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Rite Aid (RAD) Up 6.4% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Rite Aid (RAD - Free Report) . Shares have added about 6.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Rite Aid due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Rite Aid Beats Q3 Earnings Estimates, Updates View

Rite Aid reported better-than-expected earnings and sales in third-quarter fiscal 2020 results. The company delivered adjusted earnings from continuing operations of 54 cents per share, which significantly beat the Zacks Consensus Estimate of 3 cents. Also, the bottom line increased from the year-ago quarter’s adjusted figure of 28 cents. Further, it revised view for the current fiscal.

Notably, the bottom line benefited from higher adjusted EBITDA, courtesy of tight expense control and higher prescription count at retail pharmacies. Improved pharmacy network management at EnvisionRxOptions also aided performance. Further, the company has been investing in the expansion of EnvisionRxOptions, especially its services, technologies and clinical offerings.  

Management stated that it will announce a comprehensive strategy for revitalizing the retail pharmacies as well as training pharmacists to cater to health and wellness needs.

Q3 in Detail

Revenues inched up 0.2% to $5,462.3 million and surpassed the Zacks Consensus Estimate of $5,428 million. During the fiscal third quarter, the Retail Pharmacy segment revenues slipped 1.7% due to lower store count. In the Pharmacy Services segment, revenues rose 5.7% owing to rise in Medicare Part D membership.

Retail Pharmacy same-store sales slipped 0.1%, thanks to 0.5% decline in front-end sales. The downside was partly offset by 0.1% rise in pharmacy sales. Excluding cigarettes and tobacco products, front-end same-store sales inched up 1%. Pharmacy sales included an adverse impact of nearly 331 basis points (bps) from the introduction of new generic drugs. Further, prescription count at same-store sales, adjusted to 30-day equivalents, rose 2.8%. Prescription sales contributed 67.7% to total drugstore sales.

Rite Aid’s adjusted EBITDA increased 10.7% year over year to $158.1 million and adjusted EBITDA margin expanded 30 bps to 2.9%. The upside can be attributed to higher adjusted EBITDA in the Retail Pharmacy and Pharmacy Services segments.

Moreover, the Retail Pharmacy’s adjusted EBITDA benefited from robust labor and expense control, somewhat offset by lower gross profit and decline in the Transition Service Agreement fee income from Walgreens Boots Alliance. The Pharmacy Services segment gained from improved pharmacy network performance.

Financial Status

Rite Aid ended the quarter with cash and cash equivalents of approximately $289.5 million, long-term debt (net of current maturities) of $3,566.3 million and total shareholders’ equity of $1,015.9 million.

Further, the company used cash from operating activities of $423.7 million in the fiscal third quarter.

Outlook

Rite Aid updated its outlook for fiscal 2020. The view includes the assumption of higher prescription count as well as improvements in drug costs and SG&A expenses, compensated with lower prescription reimbursement rates. Moreover, EnvisionRxOptions are likely to witness consistent improvements in pharmacy network as well as initial results of SG&A decline and gains from integration and restructuring efforts.

It continues to project sales in the range of $21.5-$21.9 billion for fiscal 2020. The company projects same-store sales growth in the band of 0-1% over fiscal 2019. Moreover, Rite Aid now anticipates adjusted EBITDA to be between $515 million and $545 million compared with the earlier projection of $510-$550 million for fiscal 2020.

Further, the company estimates net loss in the band of $174-$204 million compared with the prior expectation of $235-$275 million. The company now envisions adjusted earnings in the band of 13-55 cents per share compared with the earlier guidance of flat to 56 cents. Meanwhile, capital expenditures are expected to be nearly $230 million.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -1000% due to these changes.

VGM Scores

At this time, Rite Aid has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Rite Aid has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.


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