The shares of Rite Aid Corporation (RAD, Financial) rose 50% over the last one year. This is solely because of its efforts to grow its business. The retail drugstore chain has undertaken great strategies, one of them being acquisition, to generate higher revenue. However, some missteps have led to disappointments, too.
The company recently reported its second-quarter numbers, which came in ahead of the Street’s estimates. Although both the top line and the bottom line did well, its shares plunged after the announcement as it lowered its guidance for the year.
What the quarter delivered
Driven by higher sales of products, revenue surged 3.9% over last year, clocking in at $6.52 billion. This was higher than the analysts’ estimate of $6.48 billion. Same store sales for the quarter grew 4.1%. Also, pharmacy comp sales jumped 5.6% despite an increase in new generic drugs.
Further, prescription sales have also increased and make two-thirds of the drugstore sales. In fact, the number of prescriptions filled grew 3.7% at the comparable stores. This resulted in a higher top line.
Rite Aid’s gross margin also expanded 100 basis points to 29%, mainly because of its new deal with McKesson. The new purchase and delivery deal resulted in favorable impact in inventory valuation. Also, higher prescriptions filled helped in enhancing the profits.
Earnings too jumped significantly. The bottom line stood at $0.13 per share as compared to $0.03 per share in the prior year. Analysts were expecting it to be at $0.06 per share.
Positives to be considered
Along with the new purchasing agreement with McKesson, there are many points to look forward to. It has remodeled its stores to make it better in all aspects. It is also aiming to make it stores a wellness care center rather than being just a drugstore. It has remodeled 1,433 stores for wellness centers and plans to do that with all its 4,572 stores. 117 stores are under renovation for the quarter.
Moreover, the expansion of the Affordable Care Act in many new states has been working in favor of the company. More and more people are signing up for Medicaid and Medicare programs. This program resulted in higher foot traffic at Rite Aid’s stores and helped in boosting front-end sales growth by 1.1%.
The drugstore chain has also acquired other businesses to grow. It acquired Kings Pharmacy East in August 2013, which added to its network of pharmacies. Also, it bought Health Dialog Services Corp., in April 2014, to expand into healthcare research and development services.
In fact, the latest addition to its business was that of RediClinic, which it bought at the end of April this year. This acquisition will help in providing low-cost healthcare services, attracting more and more customers. Thus, it has been opening up new RediClinics in various regions, which should help in cutting costs in the future.
Looking beyond short-sightedness
Despite so many reasons to believe in this company, investors reacted badly. This was mainly because of the poor guidance given by the company. Rite Aid lowered its earnings forecast for the year for the second time. This shattered hopes of investors. However, a prudent investor should look beyond such short term events and consider the longer term opportunities of the company. The drugstore retailer is delivering good numbers, meeting estimates, growing its business and remodelling its stores. Hence, this should be a rewarding pick in the long run.
