Can Rite Aid Continue Its Mind-Blowing Rally?

NEW YORK (TheStreet) -- Rite Aid (RAD) is healthy.

Its shares, at close to $8, are up nearly 56% for the year to date and are up more than 200% over the last 12 months, easily outperforming its rivals CVS Caremark (CVS) and Walgreen (WAG). They can go higher still thanks to a company forecast of 3% revenue and income growth for the current fiscal year.

Rite Aid has accelerated the pace of remodeling its conventional stores into "Wellness" stores, which are driving the company's growth. The company is also benefiting from a favorable business environment thanks to the new health care law and an aging population.

Still, Rite Aid's shares are trading just 0.29 times their trailing sales, which makes it cheaper than most of the players in this industry, including CVS Caremark and Walgreen. Therefore, I believe Rite Aid's shares represent a buying opportunity. Deutsche Bank has recently set a price target of $9 on Rite Aid's shares, which represents a potential upside of 15.4% from the current levels.

During the quarter, Rite Aid's revenue climbed 2.2% from the same quarter last year to $6.6 billion while its net income dropped by 55% to $55.38 million. This drop was largely attributed to inventory accounting adjustments and debt extinguishment charges. Excluding the impact of these one-time items, the company's adjusted earnings climbed 43% to 10 cents per share.

Same store sales increased by 2.1% from last year, driven by 3.5% growth in pharmacy sales.

Meanwhile, Rite Aid's bigger rivals have reported better top-line growth. CVS Caremark reported revenue growth of 4.6% in the previous quarter while its same-store sales increased by 1.4%. Walgreen reported 5% revenue growth and 4.3% comparable sales growth.

However, for Rite Aid, the first half of the previous fiscal year was a particularly strong period, which is one of the reasons why the company has lagged behind its rivals in terms of the year-over-year comparison.

Moreover, Rite Aid has said that it will introduce several new generic drugs in the second half of the current fiscal year which will give a boost to the company's earnings in that period.

For this year, Rite Aid has forecast adjusted earnings before interest, taxes, depreciation and amortization of between $1.3 billion and $1.4 billion from sales of between $26 billion and $26.5 billion. At the mid-point of this range, Rite Aid could report adjusted earnings growth of 2.83% from revenue growth of 2.94%.

Same-store sales are expected to grow to between 2.5% and 4.5% despite the negative impact on sales coming from the introduction of new generics in the second half.

Rite Aid's growth is being driven by its Wellness stores and its flagship customer loyalty program Wellness+, as well as Wellness 65+. The company's customer loyalty program, called Wellness Plus, has driven its pharmacy sales. Like any customer loyalty program, Wellness Plus is also aimed at improving the company's relationship with its customers in order to enhance the customer loyalty.

Rite Aid has also increased its focus on the higher spending senior patients through its Wellness 65+ program. So far, Wellness 65+ has attracted 1.7 million subscribers.

Rite Aid has been remodeling its stores into Wellness stores that offer superior customer services and deliver better same-store sales and script growth than conventional stores. Last year, Rite Aid's Wellness stores achieved 320 basis points higher same-store sales and 1% better script growth than non-wellness store.

In the last quarter, Rite Aid completed 94 remodels, three expansions and two relocations. The company's Wellness store count has now reached 1,215. In other words, by the end of the previous quarter, Rite Aid converted 26% of its 4,587 stores into Wellness stores.

Furthermore, Rite Aid is getting more aggressive with store conversions. In the current fiscal year, Rite Aid has planned to remodel an additional 450 stores, an uptake from 405 remodeled stores in the previous year.

Last year, the company's wellness stores averaged 38% more flu-shots than non-wellness stores, thanks to its team of 2,000 wellness ambassadors. Rite Aid has also reported a 5% growth in non-flu immunizations and has exceeded its annual target by immunizing 3.2 million patients.

With the increasing number of wellness stores and wellness ambassadors, the company could report an increase in immunization, higher same-store sales and better script growth.

Last month, Rite Aid went after inorganic growth by acquiring RediClinic, an operator of retail clinics in Texas, for less than $100 million. Rite Aid has planned to rapidly expand RediClinic from just 30 clinics to nearly 100 clinics within the next 2 years.

Rite Aid's growth is also being driven by a favorable business environment. Millions of previously uninsured Americans are now getting coverage from the Healthcare Reform Act, which could significantly increase the pool of potential drug buyers.

Moreover, a large number of branded drugs have lost their patents, which has led to the growth of generic drugs. The generics are significantly cheaper than the branded drugs but are much more profitable. Therefore their growth usually has an adverse impact on sales growth but they give a boost to profitability.

Then there is the increase in the aging U.S. population which could lead towards higher drug sales.

Meanwhile, Rite Aid has expanded its agreement with McKesson which will enhance Rite Aid's ability to manage its inventory, particularly the generic drugs, which could lead towards substantial cost savings. This will directly result in a working capital benefit f $150 million, which will be realized in the second half of the current fiscal year.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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