Over the past few days, broader markets have been trying to stabilize and even rally. However, Rite Aid (NYSE:RAD) stock has not participated in this recent up move. Even after a big gain going into the Easter weekend, year-to-date, RAD stock is down about 15.6%.
The novel coronavirus outbreak is likely to weigh on investors’ minds in the foreseeable future. Rite Aid is expected to release Q4 FY20 earnings on April 16. If you’re considering investing in the stock for the long-term, you may want to analyze the results before buying into the shares.
Rite Aid Stock and the Pandemic
The Pennsylvania-headquartered company is the third-largest drugstore chain in the U.S. With approximately 2,500 stores in 19 states, it also ranks #107 in Fortune 500.
CVS Health (NYSE:CVS) is currently the largest domestic pharmacy chain, followed by Walgreens Boots Alliance (NASDAQ:WBA).
In a matter of weeks, the COVID-19 pandemic has become a national public health emergency. All three pharmacy chains have released regular updates on the types of measures they’re taking for their employees and customers as well as communities they operate in.
RAD is now one of the participants in the White House COVID-19 Response Working Group. It has expanded services, such as home-delivery. Management has also assured consumers that the “current supply of generic medications is presently sufficient and the company does not anticipate any significant near-term supply chain disruptions that will affect its ability to fill prescriptions.”
Furthermore, it’s piloting a testing site at one of its Philadelphia locations. The aim would be to extend testing to Rite Aid parking lots in multiple locations.
Recent research by James Broughel and Yuliya Yatsyshina of George Mason University suggests that “pharmacies and pharmacists themselves are likely to become instrumental in testing for COVID-19 in the coming weeks and months. Pharmacies are well positioned to become testing sites because of their geographical coverage across the country.”
On April 6, management announced that it’d be hiring “5,000 associates for full and part-time roles. Positions will include cashiers, pharmacy technicians and distribution center associates.”
In summary, over the past several weeks the pharmacy chain has taken steps to serve customers and healthcare workers more effectively in the national battle against the outbreak.
However, how these steps may actually affect Rite Aid’s upcoming earnings and stock price in the next few months remains to be seen.
What to Expect From Q4 Earnings
The company beat Wall Street’s expectations when it released Q3 FY20 quarterly results in December. Revenue from continuing operations for the quarter was$5.46 billion. The group also reported net income from continuing operations of $52.3 million, or 98 cents per share.
Rite Aid divides revenue into two main segments:
- Retail Pharmacy (revenue of $3.91 billion was a 1.7% decrease compared YoY due to a reduction in store count)
- Pharmacy Services (revenue of $1.61 billion, was an increase of 5.7% YoY due to an boost in Medicare Part D membership).
On Dec. 18, prior to the earnings release, Rite Aid stock closed at $8.32. By Dec. 27, it hit a 52-week high of $23.88. However, by March 13, RAD shares saw an intraday low of $9.24.
Later, on March 16, management held a rather upbeat analyst day. The company expects $21.9 billion or more in fiscal 2020 revenue and between $22.5 billion-$22.9 billion in fiscal 2021. Those numbers were much better than what the Street was expecting.
As a result, the stock rallied to an intraday high of $19.92 on March 19. However, the shares are now around $13.
One of the reasons Rite Aid stock has been weak in recent days is the guidance issued — or rather lack of it — by Walgreens Boots Alliance. On April 2, WBA company released Q2 FY20 earnings. Management said “at this time WBA is not in a position to accurately forecast the future impacts” of the outbreak.
Understandably, Rite Aid stock investors are concerned that the company may provide a similar update in less than a week. So they have already been pushing down the share price.
Bottom Line on RAD Stock
It’d not be wrong to say that stock markets provide a view of what investors expect for the future of an economy as well as of a company. The current global pandemic has important health and economic consequences. It has also been bringing about major changes to our daily lives as well as how corporations are run.
Recent volatility levels in broader markets have rivaled those last seen in December 2008 and even October 1987. And the price action of RAD stock in the past several weeks is a testament to this choppiness.
If you’re not currently a shareholder, you may want to wait until the release of Q4 earnings. The price may easily swing down further in the coming days. I’d be a buyer of Rite Aid stock as the price declines toward or even at $10. In the long run, I’m cautiously optimistic for the stock.
However, if you already own the shares, you may want to wait and ride out any potential volatility. Alternatively, you may consider initiating a covered call position. For example, a May 15-expiry ATM call would provide some protection in case of further declines in the Rite Aid stock price.
It’d also enable you to participate in an up move following the earnings release too. A potential earnings beat and a positive guidance could lead to another up move in the stock.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, she did not hold a position in any of the aforementioned securities.
