Rite Aid Corp. (RAD, Financial) could deliver a successful stock price turnaround, in my opinion, following its 34% decline in the past year.
The drugstore chain is investing in new technology to improve the shopping experiences of its customers, is reducing its costs to boost its efficiency and is introducing a larger number of its own brands to strengthen its profitability.
Strategy shift
Rite Aid is freeing up its pharmacists from their administrative tasks so they can spend more time helping customers. It is achieving this goal through making its computer systems more efficient so that pharmacists spend less time filling out forms. This could differentiate the company from its peers, since the pharmacists will be able to have more meaningful interactions with customers.
In addition, the business is currently evaluating all of its retail products. This will help it to determine which categories of products should be given greater space within its stores. It is refreshing its store displays to include products that promote wellness, which could resonate with the growing number of consumers who are becoming increasingly health conscious.
Technology changes
Rite Aid is investing in new technology to improve the shopping experiences of its customers. For example, it is rolling out Amazon (AMZN, Financial) pickup stations at all of its stores. They could increase its footfall and encourage consumers who have not previously shopped with the business to visit its stores. It has implemented self-checkouts at 100 of its stores, which have resonated with its customers according to its third quarter update. It plans to open self-checkouts at a further 200 of its stores in the first half of 2020.
The company is using an increasing amount of personalization in its correspondence with existing customers. This contributed to strong results from its recent campaign regarding flu shots and could increase its sales per customer.
A closer business
The company plans to integrate its EnvisionRxOptions division within its wider business. Previously, it had operated as a separate business, but its combination with the remainder of Rite Aid may mean there are efficiencies and cost reductions ahead.
For example, the company began integrating EnvisionRxOptions’ back-office functions and technology infrastructure with the rest of the business to remove duplicate costs in the third quarter. This may improve Rite Aid’s profitability in the upcoming quarters.
Potential challenges
The company’s recent financial performance has been disappointing. For example, in its 2019 third quarter, the business recorded a decline in its same-store sales of 0.1% compared to the same quarter of the previous year.
This trend has been present over the company’s recent quarters and has contributed to a change in Rite Aid’s senior management. They are making major changes to its business model in a short space of time, which could cause investors to become increasingly cautious about the stock’s near-term prospects.
However, in the long run, changes such as the company’s planned introduction of a larger range of its own brands could boost Rite Aid’s financial performance. For example, it expanded its Thrifty ice cream brand to 900 additional stores in the third quarter. They generated additional sales for the business, with the high margins of the company’s own brand products having the potential to catalyze its profitability.
Additionally, Rite Aid will redesign its stores and website to differentiate them from sector peers. It plans to make its delivery services more innovative through new pickup experiences such as “buy online, pickup in store.” This could boost its online sales, which increased 69% in the third quarter.
Outlook
Market analysts forecast that the business will return to profitability in fiscal 2020 following its loss in fiscal 2019. Its forward price-earnings ratio of 35.4 suggests that it offers good value for the money given its growth strategy.
Disclosure: the author has no position in any stocks mentioned.
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