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Rite Aid Stock Falls on FY19 View Cut Ahead of Merger Vote

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Shares of Rite Aid Corp. witnessed another jolt yesterday as it slashed its outlook for fiscal 2019 in response to the recent generic drug bid activity that altered the anticipated projections for this market for the rest of the year. This action came just before the shareholders’ vote for the pending Rite Aid-Albertsons merger, scheduled for Aug 9. After the news was released, shares of this third largest drugstore chain dipped as much as 10% on Aug 6.

In the last three months, this Zacks Rank #3 (Hold) stock has grown 1.8% but underperformed the industry’s rally of 7%.



Rite Aid notes that trends in the generic drug market have not been favorable lately. The recent bidding for generic drugs made it clear that the pricing for these drugs is not as the company anticipated while providing its fiscal 2019 guidance in April. The company revealed that the generic drug purchasing efficiencies are likely to be $80 million lower than the estimation in its initial guidance. Consequently, the company has lowered its adjusted EBITDA, net loss and adjusted net loss per share views for fiscal 2019.

The company now estimates adjusted EBITDA of $540-$590 million, marking a significant decline from the initial guidance of $615-$675 million. Net loss is now projected between $125 million and $170 million compared with the previous guidance of $40-$95 million. The company now anticipates adjusted net loss per share of 4 cents to break-even, against the prior expectation of adjusted net earnings per share of 2-6 cents.

Other assumptions — including benefits from a more stable reimbursement rate environment, fees under the Transition Services Agreement with Walgreens (WBA - Free Report) , and other initiatives to grow sales and drive operational efficiencies — remained unchanged in the guidance. The company reiterated its sales and same-store sales (comps) guidance for the fiscal, as expectations for prescription count growth and pharmacy reimbursement rates remained robust. Moreover, the company reaffirmed its capital expenditure projections.

Concurrently, Albertsons and Rite Aid announced the election deadline for Rite Aid’s shareholders to choose the form of consideration that they desire in exchange for their shares, as stated in the merger agreement.

Under the deal, Rite Aid’s 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’s 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 companies have revealed that the election deadline for filling out and submitting the form, and related documents to obtain the desired consideration is Aug 13. However, this will not have an impact on the voting for the merger, which will be held on Aug 9.

The merger is anticipated to close in the second half of calendar 2018, creating a new entity, with annual revenues of about $83 billion. Further, the company 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.

Interested in the Drugstore Space? Check These

Investors can count on some better-ranked stocks like CVS Health Corp. (CVS - Free Report) and Herbalife LTD. (HLF - Free Report) , both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

CVS Health has gained 7.1% in the last three months. The company has long-term earnings growth rate of 10.6%.

Herbalife has delivered an average positive earnings surprise of 20.7% in the trailing four quarters. Further, the stock has rallied 75.4% year to date.

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