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Updated from Sept. 25

Rite Aid's

(RAD) - Get Rite Aid Corporation Report

stock jumped nearly 4% on Friday after an analyst upgraded the company's shares.

After the company posted its second-quarter report on Thursday, Smith Barney analyst Lisa Cartwright raised her rating on the drug-store chain's stock from sell to buy. Based on the company's second-quarter performance, Rite Aid's management appears to be having success in turning around the company's performance, Cartwright wrote.

"In our view, the company has hit the stage in its turnaround where all the little changes are beginning to jell, which should result in continued improved execution," Cartwright wrote. "We believe that the company can continue to do all these little things just a little bit better."

(Smith Barney parent company Citigroup has done banking for Rite Aid in the last year.)

Cartwright's view was in the distinct minority. Most other sell-side analysts reiterated their neutral or sell ratings on Rite Aid shares in the wake of the company's report.

Still, Cartwright's positive outlook seemed to help lift the stock. After trading down 7% on Thursday, following Rite Aid's report, the company's shares climbed back on Friday. They closed up 17 cents, or 3.9%, to $5.18.

Rite Aid reported on Thursday that it slashed its losses in the second quarter.

In its quarter of 2004, ended Aug. 30, the company lost $18.5 million, or 4 cents a share, on $4.05 billion in sales. That was an improvement from the second quarter last year, when Rite Aid lost $107.6 million, or 21 cents a share, on revenue of $3.86 billion.

The results met Wall Street expectations. Analysts surveyed by

Reuters'

Multex service were expecting Rite Aid to lose 4 cents a share.

"We're pleased with our second-quarter performance," said Mary Sammons, Rite Aid's CEO, on a conference call with investors and analysts.

And the company expects its improvement to continue. The company now anticipates its full-year bottom line to range from a $27 million loss to a $4 million profit. Previously, the company said it expected its full-year bottom line to range from a $63 million loss to break-even.

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Assuming the company's outstanding share count stays at about 515 million, the company now expects its bottom line to range from a loss of 5 cents a share to a profit of 1 cent a share. Analysts surveyed by Multex are expecting a full-year profit of 5 cents a share.

But Wall Street didn't appear to be as pleased with the results, as the company's shares were down 28 cents, or 5.2%, to $5.10 in recent trading.

Rite Aid has struggled for the past several years. The company admitted to overstating its earnings by $1.6 billion over 1998 and 1999. Earlier this year, the company's former

CEO and

CFO pleaded guilty to charges relating to the accounting scandal.

Since the accounting fiasco, the company has closed stores and cut payrolls in an effort to narrow losses. But the company, like other drug store chains, has had difficulty competing with fast-growing

Walgreens

(WAG)

.

Much of Rite Aid's year-ago loss was due to its restructuring efforts. In the second quarter of last year, the company took a $58.2 million charge related to store closings. In contrast, the drug store chain recorded a $9 million credit this year related to the restructuring.

But the company did see some positive operating trends in the quarter. Although its overall sales were only up 5%, almost all of that growth came from same-store sales gains. By the end of the quarter, the company was operating 3,386 stores, 58 less than last year.

The company's overall same-store sales, which compare results at like outlets open for more than one year, grew by 5.9% in the quarter over the year-ago period. The company's same-store pharmacy sales came in at 6.8%, a bit off the pace of industry leaders such as Walgreens. But the company posted relatively strong front-end (i.e., nonpharmacy) sales; those grew by 4.3% on a same-store basis.

Although the reduction in restructuring expenses was the main factor in lowering its loss, Rite Aid did control other costs in the quarter. The company's gross profit margin increased by 52 basis points to 23.8% of sales. Gross margin represents the difference between what a company charges for its goods and services and what it pays for them.

Rite Aid, like other drug store chains, has seen increasing sales of generic drugs relative to brand-name pharmaceuticals. While generic drugs tend to have lower prices than branded ones, they tend to offer higher gross profit margins for retailers. While Rite Aid's pharmacy sales were negatively affected by this trend in the quarter, its gross margins benefited from it, company officials said.

Meanwhile, the company's operating costs decreased as a portion of revenue by about 40 basis points. Decreasing overall litigation expenses related to the accounting scandal and lower payroll and occupancy expenses as a portion of sales helped the company's performance, company officials said.

Despite the improving results, Rite Aid saw a significant outflow of cash in the quarter. The company used $111 million in operating cash in the second quarter, officials said.