Rite Aid (RAD) was a $.20 stock in February. It was even money on Wall Street as to whether the big drug store chain would go bankrupt. Now, even if same-store sales are down, as long as they are not too far down, the Rite Aid stock goes up. It trades at a 52-week high of $2.35.

Rite Aid is a classic example of how low expectations pay off for investors who bottom fish. Sales at the company’s stores were dropping at a sickening rate when the recession was in full force. But by August, they were down less than 2%. For Rite Aid, that is stable.

Two things helped Rite Aid turn the corner. The first was that its sales stopped dropping, but the second was nearly as important: GE Capital gave the retailer a $290 million revolving line of credit late in July. It is backed by $1 billion in assets.

The deal is not ideal, but without it, Rite Aid’s future was in doubt.  The GE transaction was part of a series of balance sheet improvements that began in June. Rite Aid had over $1.8 billion in debt that was due in 2010 and was able to get bankers to push the maturity of that paper further into the future. The S&P upped its outlook on Rite Aid from “negative” to “stable,” while keeping its rating at “B-.”

The company is still in trouble, but it has bought itself two years to get out of it.

The reason that financiers were willing to offer a debt extension to Rite Aid was almost certainly the success of the company’s cost-cutting measures. In its fiscal first quarter of 2010, which ended May 30, revenue was stable, with a tiny drop to $6.5 billion, from the same period a year earlier. Same-store sales were up .6%. The drug store chain’s net loss improved to $98 million from $157 million in the same period a year earlier.

These quarterly results were modest, but they were good enough for banks to take a risk on Rite Aid becoming successful again when the economy improves.

Timing Played a Big Role in Saving Rite Aid

Rite Aid’s good fortune may be an example of luck more than good management. If the company had tried to refinance its debt in February or March during the stock market panic, it would almost certainly have failed. It was able to hold on until the summer, and by then, the capital markets had taken a substantial turn for the better.

The other element to Rite Aid’s success is that the chain is so large and offers such a broad spectrum of drugs and merchandise that the very modest improvement in consumer spending was enough to keep sales from collapsing last quarter, which gave investors hope that the current quarter may even show a modest improvement.

Luck and timing. A bottom fisher’s dream

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