NEW YORK (TheStreet) -- Rite Aid Corp (RAD) and CVS Caremark (CVS) have pivoted to "wellness" -- out with the cigarettes, in with healthy living. Major U.S. drugstore chains are improving wellness offerings in significant ways. And Rite Aid and CVS in particular are looking to help the bottom line with the new policies.
Following Rite Aid's breakout year in 2013, profits have rolled in and the stock price has skyrocketed. As of 10 a.m. Wednesday, Rite Aid was at $7.10, up nearly 40% year to date and 151% over the past 52 weeks. First-quarter revenue increased 3% to $6.5 billion, up from $6.3 billion in the first quarter.
Expanding pharmacy and clinical services and the remodeling of Rite Aid's and CVS's wellness stores could provide the innovative wellness offerings that consumers seek. Will this help stockholders too?
Rite Aid's revamped Wellness Store on North Canon Drive in Beverly Hills gives an example of what Rite Aid's future remodels may look like. The company is rolling out a "Fresh Day Cafe" that serves fresh coffee, pastries, breakfast sandwiches and Rite Aid's own Thrifty ice cream. The company also plans to add more educational material and new merchandising.
Rite Aid plans to expand these Wellness Stores over the next several years, with a focus on holistic health care.
Rite Aid's acquisition of RediClinic sets the company up to push back against larger competitor, CVS, which also operates in-store Minute Clinics at some stores. Rite Aid's number of prescriptions filled in stores open at least a year climbed 2.3% from a year ago. And Rite Aid is now engaged in site selection, adding its first RediClinics to existing and new stores.
CVS made a splash with its announcement that it is phasing out cigarettes, cigars and chewing tobacco in 7,600 stores nationwide by Oct. 1. Rite Aid has responded by strengthening its smoking cessation program.
At Rite Aid's first-quarter corporate earnings call last Thursday, John Standley Chairman and CEO stated to Deutsche Bank Analyst Karru Martins, "We have got a lot of our customers and patients that are currently buying tobacco products and for whatever personal reason they have, they have made that decision and at this point, we think that we can probably deliver the -- a great solution for those customers when they decide to quit smoking."
Meanwhile, the pharmacy field is shifting more to big chains. Regional players and smaller grocery stores with pharmacies have been getting out of the business as reimbursement rate pressure rises.
Frank Vitrano, Rite Aid's SEVP and CFO said to Karru Martins, "We have seen some small chains, three or four or five store -- grocery stores that decided to either close or get out of the business. Those have been some of the opportunities."
Recent profit growth at Rite Aid has been paving the way for financial improvements. Same-store sales increased 3.1% in the quarter, reflecting a higher pharmacy script count and the inflation rate.
Goldman Sachs reissued its buy rating of Rite Aid earlier this month with a price target of $8.00, up from $5.00. Analyst Robert P. Jones said, "Despite the 80% move in the stock (vs. S&P 11%) since September 2013, we still see upside in the company's turnaround."
But for Rite Aid to have another breakthrough year, it must remain profitable and grow those profits. Rite Aid delivered strong store operating performance during the quarter. It remains to be seen whether this growth can continue long-term.
The drugstore chain continues to make significant progress as a growing retail health care company. 1,325 Wellness remodels have been completed so far. These stores continue to outperform the rest of the chain in terms of same-store front-end sales.
Wellness is just rolling out, but it looks like a winner for Rite Aid.
Now let's look at TheStreet Ratings' take on the stocks.TheStreet Ratings team rates RITE AID CORP as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:
"We rate RITE AID CORP (RAD) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, good cash flow from operations and solid stock price performance. However, as a counter to these strengths, we also find weaknesses including deteriorating net income and poor profit margins."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- RAD's revenue growth has slightly outpaced the industry average of 5.5%. Since the same quarter one year prior, revenues slightly increased by 2.7%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- Net operating cash flow has increased to $239.75 million or 29.98% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 11.91%.
- RITE AID CORP has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, RITE AID CORP increased its bottom line by earning $0.22 versus $0.12 in the prior year. This year, the market expects an improvement in earnings ($0.35 versus $0.22).
- The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Food & Staples Retailing industry. The net income has significantly decreased by 53.8% when compared to the same quarter one year ago, falling from $89.66 million to $41.45 million.
- The gross profit margin for RITE AID CORP is currently lower than what is desirable, coming in at 29.48%. It has decreased from the same quarter the previous year. Along with this, the net profit margin of 0.64% trails that of the industry average.
- You can view the full analysis from the report here: RAD Ratings Report
TheStreet Ratings team rates CVS CAREMARK CORP as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:
"We rate CVS CAREMARK CORP (CVS) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, solid stock price performance, impressive record of earnings per share growth, compelling growth in net income and good cash flow from operations. We feel these strengths outweigh the fact that the company shows low profit margins."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The revenue growth came in higher than the industry average of 5.5%. Since the same quarter one year prior, revenues slightly increased by 6.3%. Growth in the company's revenue appears to have helped boost the earnings per share.
- Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 31.07% over the past year, a rise that has exceeded that of the S&P 500 Index. Regarding the stock's future course, although almost any stock can fall in a broad market decline, CVS should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
- CVS CAREMARK CORP has improved earnings per share by 23.4% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, CVS CAREMARK CORP increased its bottom line by earning $3.76 versus $3.03 in the prior year. This year, the market expects an improvement in earnings ($4.45 versus $3.76).
- The net income growth from the same quarter one year ago has significantly exceeded that of the Food & Staples Retailing industry average, but is less than that of the S&P 500. The net income increased by 18.3% when compared to the same quarter one year prior, going from $954.00 million to $1,129.00 million.
- Net operating cash flow has increased to $2,172.00 million or 32.43% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 11.91%.
- You can view the full analysis from the report here: CVS Ratings Report
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.