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Why Is Rite Aid's Stock Performing So Poorly?


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Rite Aid's share price declined by around 80% over this year, while the industry decline has been around 12.5% . The speculation of Amazon.com's entry into the drugstore business has hit the company's share price even harder over the recent past. Along with this, Rite Aid's failed deal with Walgreens (which later got back on track with some changes to the agreement) and its poor pharmacy reimbursement rates have impacted the company adversely.

Rite Aid's Travails

Though Amazon's executives have not yet confirmed the reports, it seems like the e-retail giant has already been in talks with pharmacy benefit managers and analysts to understand the market trends. Though a market entrant like Amazon is a reason for concern, there are other reasons why Rite Aid's stock price is plunging. The stock price declined sharply in June when its probable merger with Walgreens got canceled due to the lack of approval from the Federal Trade Commission.

However, there has been a new deal between the two entities in September and under the terms of the new restated and amended purchase agreement, Walgreens will now buy 1,932 stores, three distribution centers, and other inventory from Rite Aid for an amount of around $4.4 billion in cash and other consideration. Rite Aid also will have the option to buy generic drugs at similar costs like Walgreens for 10 years through a Walgreens affiliate. The deal has been approved by both the companies' board of directors and is awaiting some customary closing requirements.

Finally, Rite Aid has also been adversely impacted by poor pharmacy reimbursement rates. This, in turn, impacted the company's gross profit and, in turn, its EBITDA for the first half of fiscal 2018. The margin contraction is expected to continue in the second half as well, in the face of the low reimbursement rates. Rite Aid's EBITDA margin declined by 100 and 110 basis points in Q1 and Q2 of this fiscal year, respectively. Though the termination charges to the tune of $325 million that it received from Walgreens helped in boosting its operating results to some extent in Q2, the company still has a long way to go to make a significant recovery.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Rite Aid

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



This article appears in: Investing , Stocks , US Markets , Investing Ideas
Referenced Symbols: RAD , WBA , CVS


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