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Rite Aid (RAD) Slumps 14% Since Q2 Loss: What Lies Ahead?

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Rite Aid Corporation (RAD - Free Report) , which had quite an eventful journey of late, reported dismal second-quarter fiscal 2018 results last week. Shares of the company have plunged 14% since the company posted a loss, and its top line declined year over year alongside lagging the Zacks Consensus Estimate.

The second-quarter outcome came roughly a week after Rite Aid and Walgreens Boots Alliance Inc. (WBA - Free Report) received the Federal Trade Commission’s (‘’FTC’’) nod for their latest pact. The companies have been in talks since October 2015 to engage in a transaction — first a merger, which was terminated on antitrust concerns (this June) and replaced by Walgreens’ bid to buy 2,186 Rite Aid stores and related assets. Well, the second proposal, which was revised recently — to acquire 250 lesser stores, finally appeased the FTC on Sep 19.

All aforementioned actions have taken a toll on investors’ sentiment, as evident from Rite Aid’s year-to-date slump of 76.2%, which is significantly wider than the industry’s 3.7% drop. Let’s delve deeper into Rite Aid’s second-quarter results and see where the company is headed.

Q2 in Detail

Rite Aid posted adjusted loss of 1 cent per share for the second quarter that came in line with the Zacks Consensus Estimate. Further, this compared unfavorably with the year-ago period earnings of 3 cents. Management blamed the miserable performance on a tough reimbursement rate environment, along with the impacts from the amended asset sale deal.

Rite Aid Corporation Price, Consensus and EPS Surprise


Rite Aid Corporation Price, Consensus and EPS Surprise | Rite Aid Corporation Quote

While Rite Aid benefited from a merger termination fee of $325 million that it received from Walgreens, decline in adjusted EBITDA weighed upon its performance.  

Furthermore, revenues dropped 4.4% to $7,678.9 million, also falling short of the Zacks Consensus mark of $7,871 million. During the quarter, Retail Pharmacy segment revenues slipped 3.4% on account of soft same store sales and unfavorable reimbursement rates. Moreover, revenues from the Pharmacy Services segment dropped tumbled 8.7% owing to an election to take part in lesser Medicare Part D regions.

Same-store sales declined 3.4%, owing to a 4.6% fall in pharmacy sales and 0.9% dip in front-end sales. Pharmacy sales included a negative impact of nearly 189 basis points (bps) from the introduction of new generic drugs. Also, prescription count at comparable stores slipped 1.8%. Prescription sales constituted 67.8% of total drugstore sales and third-party prescription sales accounted for 98.3% of pharmacy sales.

Rite Aid’s adjusted EBITDA crashed about 31.8% year over year to $213.3 million, with the respective margin contracting 110 bps. This was due to a fall in adjusted EBITDA contributions from Retail Pharmacy segment mainly owing to reduced reimbursement rate. This was somewhat compensated by efficient cost curtailment and improved scrip counts and generic purchasing efficiencies.

Store Updates

Rite Aid continues to renovate stores, with 54 outlets remodeled, 1 opened and 1 relocated in the quarter under review. This brings the company’s total wellness stores count to 2,532. Further, the company shut 17 stores during the quarter, thus taking the total store count to 4,507 as of Sep 2, 2017.

Financial Status

Rite Aid ended the second quarter with cash and cash equivalents of approximately $239 million, long-term debt (net of current maturities) of $7,082.5 million and total shareholders’ equity of $733.6 million. The company also had borrowings worth $2.2 billion remaining under its $3.7 billion revolving credit facility, alongside having outstanding letters of credit worth $59 million.

Further, Rite Aid’s cash from operating activities came in at $297.8 for the first half of fiscal 2018.

Where’s Rite Aid Headed?

Per the latest deal with Walgreens, the latter will buy 1,932 Rite Aid stores, three distribution centers and related inventory in an all-cash deal of around $4.375 billion. Notably, the companies plan to carry out the transition of ownership of stores in a phased manner, beginning in October 2017. The transition is likely to be completed by spring 2018.

While the amended contract wasn’t well received by investors as it will curtail Rite Aid’s main business, the transaction is likely to lower Rite Aid’s debt position and improve its financial leverage and balance sheet. Management stated that it intends to use the funds from this deal to pay down a part of its huge debt. In this regard, the company plans to repay roughly $270 million worth of net liabilities associated with the divested assets; restructuring expenses and transaction fees of nearly $100 million and $85 million as income tax.

All said, the deal will make the Zacks Rank #3 (Hold) company a smaller, but stronger firm with lesser exposure to the pressures of unfavorable pharmacy reimbursement rates, which has been a hindrance for the company for quite some time now. As for Walgreens, with the approval of this long-awaited deal, the company is now poised to dominate the drugstore chain in the United States in terms of size, leaving behind CVS Health Corporation (CVS - Free Report) . Rite Aid, on the other hand, will occupy the third spot.

Still Want Exposure in the Drugstore Segment?

Investors can count on Herbalife LTD. (HLF - Free Report) , which has a splendid earnings surprise history and a Zacks Rank #2 (Buy).  You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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