The Real Rite Aid Question After Earnings: Can It Survive? (RAD, WAG, CVS, WMT)

Rite Aid Corporation (NYSE: RAD) is actually trading up on a day that the broader market is down considerably.  That always makes being critical sound a bit misplaced, but we are not looking at a day, nor a week, nor even a couple of months.  Rite-Aid reported its first quarter earnings (ended May 28) this morning which actually managed to beat expectations with a narrower-than-expected loss.  Our primary question remains in force: Can Rite Aid actually survive?

Rite Aid reported first quarter 2011 revenues of $6.4 billion, roughly equal to first quarter revenues for 2010.  Isolated store closings roughly offset an 0.8% increase in same store sales.  The struggling drugstore chain realized minor improvements on its bottom line, posting a net loss of $63 million versus a net loss of nearly $74 million for 2010. Rite Aid’s 2011 first quarter loss of $0.07 per share compares with last year’s first quarter net loss of $0.09 per share.  Thomson Reuters had estimates of -$0.12 EPS and $6.36 billion in revenues.

Rite Aid confirmed 2012 guidance with expected sales near $26 billion. The company expects 2012 same store sales to exceed 2011 numbers by 0.5% to 2.0%.  The company also said that anticipates a net loss between $0.42 to $0.64 per share.  Thomson Reuters has estimates of -$0.53 EPS for the year on $25.65 billion in sales.

Sadly, Thomson Reuters still sees losses for the years into the future as next year’s estimates are -$0.40 EPS and $25.24 billion in revenues.  We want to show you in math exactly how Rite Aid compares to peers on the trouble-front.  We are going to assume that revenue targets are merely hit by Rite Aid, but also by Walgreen Co. (NYSE: WAG) and CVS Caremark Corporation (NYSE: CVS) which are both profitable and which pay dividends.  Wal-Mart Stores Inc. (NYSE: WMT) is a huge thorn in the side of Rite Aid but it is not a pharmacy pure-play and therefore not counted.

In our world of make-believe that Rite Aid is in next year, magically Rite Aid is a profitable company but its sales remain at the targeted $25 billion.  Walgreen Co. (NYSE: WAG) has a market cap of $38.75 billion and its expected sales next year are $75.68 billion.  CVS Caremark Corporation (NYSE: CVS) has a market cap of $49.6 billion and its expected sales next year are $113.66 billion.  That puts values at 0.51-times expected sales for Walgreen and 0.43-times expected sales for CVS.

Rite Aid has been “stuck at the buck” for longer than one can imagine and its losses have been endless.  Its market cap is only $1.01 billion, and that is after a 3% gain to $1.132 today.  If you evaluate its $1 billion against the $25.24 billion you get a whopping valuation of 0.04-times expected revenues.  If you used the Walgreen and CVS valuations on revenues, Rite Aid would be worth more than 10-times to 12-times its current share price.  Of course that is not the case, but now you see just how rotten things are.

There is a ray of sunshine here.  We aren’t only negative, not all of the time. Rite Aid’s loss did narrow.  It did actually have positive same-store sales.  Strengths were lower interest expenses and lower operating expenses.  Another ray of sunshine is that even though this was a $1.40 stock in February, the stock is actually up more than 20% year-to-date.

Our concerns are not alone.  Most analysts have simply abandoned covering the stock and the consensus price target is a mere $1.24 from Thomson Reuters.  Back in 2007, Rite Aid did manage to get back above $5.00 before the recession interrupted what was looking like an incredible turnaround.  Still, shares have been stuck close to the $1.00 level for most of the recovery period.

Rite Aid was one of the great growth stories of the 1990s.  It grew and grew in many markets but it became very bloated and it nearly imploded.  The fact that it is still alive is no small miracle.

Our question for the long-term remains: Can Rite Aid actually survive?  Losses eat cash reserves.  Credit lines are not assured endlessly, and as losses continue those credit lines can come at more and more expensive terms.  Will Rite Aid fold this year or next?  That is unlikely.  The concerns still remain.  And if you think that “can is survive” is a tough question, there is another consideration here… SHOULD Rite Aid survive?

We invite Rite Aid’s management to respond.  We will listen.

JON C. OGG