This indicates to me that they do not have an understanding of their front-end customers. The store layouts and shelf location of items seem to be extremely poorly designed. Within their front-end sales segment according to their 10-K for fiscal year ending February 2021, general merchandise accounted for 17.7%, over-the-counter medications and personal care products 10.8%, and health and beauty items were 4.8%.įront-end sales could be the key to a potential company turnaround, in my opinion, but there are so many problems currently in their stores that it is difficult to get higher sales. So it seems that front-end items sold declined about 4% from 2019.įront-end sales accounted for about 30.8% of their retail pharmacy segment sales in the latest quarter. While the CPI is not a perfect measurement of the higher selling prices for items sold at Rite Aid stores, it gives a reasonable estimate. Using the CPI calculator, the price index increased 6.6% from August 2019 to August 2021. This may seem to be an improvement, but it is a decline in actual items sold because of higher prices in 2021 compared to 2019. Total front-end sales in 2021 increased $56 million from the same quarter in 2019, which is about a 1.7% increase using same store metrics.
Most of their top management comes from the healthcare industry and not from the retail store industry.īecause 2020 was such an unusual year it is more appropriate to compare 2Q results with the same period in 2019. This might be the result of having no board members with strong retail backgrounds. The front-end sales segment includes almost everything sold in the store except for prescriptions and is not, in my opinion, getting enough attention from management. I doubt that the market will drive the shares this low because some traders are hoping for a change in the last item I just mentioned - poor management. Using the 6.0x multiple, the RAD share price would be only $1.58.
I think a more realistic multiple is 6.0x given Rite Aid's terrible results for the last few years, their very high leverage, and their poor management. Using the midpoint EBITDA of $480 million and the total current enterprise value of $3.711 billion, the market is valuing RAD shares at an EBITDA multiple of 7.7x. Like most other companies, the two major factors impacting the difference between reported losses/income and adjusted EBITDA is depreciation of $73.9 million and interest expenses of $48.6 million. Their latest quarter adjusted EBITDA number was $106.2 million compared to a reported loss of $100.3 million. You wonder if Rite Aid would have gone into Ch.11 bankruptcy if it were not for the pandemic. They were allowed to remain open last year and they make money from vaccines. Rite Aid continues to benefit from the Covid-19 pandemic. Management's estimates also are dependent upon a more normal cold/flue season this year compared to last year. Their guidance was increased from $440 million-$480 million, which was based on expected increases in booster shots and vaccine mandates. The guidance for EBITDA for this year is $460 million-$500 million. They can only cut costs only so much-they need additional revenue. The analysts only ask softball questions and do not press the executives about what revenue numbers are needed to breakeven. Management just seems to shrug their shoulders when discussing these numbers during calls. While annual losses are not as bad as a few years ago, these figures are still terrible. According to their current guidance for the fiscal year, management is expecting a loss of $197 million-$221 million or about a $3.54-$3.97 loss per share. For the latest quarter, Rite Aid had a loss of $1.86 per share.
There does not seem to be any end to their reporting of losses. There are four main reasons for my sell recommendationġ) Rite Aid keeps reporting losses with no reversal in sight.Ĥ) Potential government regulations of prescription drugs, including prices and distribution. Because I feel the current RAD stock price, which is currently trading at about $13.00 ($0.65 pre 1-20 reverse stock split) does not fully reflect the problems facing the company, I continue to rate RAD stock a sell. While this past August they were able to negotiate an extension of their credit facility to 2026, their total long-term debt is now higher than a year ago. Since my February 26 Seeking Alpha article, RAD shares have dropped over 32% compared to a 23% gain for the S&P 500. Management seems incapable of implementing needed changes to turn this company around. ( NYSE: RAD) continues to report huge losses and this retail pharmacy chain faces a bleak future.
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