There is a lot of momentum building around the Rite Aid Corporation (RAD - Free Report) stock lately, mostly due to its merger deal with grocer Albertsons Companies Inc. Moreover, the company has done a commendable job, reducing its exposure by selling stores and assets to Walgreens Boots Alliance Inc. (WBA - Free Report) . This sale has also helped the company to considerably curb its debt burden with the proceeds from the sale.
As a result, investors have shown renewed interest in the stock, which has picked up 5% in the last three months, reflecting tremendous growth compared with the industry’s 0.3% increase. Further, this also represented a marked recovery when compared with the stock’s slump of 28.7% in the past year.
However, there is a considerable amount of uncertainty that still surrounds the stock, as clear from the mixed top- and bottom-line performance in first-quarter fiscal 2019 alongside soft comparable store sales (comps). In the fiscal first quarter, the bottom line lagged estimates while sales topped. Further, the bottom line was flat compared with the prior-year quarter and the top line declined marginally. While earnings lagged estimates after two straight quarters of positive surprise, sales topped after three consecutive misses.
Factors Supporting Rite Aid’s Growth
As mentioned earlier, the pending merger with Albertsons, the sale of assets to Walgreens and lowered debt burden have been aiding Rite Aid. Additionally, a positive outlook for fiscal 2019 has boosted investors’ confidence further.
Clearly, Rite Aid is on track with its merger with Albertsons, which is expected to close in the second half of calendar year 2018. Progress so far is reflected by the approval of boards of directors of the companies, the expiry of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and approval of the proxy statements.
Under the deal, Rite Aid shareholders have the choice to opt for Albertsons’ shares and cash or, only the company’s shares. For every 10 Rite Aid shares, shareholders can get one Albertsons share and $1.83 in cash or, 1.079 Albertsons shares. Consequently, Rite Aid shareholders will own about 28-29.6% stake in the combined company, subject to the outcome of the cash elections. Further, Albertsons’ shareholders will own nearly 70.4-72% stake in the combined company.
The combined company is expected to generate annual revenues of about $83 billion. Further, the new entity anticipates delivering annual run-rate cost savings of $375 million in three years. Of these, the companies expect to realize nearly 60% of the cost synergies in the first two years, after closing the transaction. Additionally, the companies anticipate identifying about $3.6 billion of potential revenue opportunities.
Asset Sales to Walgreens
Rite Aid has successfully completed the transfer of all stores and related assets to Walgreens under its amended and restated asset purchase agreement. As of Mar 27, 2018, it transferred all 1,932 stores and related assets to Walgreens for net cash proceeds of $4.157 billion. These cash proceeds have been used in lowering debt, thus, strengthening the company's liquidity position. As of Jun 2, 2018, the company’s debt, net of cash was $3 billion.
While the transfer of stores and related assets is complete, management plans to transfer the three distribution centers and related inventory after Sep 1, 2018. Further, the company is focused on identifying opportunities to strengthen business, and providing a great experience for customers and patients.
Robust Fiscal 2019 Outlook
Following a mixed first-quarter fiscal 2019, Rite Aid reiterated its robust initial view for fiscal 2019. Moving ahead, the company anticipates benefiting from generic drug purchasing efficiencies, a stable reimbursement rate environment than witnessed in fiscal 2018 and TSA fees related to the Walgreens deal along with other initiatives to grow sales and drive operational efficiencies. It estimates sales of $21.7-$22.1 billion in fiscal 2019, with comps anticipated in the range of flat to up 1%. Further, the company expects adjusted net income per share of 2-6 cents compared with loss per share of 2 cents reported in fiscal 2018.
Based on the above-mentioned factors, we believe that Rite Aid has significant growth potential in the days ahead. This is also evident from the company’s Value Score of B and a Zacks Rank #2 (Buy).
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