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Why You Should Invest In This Drugstore Retailer

August 05, 2014 | About:
Suravi Thacker

Suravi Thacker

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Drugstore retailers such as Rite Aid Corporation (RAD) are having a tough time because of increasing costs of drugs and lower third party reimbursements. These issues are taking a toll on the top line as well as the bottom line. It is hampering the margins as well. Nonetheless, players such as Walgreen (WAG) and Rite Aid are paving their way through obstacles, by undertaking various strategic measures.

Growing sales

Drugstore sales for the month of June climbed 3.5% over last year’s June, clocking in at $2 billion. The increase in revenue was helped by overall same store sales growth of 3.9%. Same store sales metric for the front end of the store inched up by 0.9% and that of the pharmacy section surged 5.4%. However, sales were hampered by the introduction of new generic drugs which lowered the top line by 1.69%. Prescription sales make the most of the retailer’s top line and this time, it was 68.4% of total drugstore sales.

However, this was not the case when the drugstore retailer reported its last quarter results. Although revenue inched up by 2.7% to $6.5 billion, over last year, it failed to meet the analysts’ estimates. This growth in top line was driven by stronger sales in the pharmacy segment. Overall, Rite Aid’s same store sales grew 3.1% during the quarter. Moreover, its bottom line dropped 55% to $0.04 per share, as higher drug costs took a toll on its earnings.

Even peer Walgreen registered lower than expected third quarter results recently, wherein its revenue rose 6% to $19.4 million over last year’s quarter. Same store sales increased 4.8% during the quarter. However, earnings grew 7% over the prior year’s quarter, clocking in at $0.91 per share. Walgreen managed to post a better quarter, mainly because of its recent deal with Alliance Boots.

Key reasons for success

Despite all the problems, Rite Aid managed to register sales growth for the month of June. One of the key strategies adopted by the company is acquisition of other businesses. For instance, Rite Aid made three acquisitions in the last one year in order to strengthen and expand its healthcare reach.

It acquired Kings Pharmacy East, Inc., in August 2013, in order to expand its pharmacy operations. Kings Pharmacy owns and operates pharmacy and hence added a list of pharmacies to its network.

Rite Aid also acquired Health Dialog Services Corp on April 1, 2014. Health Dialog Services is a Boston based company and provides health care system research and development services. This will help Rite Aid to support and grow Rite Aid Health Alliance, a health management effort to provide comprehensive care to patients, in collaboration with other health care providers.

Lastly, the drugstore retailer acquired RediClinic in April 2014. RediClinics are small retail clinics which will help Rite Aid expand its presence in patient care. In fact, Rite Aid plans to expand its presence by adding 70 new clinics over the next two years. This seems to be quite a bold move on Rite Aid’s part.

Takeaway

It is quite clear that the company has been smart enough to grow its business through acquisitions. The buyouts should help Rite Aid outperform other industry players such as Walgreen. Further, its expansionary moves should help it expand its revenues as well as its customer base. This is probably one of the reasons why the drugstore retailer provided a bright outlook for the year. Hence, investors should give this company a thought.


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