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3 Reasons Why Rite Aid Is Right On

NEW YORK (TheStreet) -- Rite Aid (RAD - Get Report), the third-largest U.S. drugstore chain, delivered an impressive performance in 2013. It has cranked out profits for five consecutive quarters, along with a 260% increase in its share price. However, by mid-December, the company's stock plummeted by 10% due to weak earnings guidance for the current fiscal year. The business's shares have now fully recovered, closing at $5.85 on Friday. Some of this recovery can be attributed to positive commentary by Deutsche Bank, followed by an upgrade by J.P. Morgan.

There are troubling aspects to the business, too. Rite Aid's sales growth has slowed amid the rise of generic drugs.

Despite the slowdown, a weak guidance and the massive rally in 2013, I believe Rite Aid's shares are still attractive for long term investors.

The company has a solid track record of meeting or breaking the market's revenue and earnings expectations. It has been working to increase its revenues and earnings, while its financial health has been improving. The company has delivered a strong performance in the previous quarters and may continue to do so in the coming years.

Quarterly Results

In the previous quarter, Rite Aid's revenue rose 1.9% year over year to $6.36 billion, above Wall Street's expectations of $6.32 billion. This growth was due to the 2.3% increase in same-store sales, led by a 3.5% increase in pharmacy sales.

Meanwhile, Rite Aid's net income rose 15.6% from the same quarter a year ago to $71.5 million, or 4 cents per share. This improvement came after a drop in interest expenses and lease termination and impairment charges. On the other hand, Rite Aid's adjusted earnings dropped by 4.4% from the prior year to $282.3 million. However, the prior year's results also include an $18.1 million benefit from a litigation settlement.

Weak Guidance

For the full year, Rite Aid has lowered its earnings guidance from 18 cents to 27 cents per share to 17 cents to 23 cents per share. This was particularly disappointing because even the high end of the guidance is 1 cent below the market's consensus estimate. Moreover, some of its other primary competitors, such as the industry leader CVS Caremark (CVS), are expecting improvements in sales and earnings in the future. CVS Caremark is expecting annual adjusted earnings of between $4.36 and $4.50 per share, which, unlike Rite Aid's guidance, is in line with the market's profit expectations of $4.47 per share.

For the full year, Rite Aid is expecting to generate revenues of between $25.3 billion and $25.4 billion, which is in line with market consensus revenue estimates of $25.36 billion. This will come on top of a modest 0.35% to 0.85% increase in same-store sales. If Rite Aid manages to meet market expectations, then its revenues will be largely flat from last year's $25.39 billion.

Rise of Generics

For Rite Aid, the drop in earnings estimate was due to Medicare reimbursement cuts and the higher cost of some generic drugs. The last couple of years have witnessed the expiration of patents on some leading drugs, which not only had an adverse impact on the top and bottom line growth of pharmaceutical companies, but also changed the business environment for drugstore chain operators.

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