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Rite Aid Corporation (NYSE: RAD)

Rite Aid Corp. (RAD), through its subsidiaries, operates retail drugstores. Its drugstores primarily provide pharmacy services. The Company sells prescription drugs and front-end products. It offers approximately 28,000 front-end products, which include over-the-counter medications, health and beauty aids, personal care items, cosmetics, household items, beverages, convenience foods, greeting cards, seasonal merchandise, and various other everyday and convenience products, as well as photo processing.

RAD markets its products primarily under the Rite Aid brand. It sells its products to the customers covered by health plan contracts, which contract with a third-party payers, such as an insurance companies, governmental agencies, health maintenance organizations and other managed care providers. As of February 28, 2009, the Company operated 4,901 stores in 31 states across the country and in the District of Columbia. It has a strategic alliance with GNC to operate GNC stores within Rite Aid stores.

The Company was founded in 1927 and is headquartered in Camp Hill, Pennsylvania.

Source: Reuters.com, SEC Filings. FY2009 ending February 28, FY 2008 ending March 1.

Financial Summary

Revenues declined 2.7% and in the second quarter of fiscal 2010 ended August 29, 2009, compared to  the same quarter of fiscal 2009 ended August 30, 2008. Revenue decline in fiscal 2010 was driven by a reduction in the store base and a decline in same store sales. The Company expects the sales to continue to be pressured during the remainder of fiscal 2010 due to the current economic environment, which is causing consumers to spend less on non-essential items and be more aggressive about searching for promotional sales.

Net loss for the 13-week period ended August 29, 2009, was $116.0 million compared to the net loss of $222.0 million for the 13-week period ended August 30, 2008. Gross margins decreased during the quarter due primarily to reductions in pharmacy reimbursement rates that were not fully offset by the benefits of new generic drug introductions and lower generic acquisition costs and a higher mix of promotional front-end sales. These items were more than offset by an improvement in selling, general and administrative expense as a percent of revenues, a decrease in lease termination and impairment charges, a gain on sale of assets versus a loss in the prior year period, and debt modification charges incurred in the prior year quarter due to the early tender of certain bonds.

Liquidity remained strong with $822.3 million of availability on the Company’s credit and accounts receivable facilities at August 29, 2009. The Company is highly leveraged with a debt balance exceeding $5.9 billion, or approximately 73% of total assets at August 29, 2009.

The Company’s stock price declined from approximately $2.20 in the mid of September to 1.59 at October 15, 2009 due to lowered management’s guidance for fiscal year 2010 and decreasing sales, despite the rebounding retail sales in the U.S.

Analyst Consensus

For the full year ending in February 2010, RAD expects to lose $390 million to $615 million, or 48 cents to 74 cents per share. In June, it projected a loss of $265 million to $490 million, or 33 cents to 59 cents per share. It cut its revenue forecast to a range of $25.7 billion to $26.2 billion from $26.3 billion to $26.7 billion.

Consensus estimates, $

Source: http://www.reuters.com/finance/stocks/estimates?symbol=SCSS.O

Six analysts recommend a “Hold” strategy for the Company.

Consensus rating

Source: http://markets.ft.com/tearsheets/analysis.asp?s=rad

Investment Highlights

RAD is one of the nation’s leading drugstore chains with approximately 4,812 stores in 31 states and the District of Columbia, with fiscal 2009 annual revenues of more than $26.3 billion. The Company operates most of its drug stores on the east and west coasts of the U.S. The Company reported the ninth consecutive quarterly net loss in August 2009. RAD has been reducing its debt level, closing some stores, revamping others and renegotiating some leases. The acquisition of the Brooks and Eckerd chains in 2007 added hundreds of stores, however they have not performed as well as RAD’s own locations.

Economic conditions have hurt the Company’s sales of non-pharmacy items like food and cosmetics because customers looked harder for bargains and bought more items that were on sale. The Company plans to start testing a new customer loyalty program that will emphasize pharmacy sales. The program will be launched in full next year and the Company said expects the new program to boost its sales. The Company already offers discounts on prescription drugs and store brand products through its Rx Savings Card program.

RAD and Atlantic General Hospital and Health System announced an agreement to open Atlantic ImmediCare clinics inside three RAD stores in Ocean Pines and Pocomoke City, Maryland, and Millsboro, Delaware, this fall. The clinics, which will be open daily, will provide extended hours for care in the evening and on weekends.

RAD announced that it has successfully completed its previously announced refinancing of the majority of its September 2010 debt maturities, including its $145 million Tranche 1 Term Loan and $1.75 billion senior secured revolving credit facility. The comprehensive refinancing plan was accomplished in a series of transactions, beginning with an amendment and restatement of Rite Aid’s senior secured credit facility to permit greater flexibility with respect to refinancings, followed shortly thereafter by three separate transactions consisting of (1) the incurrence of $525 million of senior secured term loans due 2015, the proceeds of which were used to repay existing term and revolving loans due 2010, (2) the issuance of $410 million of 9.75% first lien senior secured notes due 2016, the proceeds of which were used to repay existing revolving loans, and (3) the incurrence of a new $1.0 billion revolving credit facility expiring in 2012 to replace the remaining portion of Rite Aid’s existing revolving credit facility expiring in 2010.

The U.S. retail sales excluding those for autos rose for a second month in September, raising cautious optimism consumer spending could support the economy’s fledgling recovery. Non-auto sales rose a stronger-than-expected 0.5% last month, according to a Commerce Department report, building on the 1% gain reported in August and beating economists’ expectations for a 0.2% increase. The trend improvement is providing evidence that the retail sector recovery is starting to unfold. Drugstores could benefit if the upcoming cold and flu season turns out to be a big one, leading patients into stores for medications, tissues and cough drops.

Technical Analysis

Source: http://stockcharts.com/h-sc/ui

RAD closed above its 13-day moving average. This is generally considered to an indication of a bullish trend.

RAD is trading within its Bollinger Bands. This is a normal condition and suggests that the stock is neither overbought nor oversold relative to the recent price action.

The MACD for RAD currently indicates a strong bearish signal for two reasons. First, the MACD is below the signal line, a 9-day moving average. Second, the MACD is below the critical level of 0, which implies that the underlying moving averages are trending lower.

Comparative Analysis

The Company is traded with discount to its peers mainly due to lack of profitability, decreasing revenues despite the rebounding industry and lowered management’s guidance for the remaining of fiscal 2010.

Source: Thomson Financial, Yahoo! Finance, Analyst estimates.

Insider Trading Activity

Net Share Purchase Activity

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