Updated from 6:01 p.m. EDT

Criticized for expanding overzealously, derided for taking on too much debt, scrutinized by government regulators and punished by investors,

Rite Aid

(RAD) - Get Report

has had few opportunities lately to deliver any positive news on Wall Street.

Despite the adversity, the country's third-biggest drug store chain sought Tuesday to paint a relatively upbeat financial picture, noting that it had sold its

PCS Health Systems

subsidiary for $1 billion, refinanced a substantial part of its debt and closed 13 of its stores.

Rite Aid said that it even had addressed some of its inventory woes in the latest quarter, emphasizing that its customers now have a much better chance of finding what they're looking for in its nearly 3,800 stores nationwide. Revenue, the company added, rose 7.4% to $3.4 billion.

Weak Numbers

Still, the company's

financial results for the quarter ending Aug. 26 did not exactly relieve anxiety about its long-term prospects, as Rite Aid reported a loss that was far larger than Wall Street had expected.

That news provided investors with their latest jolt. Rite Aid's shares dropped 81 cents, or 20%, to close at $3.19. The company's stock is trading well below its 52-week high of $13.25, reached last December as Rite Aid's management was shaken up.

Rite Aid said its net loss from operations widened in the second quarter to $425 million, or $1.87 a share, compared with a loss of $154.4 million, or 60 cents a share, a year earlier.

Non-cash charges of $210.6 million, including expenses linked to converting debt, closing stores and restating financial results contributed to the loss, according to the company, which is based in Camp Hill, Pa.

"As far as generating cash flow from its underlying business, the jury is still very much out," said Mark Husson, an analyst who tracks the company for

Merrill Lynch

, a firm which has not done any underwriting for Rite Aid.

Excluding one-time items, however, the company's operating loss was $150 million, or 48 cents a share. Analysts had expected a loss of 19 cents a share, according to

First Call/Thomson Financial

. Husson, who pessimistically predicted a loss of 51 cents a share in the quarter, said Wall Street should remain wary.

"They're talking a big game," added Husson, who rates shares of Rite Aid a near-term reduce, "but investors need to take a step of faith in order to believe that the company will reach its targets."

Karen Rugen, a spokeswoman for Rite Aid, said investors should not rely on Wall Street's consensus of a loss of 19 cents a share in the latest quarter, because the company had not given analysts much guidance in the last year. The company, seeking to improve its relationship with Wall Street, provided analysts with an array of numbers on Tuesday.

When Bob Miller, who's credited with turning around super-center chain

Fred Meyer

, became chairman and chief executive of Rite Aid last December, bringing a new management team with him, he pledged to increase sales and reduce debt. He also inherited a host of problems.

The company earlier this year restated its financial results downward by $1 billion for the past two years and reported a $1 billion loss for the year ending in February 2000. At the time, Miller even was quoted as saying he would not have taken charge of the company if he had known the full extent of the damage.

Challenges Ahead

Although Rite Aid on Tuesday expressed optimism about upcoming quarters, George Schultze, managing member of

Schultze Asset Management

, said he believed the company faces a "liquidity crisis," and argued that it remains unrealistic about its odds of overcoming a pile of debt.

"Management talks it up," said Schultze, adding that his White Plains, N.Y.-based investment firm has had success selling shares of Rite Aid short in a bet that the stock price will decline. "But it doesn't acknowledge that the company faces a crisis over the next six to nine months.

"We don't think they'll get there," he said.

Despite some positive signs, other challenging issues remain, including the declining value of its stake in

drugstore.com

(DSCM)

. When Rite Aid announced more than a year ago that it had struck a deal with drugstore.com, then a fledging Internet pharmacy, its top executive raved about the potential of the online prescription drug market.

"We believe this will be a win situation for Rite Aid, any way you look at it," Martin Grass, then Rite Aid's top executive, said in a statement at the time, just months before he left the ailing company, paving the way for Miller.

As part of a 10-year agreement in which the companies said they would provide prescription drugs online, Rite Aid paid $7.6 million for a 25% stake of the Internet company. At the same time,

General Nutrition Centers

, the vitamin and mineral supplement retailer, made a cash investment of $2.4 million.

In a separate arrangement,

Amazon.com

(AMZN) - Get Report

, the Seattle-based Internet retailer, also had taken a stake in the company.

But at a time when drugstore.com's shares, like those of its peers in the Internet sector, are struggling, falling sharply to $3.06 Tuesday from a perch of $55 hit late last year, the partnership is beginning to drag on Rite Aid's balance sheet. Rite Aid accounted for second-quarter non-cash losses of $89.7 million related to its drugstore.com investment.

Husson of Merrill Lynch played down the significance of the loss, pointing out that it was "money the company never had." He said it's unlikely the company's relationship with drugstore.com will change, because Rite Aid values its online presence and simply cannot afford to sell prescription drugs over the Web on its own.

"It's just going to show that the stand-alone dot-coms that were once looked at as a big asset are now looked at as a big liability," he said.

Another analyst, Eric Bosshard of

Midwest Research

, said drugstore.com's dilemma is "just a nuisance" for Rite Aid, which could have lost even more cash if it had tried to go solo. "It's better to let someone else lose the money," he added, "then spend it yourself."

Bosshard, whose firm has not done any underwriting for the drug store chain, said he was pleased with the auspicious signs that emerged in the latest quarter, but stressed that the company was running out of time to reverse its cash flow and earnings.

"At this point, it's put up or shut up," said Bosshard, who rates the stock neutral. "They need to make progress in the second half of their year, or it's not going to happen at all."