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Rite Aid (RAD) on Track with Asset Sale: Is it Aiding Stock?

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Rite Aid Corporation is on track with the process of transferring stores and related assets to Walgreens Boots Alliance Inc. (WBA - Free Report) under its amended and restated asset purchase agreement. Per the agreement, Walgreens will buy 1,932 Rite Aid stores, three distribution centers and related inventory in an all-cash deal of around $4.375 billion. The company is carrying out the transfer of assets in a phased manner.

As of Jan 22, 2018, Rite Aid has transferred 625 stores and related assets to Walgreens, generating net cash proceeds of $1,309.8 million. The company has used these proceeds to pay off its entire $970 million in outstanding secured loans. This has helped it to strengthen liquidity position. Further, the company expects to complete the transfer process by spring 2018.

The company stated that majority of the closing conditions for the sale have been met, and only few conditions need to be satisfied for the remaining transfer of stores. Going forward, Rite Aid expects to smoothly complete the transfer process. Simultaneously, it remains focused on identifying new opportunities to strengthen business and providing a great experience to customers and patients, which should also enhance shareholder value.

Is Transfer of Stores Aiding Stock Price?

Rite Aid has been witnessing an uptrend in its share price since completing the pilot closing and the first transfer of 97 Rite Aid stores and related assets in third-quarter fiscal 2018. Notably, the stock has gained 29.1% in the last three months, outperforming the industry’s growth of 7.6%. Moreover, the company has witnessed significant upside in the past month with shares surging as much as 14.9%.



What’s Bothering Investors?

While the upside in stock price is surely boosting investors’ view, we are looking for more positives to become confident on the stock. Particularly, the company’s dismal top-line trends due to unfavorable reimbursement rates and soft same store sales, keep us on the sidelines. Moreover, revenues at the Pharmacy Services segment , which provides PBM (pharmacy benefit management) services, continues to be soft due to an election to take part in lesser Medicare Part D regions and fall in commercial business. Consequently, the stock carries a Zacks Rank #4 (Sell).

Where is Rite Aid Heading?

Rite Aid’s rescue to the biggest challenge of unfavorable reimbursement rates lies in the aforementioned sale of stores and assets to Walgreens. The company’s smaller size after the sale of these assets is likely to reduce Rite Aid’s exposure to the pressures of unfavorable pharmacy reimbursement rates. However, the real outcome will be evident only after all the stores are transferred to Walgreens.

Further, the company anticipates its Pharmacy Services segment to gain traction in coming days as it plans to promote the PBM business, which it manages through Envision Rx that was acquired in 2015. Notably, the company grew Envision Rx's Medicare Part D membership by more than 100,000 lives to 500,000 lives in the past year.

Going forward, the company expects Envision to drive growth across the board, as it targets increasing its customer base by 100,000 customers into fiscal 2019. Additionally, the company’s Health Dialog and RediClinic businesses are likely to aid health and wellness scores, which should improve overall performance.

Still Interested in Retail? Check These Stocks

For more exposure in the broader retail sector investors can count on Diplomat Pharmacy, Inc. and American Eagle Outfitters Inc. (AEO - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Diplomat Pharmacy has advanced 22.3% in the past month. The stock has a long-term growth rate of 6.6%.

American Eagle, with long-term earnings per share growth rate of 5.5%, has surged 32.3% in the last three months.

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