Turnaround Investors Punching Out of Rite Aid

Rite Aid Corp. (NYSE: RAD) has been an incredible turnaround story. Things went south in the late 1990s after massive leveraged growth, and it has only been in the past year or so that investors have been able to make real money in the company since then. Unfortunately, many of those turnaround investors have decided to use the most recent weakness as an exit strategy.

What investors going into Rite Aid now have to consider is that Rite Aid was one of the best turnaround gains of the past 18 months or so. This was a $1.00 stock in late 2012. Now Rite Aid shares were still way above $7.00, and that is after a 15% pullback from the recent multiyear peak.

The problem was not same-store sales rising by 3.5% in May. It was that the company announced last week that it now only expects quarterly adjusted EBITDA of between $275 million and $285 million and net income of $35 million to $45 million to generate earnings per share of roughly $0.04. That adjusted EBITDA would trail last year and compare to an estimate of $0.08 earnings per share from Thomson Reuters.

Rite Aid then decided to revise its 2015 guidance to adjust for a weaker May and also accounting for generic purchase price reductions. Rite Aid’s adjusted EBITDA is now projected by the company to be $1.275 billion to $1.35 billion, with annual net income of $298 million to $408 million.

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What has to be eating away mentally at turnaround investors is that this growth snap-back could run into further problems ahead. Again, that is a could run into scenario rather than a will run into scenario. Still, revenue growth is barely expected to be over 2% for this year and next, yet the consensus growth is expected to rise from $0.23 EPS in fiscal 2014 to an expected $0.35 EPS in 2015 and then to $0.48 EPS in 2016.

The earnings growth on only 2% sales growth implies much more cost management and perhaps a transition to higher margin sale items that are not necessarily higher priced sales per unit.

Rite Aid shares fell hard on Thursday last week, down to $7.87 from $8.50 on over 100 million shares. Then shares closed down again at $7.72 on Friday on almost 46 million shares, and the stock was down another 4% to $7.40 on more than 42 million shares late on Monday with an hour until the closing bell.

Turnaround investors are taking serious profits here. They may come back in at some point, but that core base of Rite Aid bulls that had been in place over the past year has decided enough is enough. After all, how many investors ride a turnaround from the $1, $2 or $3 handles all the way up to $6 or $7, or even $8, before they start getting to the point that they don’t want to take their cost basis and then some off the table?