Bear Of The Day: Rite Aid (RAD)

Rite Aid (RAD) has had a devastating past 3 year, having lost 95% of its total market value in that time frame. RAD continues to fall with no bottom in sight and an inability to remain profitable for any length of time. The entire drug-retail market has far underperforming the S&P 500 both year-to-date and over the last 52-weeks perpetuating RAD’s losses.

In September of 2017, Rite Aid sold “1,932 Stores, three distribution centers, related inventory and other specified assets and liabilities related thereto for a purchase price of approximately $4.38 billion,” to Walgreens (WBA) in a cash deal. Ever since this deal, RAD has been unable to be profitable, posting full-year losses for fiscal 2018 and fiscal 2019 (ending 2/28/19). I believe this could be due to their inability to achieve the same economies to scale that they previously were able to with a larger operation.

Retail pharmacy revenues have dropped over the past three years by 6%. Pharmacy Service revenue is down over the last 3 years, but costs are up causing operating profits to be down 16% over the same time frame.

Rite Aid has had a growing number of store closures over the past 3 years with 82 in 2018, 57 in 2017, and 40 in 2016, representing a 6.2% store decrease over this period. The company has seen continuous declines in every part of the business and sell-side analyst are continuing to lower their EPS estimate outlooks, pushing this stock into a Zacks Rank #5 (Strong Sell).

RAD is currently the most shorted stock in America today, with 390% of free-floating shares being held short. Based on this sentiment and the 75% loss RAD has already demonstrated over last 52-weeks, I am estimating that these short sellers are just waiting for this firm to go bankrupt. Some analysts are predicting that Rite Aid has an up to 50% chance of bankruptcy this year.

Best case scenario for any long investor in RAD (if there are any more) is that they get bought out by a larger firm, giving investors and this stock one last spark. This is unlikely considering this space has been quickly declining, and competitors’ multiple continue to shrink.

RAD will likely continue to breakdown down with the industry. Reimbursement rates have deteriorated over the past few years which has led to a decline in the retail-drug store market. RAD has seen a more significant decline than the industry because of recognizable systemic issues with management.

I have very little confidence that this company will recover and recommend you sell this stock before it’s too late.


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