of about $436 million, it holds a debt of $6.86 billion. Selling two distribution centers will take that debt down to $3.2 billion. However, this still leaves a tremendous obligation for a firm of its size.
Furthermore, management has had to resort to some less-than-ideal strategies for its equity to continue trading. RAD stock staved off a delisting from the New York Stock Exchange by instituting a 1-for-20 reverse stock split in April. However, history shows that such moves usually delay rather than prevent a move to the pink sheets.
As InvestorPlace feature writer James Brumley stated, it will take a miracle to revive RAD stock. He also points out, I think correctly, that Rite Aid could file for bankruptcy much like Fred’s did. Rite Aid may still have to accept that path eventually.
Admittedly, choosing Ms. Donigan as the CEO implies Rite Aid still chooses to fight for survival. If she can find a path to save the company without a Chapter 11 filing, Rite Aid stock will shoot much higher. I realize traders may take a speculative position in the company before earnings on that hope alone. However, barring a radical improvement, buying RAD stock here looks risky at best.
Final Thoughts on RAD Stock
Traders are likely awaiting the next earnings report for management’s outlook rather than the raw numbers. Analysts forecast a modest profit amid declining revenues. However, this would still leave Rite Aid fighting for survival. Since this is Ms. Donigan’s first quarterly report since taking the CEO job, most traders will look for guidance and any hope that the company can salvage RAD stock.
As of now, such a possibility appears remote. Capitalism is a process of creative destruction. Businesses that once dominated their industries fail to anticipate changes in their domain. These firms often end up existing as shadows of their former selves or permanently closing their doors.
The changing marketplace looks poised to make Rite Aid the next victim of capitalism’s sometimes destructive tendencies. Holders of RAD stock will not like this news. But as things appear now, Rite Aid has few apparent options to avoid becoming the Sears Holdings (OTCMKTS:SHLDQ) of pharmacy retailers. When the company releases its report on Thursday, RAD stock bulls will watch closely for any indication of avoiding such an outcome.
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.