Rite-Aid Stock Looks Well-Positioned to Climb After Its Q1 Results

During its last earnings conference call, Rite Aid (NYSE:RAD) made conservative comments about its near-term outlook.  Meanwhile, there are multiple signs that the retailer is in the midst of a turnaround. Given these points, I’m bullish on RAD stock heading into the release of the company’s fiscal first-quarter results. The company’s earnings for Q1, which ended in February,  are slated to be unveiled on June 25.

RAD Stock Looks Well-Positioned to Climb After Its Q1 Results

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In March, as the coronavirus crisis in the U.S. began, Rite Aid’s comparable front-end same-store sales surged an incredible 33% year-over-year, the retailer announced in conjunction with its Q4 earnings. The company said that the surge was driven by strong demand for ” general cleaning products, sanitizers, wipes, paper products and OTC items.”

Since drug stores were declared essential throughout the U.S.  and were consequently allowed to remain open during the crisis, the huge increase of Rite-Aid’s sales certainly makes sense.

With many other stores closed during the lockdowns, the company’s sales of some products, such as stationery, cosmetics, toys, and clothes, were likely boosted during the lockdowns. Further, many consumers were looking to buy as much toilet paper, cleaning products and sanitizer as they could. And finally, consumers likely bought large amounts of over-the-counter medicine.

Rite Aid said that its sales growth moderated in April, but its sales growth was likely still fairly strong in April and May as a result of the drivers I outlined above. Those positive catalysts likely continued during much of the company’s Q1.

A Closer Look at RAD Stock

On its Q4 earnings conference call, Rite Aid stated that its increased sales were “largely offset” by higher costs, including bonuses for its workers and higher cleaning costs.

Additionally, the company warned that the 8.3% YOY jump in its number of prescriptions filled (which it said was the result of people filling 90 day’s worth of prescriptions pre-lockdown, would likely reduce prescription sales in April and May. Finally, Rite Aid stated that delays in elective medical procedures could hurt its prescription trends.

But I think the company’s comments will prove to be overly cautious and unwarranted. The nation’s larger supermarket chain, Kroger (NYSE:KR), also had to make large, extra investments as a result of the coronavirus crisis, and it recently reported that its Q1 EPS had jumped to $1.52 from 95 cents versus the same period a year earlier.

I believe that the surge in Rite Aid’s business also meaningfully lifted its bottom line last quarter.

I think that Rite Aid’s subscription trends can continue to be fairly strong going forward. In the last few months, many unemployed individuals and people working from home have had much more time to get new prescriptions and refill their expired subscriptions. People have generally been more worried about their health during the coronavirus crisis and may have sought more prescriptions from their doctors.

The suspension of elective medical procedures may have had a negative impact on Rite Aid’s prescription trends in Q1. But starting last month, many states began resuming such procedures, likely triggering some pent-up demand for them. Further, I believe that Rite-Aid’s other positive catalysts will far outweigh that one negative point.

Previous Signs of a Turnaround

In Q4, which ended in February, before the coronavirus crisis started in the U.S., Rite Aid’s EBITDA, excluding certain items, rose by $1.5 million versus the same period a year earlier to $135.6 million.

Its “same-store 30-day equivalent prescription count” surged 5% YOY. Further, excluding income tax and “restructuring-related costs,” it generated $20.1 million of net income in Q4, versus a net loss of $55.9 million in Q4.

I think the company’s results show that the initiatives of its new CEO, Heyward Donigan, who was hired in August 2019, are working. Among these initiatives are improving its e-commerce capabilities and increasing the number of Medicare Part D members it services.

In Q4, its digital sales jumped 28% YOY and its Medicare Part D membership surged 39% YOY. Additionally, Rite Aid’s partnership with Amazon (NYSE:AMZN), which was only slated to finish rolling out to more than 1,500 Rite Aid stores at the end of last year, may have started to meaningfully positively impact Rite Aid’s results last quarter.

The Bottom Line on RAD Stock

Rite Aid’s March sales surge suggests that its business thrived during the coronavirus crisis. Additionally, it reported fairly strong Q4 results, indicating that Donigan’s initiatives are working.

Yet Rite-Aid stock is down about 20% from its February high of $16.04. I believe that investors have underestimated the company’s Q1 performance, creating a buying opportunity ahead of its upcoming results.

As of this writing, Larry Ramer did not own shares of any of the aforementioned securities. Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been airline stocks, oil stocks and Snap. You can reach him on StockTwits at @larryramer.

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