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Analyst Blog

On Jan 30, we upgraded drugstore chain retailer, Rite Aid Corporation (RAD - Analyst Report) to Outperform based on the company’s impressive performance during the third-quarter of fiscal 2013 and an upbeat guidance.

Why the Upgrade?

Rite Aid reported earnings of 7 cents a share that fared significantly better than both the year-ago quarter’s loss of 6 cents as well as the Zacks Consensus Estimate of a loss of 4 cents. Results also improved sequentially as the company swung back to profit, reflecting rise in front-end sales, favorable script trends and introduction of new generic medications.

Rite Aid's gross margin expanded 250 basis points to 29.0% during the quarter, while adjusted EBITDA margin expanded 120 basis points to 4.7%. Consequently, the company now expects bottom-line results to come in the range of a loss per share of 5 cents to earnings per share of 3 cents, up from its previous guidance of loss per share in the range of 9 cents – 23 cents.

The strong positive bias on this Zacks Rank #1 (Strong Buy) company has been fuelled by several strategic steps taken to boost its long-term profitability. Rite Aid is focusing on expanding its pharmacy and clinical services and striving to abridge costs.

The company’s Wellness+ customer loyalty program has been successful in luring customers as the Wellness+ members now account for 76% of front end sales compared with 72% in the year-ago quarter. On the cost front, the company is focusing on generating cost savings through centralized indirect procurement of drugs and reduction in supply chain costs.

Going forward, Rite Aid remains focused on expanding its portfolio of generic medications, which in turn will facilitate the company in enhancing margins.

Other Stocks to Consider

Besides Rite Aid, other stocks in the healthcare industry that are worthy of a consideration include AmerisourceBergen Corporation (ABC - Analyst Report), GNC Holdings Inc. (GNC - Snapshot Report) and Herbalife Ltd. (HLF - Snapshot Report) all carrying a Zacks Rank #2 (Buy) and are expected to continue with their upbeat performances. 

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