Analysis: Is Rite Aid the Right Stock to Represent Drugstores in My Portfolio?
Old habits die hard. After looking at the 15 stocks I chose to review, I immediately started with the cheapest stock. The one I have a rewards card and receive 20% off all my purchases.
The first thing that threw me off was the balance sheet. Rite Aid (RAD) had assets for the past three reporting periods of $7.078 million, $7.364 million, and $7.555 million but liabilities of $9.538 million, $9.951 million, and $9.767 million. That’s a difference of negative $2.8 million to $3.1 million. How does a business stay in business losing millions each year!? Maybe they shouldn’t be giving us repeat customers 20% off everything!?
But, looking for a silver lining, Rite Aid’s current cash and cash equivalents increased from 2011 to 2013 and its short/current long term debt from $63,045 in 2011 to $37,311 in 2013. The trick for me is figure out why and if it’s even important. Rite Aid’s long term debt also fell a couple of hundred thousands and its other liabilities went from $1,190,074 to $963,663.
Hmmm. Total assets, though, fell from $7,555,850 to $7,078,719. Isn’t there a saying about being careful of what you ask for? I wanted more data and I got it. Only I was happy thinking I could afford its sub-$3 stock price so why not?
I took a peek at Rite Aid’s income statement and quickly realized why I was never a finance major. There was only one line that was crystal clear; fortunately, it was the one line that meant the most to me. Rite Aid’s net income applicable to common shares went from a $564,872 loss in 2011 to a $107,475 gain in 2013. Most of this gain came from the line item for income before taxes which went from a $545,582 loss in 2011 to a gain of $7,505 in 2013. Or was it the earnings before interest and taxes which rose from $1,999 to $522,926 from 2011 to 2013?
Moving forward, the goal is to get an idea of why these numbers changed, if it’s the norm for drug stores, how the competitors compare, what the expectations were relative to what actually happened, what the future forecasts are and so forth.
Jim Cramer said this of Rite Aid during the Lightning Round segment of his Mad Money Program on Tuesday May 7:
“It is making a comeback. There is room for RAD.”
I did look at one other thing that’s considered important when looking at a retailer: same-store sales reports. Looking at the April sales, it wasn’t quite what I was hoping to see. One explanation for the negative sales numbers could be that store sales were negatively impacted by an earlier Easter this year compared to last year (March 31, 2013 versus April 8, 2012).
For the four weeks ended April 27, 2013, same store sales decreased 4.0 percent over the prior-year period. April front-end same store sales decreased 3.5 percent, negatively impacted by an earlier Easter this year compared to last year (March 31, 2013 versus April 8, 2012). Pharmacy same store sales, which included an approximate 454 basis points negative impact from new generic introductions, decreased 4.2 percent. Prescription count at comparable stores decreased 0.2 percent over the prior-year period.
Total drugstore sales for the four-week period decreased 4.6 percent to $1.902 billion compared to $1.993 billion for the same period last year. Prescription sales accounted for 67.9 percent of drugstore sales, and third party prescription sales represented 96.9 percent of pharmacy sales.
So, I looked up March 2013 sales and, well — inconclusive.
For the four weeks ended March 30, 2013, same store sales decreased 2.0 percent over the prior-year period. March front-end same store sales increased 3.8 percent, with 3.0 percent of the increase attributable to a shift in the timing of Easter, which fell on March 31 this year compared to April 8 last year. Pharmacy same store sales, which included an approximate 566 basis points negative impact from new generic introductions, decreased 4.5 percent. Prescription count at comparable stores increased 0.3 percent over the prior-year period.
Want to go one more month just to get three sales reports to form a trend?
For the five weeks ended March 2, 2013, same store sales decreased 3.6 percent over the prior-year period. February front-end same store sales decreased 1.3 percent while February front-end same store sales attributable to flu-related over-the-counter products were flat. Pharmacy same store sales, which included an approximate 695 basis points negative impact from new generic introductions, decreased 4.7 percent. Prescription count at comparable stores increased 0.3 percent over the prior-year period. This number includes a decrease of 0.1 percent attributable to flu-related prescriptions and flu shots.
Looks bad, huh?
Let’s see. Though revenue growth is negative, EPS Growth (MRQ) is 169% and EPS Growth (TTM) is 126%. Gross Profit Margin at 28.82% is higher than the industry average though the Operating Profit Margin (0.03%) and Net Profit Margin (0.47%) are below the industry average.
Rite Aid is the most highly leveraged company among peers and has a Debt to Total Capital ratio of 168.81%. Given that the company’s operating profits are 2.88 greater than interest payments, though, there should be no issues in repaying debt.
What do the analysts say?
- Credit Suisse: Outperform
- S&P Capital IQ: 4 out of 5 stars
- Jaywalk Consensus: Buy
- Ford Equity Research: Strong Buy
- The Street: Hold
- Research Team: Hold
- Market Edge: Long
But what do the real analysts think? The ones who are most vested in the success of the company? They sold 73,885,260 shares last month.
Brian Fiala sold 691,700 shares on April 22 and currently holds 815,805 shares or less than 0.1% of the company. Brian Fiala is Executive Vice President, Human Resources.
Jean Coutu Group sold 72,500,000 shares on April 16 and currently holds 105,901,162 shares or 11.7% of the company.
Mary Sammons sold 693,560 shares on April 15 and currently holds 841,797 shares or less than 0.1% of the company. Mary Sammons has been a member of Rite Aid’s Board of Directors since December 5, 1999.
What does all this say? It says I have a lot of researching and learning to do to figure out what all this says. I’ll start with these links:
But no matter what happens, I do know that I will continue to take advantage of my 20% off discount.