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Rite Aid (RAD) Up 1.9% Since Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Rite Aid Corp.RAD . Shares have added nearly 2% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock's next earnings release, or is it 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 catalysts.

Rite Aid Q3 Earnings Lag, Walgreens Merger on Track

Rite Aid posted dismal third-quarter fiscal 2017 results. This Drug-store retailer's adjusted earnings of $0.02 a share plunged 75% from the year-ago period, and also missed the Zacks Consensus Estimate by a penny. The decline in bottom line was mainly attributed to a fall in adjusted EBITDA, which was somewhat compensated by lower taxes.

While results benefitted from the company's front-end business, solid cost control and sustained growth witnessed at EnvisionRx (the company's pharmacy benefit manager), unfavorable reimbursement rates remained a major hurdle for the company. Management also expects the reimbursement rates to remain a pressure throughout the rest of fiscal 2016.

Moving to top line, the company's revenues dipped 0.8% to $8,089.7 million, also falling short of the Zacks Consensus Estimate of $8,229.6 million. During the quarter, the company's top line gained from strength in the Pharmacy Services segment, while revenues from the Retail Pharmacy segment disappointed.

Deeper Insight

Sales at the Retail Pharmacy Segment fell 3.1% to $6,535.3 million due to lower comparable store sales (comps). Sales at the Pharmacy Services segment, which was acquired on Jun 24, 2015, improved 9.7% to $1,645.8 million.

The company's comps declined 3.4%, owing to a 4.7% fall in pharmacy comps along with a 0.4% drop in front-end comps. Pharmacy comps included a negative impact of 182 basis points (bps) due to the introduction of new generic drugs. Also, prescription count at comparable stores dipped 2.4%. Prescription sales constituted 68.9% of total drugstore sales and third-party prescription sales accounted for 98.2% of pharmacy sales.

Rite Aid's adjusted EBITDA slumped 26.6% year over year to $274.1 million, whereas adjusted EBITDA margin contracted 120 bps to 3.4%. The decline in adjusted EBITDA, in dollar terms, was mainly due to a fall in adjusted EBITDA contributions from Retail Pharmacy segment owing to lower pharmacy gross profit, made partly by a rise in front end gross profit. Further, strong numbers at the Pharmacy Services segment somewhat cushioned the adjusted EBITDA.

Financials

Rite Aid ended the quarter with cash and cash equivalents of $220 million, long-term debt (excluding current maturities) of $7,208.3 million and total shareholders' equity of $646.1 million.

In third-quarter fiscal 2017, the company used cash flow of $152.6 million in operating activities and incurred gross capital expenditure of nearly $108.1 million.

Store Update

Rite Aid stores continue to renovate, with 95 outlets remodeled and nine relocated in the fiscal third quarter. Additionally, the company opened three stores. This brings the company's total wellness stores count to 2,322. Further, the company acquired one store and shut seven stores during the reported quarter. With this, Rite Aid operates 4,547 stores across 31 states and the District of Columbia as of Nov 26, 2016. Additionally, the company opened two clinics in the quarter, taking its total clinics count to 92.

Merger Update

Rite Aid and Walgreens recently inked a deal to sell 865 Rite Aid stores and some assets to Fred's. This agreement is aimed to satisfy antitrust concerns related to Rite Aid's long awaited acquisition by Walgreens, which was announced in Oct 2015 and is expected to close on Jan 27, 2017. In this regard, Fred's agreed to buy Rite Aid's stores and assets for $950 million in cash. Per the deal, if the Federal Trade Commission demands any more divestitures, Fred's will have to buy additional Rite Aid stores, following Walgreen's approval.

Rite Aid and Walgreens expect the merger to create a drugstore behemoth with a superior network that will cater to more health and wellness solutions both in stores and online. Additionally, the combined company formed from the Walgreens-Rite Aid merger will operate over 12,000 stores in the U.S. and fill over one billion prescription drugs every day.

How Have Estimates Been Moving Since Then?

In the past month, the stock has witnessed a downward trend is fresh estimates. There has been one revision lower for the current quarter. There hasn't been any change in the consensus estimate though.

Rite Aid Corp. Price and Consensus

Rite Aid Corp. Price and Consensus | Rite Aid Corp. Quote

VGM Scores

At this time, Rite Aid stock has a Growth score of 'C', though it has a solid Momentum score of 'A'. However, the stock was allocated a grade of 'B' on the value side, putting it in the top 40% for this investment strategy.

Overall, stocks has an aggregte VGM score of 'B'. If you aren't focused on one strategy, this score is the one you should be interested in.

Zacks style scores indicate that the company's stock is suitable for value and momentum investors.

Outlook

While estimates have been broadly trending downward for the stock, the magnitude of this revision is a net zero. It's no surprise shares of RAD have a Zacks Rank #4 (Sell). We are expecting a below average return from the stock in the next few months.

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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.


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

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