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Rite Aid Upgraded to Strong Buy

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On Sep 27, Zacks Investment Research upgraded Rite Aid Corporation (RAD - Free Report) to a Zacks Rank #1 (Strong Buy).

Why the Upgrade?

Rite Aid has been witnessing rising earnings estimates on the back of better-than-expected second-quarter fiscal 2014 results. The drugstore chain operator posted a quarterly profit for the fourth consecutive quarter, driven by higher adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) and lower interest expenses. Moreover, the company has witnessed 11 straight quarters of improved adjusted EBITDA.

The company has outperformed the Zacks Consensus Estimate 5 times in the trailing 6 quarters.

On Sep 19, Rite Aid reported second-quarter fiscal 2014 adjusted earnings of 8 cents per share, which fared better than the Zacks Consensus Estimate of a loss of 4 cents and the year-ago comparable quarter’s loss of 5 cents. The company’s total revenue inched up nearly 0.8% year over year to $6,278.2 million and surpassed the Zacks Consensus Estimate of $6,265.0 million.

Better-than-expected quarterly results prompted management to raise its adjusted EBITDA and earnings outlook for fiscal 2014. The company raised its adjusted EBITDA guidance range to $1,240.0–$1,300.0 million for fiscal 2014, from $1,090.0–$1,175.0 million projected earlier. Rite Aid now expects earnings in the range of 18–27 cents per share for the fiscal, up from the previous guidance range of 1–16 cents.

Rite Aid, which witnessed declining sales and weak bottom-line results in the recent past, is now showing signs of improvement, thanks to the company’s cost reduction initiatives and improvement in the store-level performance.

Of late, Rite Aid has been utilizing additional resources such as the Wellness+ customer loyalty program and the Flu Immunization program to boost customers’ demand amid the challenging macroeconomic environment. The company’s Wellness+ customer loyalty program has been successful in attracting customers. This is evident from the fact that in fiscal 2013 Wellness+ members contributed 79% of the front-end sales, compared with 68% in fiscal 2012.

On the cost front, the company is focusing on generating cost savings through centralized indirect procurement of drugs and reduction in supply chain costs. We believe that these programs and initiatives will facilitate the company to increase its customer base and generate long-term profitability.

The Zacks Consensus Estimate for fiscal 2014 increased 37.5% to 22 cents per share as most of the estimates were revised higher over the last 30 days. Moreover, for fiscal 2015, the estimates were revised higher over the same time frame, lifting the Zacks Consensus Estimate by 19.2% to 31 cents per share.

Other Stocks to Consider

Besides Rite Aid, other stocks performing well in the drugs store and drug supplies industries are GNC Holdings Inc. (GNC - Free Report) , Herbalife Ltd. (HLF - Free Report) and McKesson Corporation (MCK - Free Report) . All these companies carry a Zacks Rank #2 (Buy).

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