Rite Aid (RAD) Receives Much-Needed Aid Today After Outlining Strategic Plans To Boost Profitability
3:24 pm Tuesday, December 21st, 2021
Rite Aid (NYSE:RAD) is receiving the aid it strongly needed today after the company delivered positive adjusted earnings for Q3 (Nov) and announced new strategies to turn the struggling drugstore chain around. These strategies include plans for the closure of 63 stores over the next several months to improve profitability and the launch of a new partnership with Prime Therapeutics to grow its relatively underperforming pharmacy benefit management (PBM) company, Elixir. Thus, even though the company reported revenue growth of just 1.8% yr/yr and an adjusted EPS decline of over 60%, the stock is soaring today as investors set their sights on RAD’s outlook.
In Q2 (Aug), RAD posted a sizable net loss of $(0.41) per share, saw virtually stagnant growth yr/yr and sequentially, and provided light FY22 guidance. It seemed like disarray was only set to continue for RAD even though it brought in a new CEO, Heyward Donigan, in 2019, as no major plans to address some of the difficulties that plagued Q2 were discussed.
However, RAD is getting back on the “rite” path today after Ms. Donigan laid out multiple actions that the company plans to pursue in an effort to transform the third-largest drugstore chain in the US into a pure-play omni-pharmacy company.
RAD is looking to become the go-to choice for delivering medications to its customers in as many ways as possible, mainly through a direct-to-consumer digital offering, which it plans to launch in the future. RAD’s omni-channel investments follow similar endeavors from WBA and CVS, which have both increased their focus in the area since the pandemic began. For example, WBA recently invested $5.2 bln in its primary care offering, VillageMD, which will only further its omni-channel capabilities.
Due to fierce competition, competing digitally may be RAD’s best route to future success. For example, in Q3, RAD’s digital sales leaped 75% yr/yr; sales more than tripled in its marketplace and delivery businesses, where it has partnerships with Uber Eats and Postmates (UBER). This growth massively outpaced other numbers in the quarter, such as Retail Pharmacy same-store sales of +4.4% and front-end comps, excluding tobacco, of only +1%.
Lastly, acknowledging the disappointment regarding Elixir, Ms. Donigan was optimistic that partnering with Prime Therapeutics, which owns WBA’s recently divested AllianceRX business, will increase RAD’s rebate value. By lowering the price RAD will pay for drugs, the company hopes to be more price-competitive in the market.
With the pandemic mostly in the rear-view mirror, we expected improving metrics as consumers started frequenting stores and resuming certain therapeutic prescriptions. Therefore, after the company’s lackluster Q2 earnings report, we like seeing the aggressive actions RAD plans to take in Q3 to capitalize on newly converted customers due to its COVID vaccine program. Although RAD expects to close over 60 stores over the next few months, it still operates over 2,500 pharmacies, giving it a significant customer base. Given that context, RAD could be a good turnaround play, especially given that it will be lapping favorable numbers in the coming quarters.
