Rite Aid: Zacks’ Bull of the Day Play

Rite Aid’s shares surged after the company reported excellent results and raised its guidance. As the turnaround appears to be back on track on now, shares are likely to continue to move higher.

Headquartered in Camp Hill, Pennsylvania, Rite Aid Corporation (RAD) is the third largest retail drugstore in the U.S., based on revenues. The company has about 4,600 stores across the country.

Excellent Results and Raised Guidance

Rite Aid reported its third quarter fiscal 2015 results on December 18. Revenues for the quarter increased 5.3% to $6.7 billion thanks mainly to 5.4% increase in same store sales from the previous year quarter.

Net income came in at $104.8 million or $0.10 per share, up from $71.5 million or $0.04 per share, a year ago and much ahead of the Zacks Consensus Estimate of $0.05 per share.

Based on third quarter results, the management raised their guidance for fiscal 2015. They now expect net income to be between $315 million and $370 million or between $0.31 and $0.37 per share. The management expects script growth to benefit from the Affordable Care Act, favorable demographics filed by acquisitions and growth in immunizations.

This guidance was significantly better than the previous guidance of $0.22 – $0.33 per share and the Zacks Consensus Estimate of $0.30 per share.

The partnership with McKesson for drug distribution and purchasing process now appears to be paying dividends as all stores were converted to this new distribution process by early in the third quarter.

Estimates Revisions

As a result of a strong quarterly report and updated guidance, analysts have started raising their estimates for RAD. Zacks Consensus Estimate for the current fiscal year now stands at $0.33 per share up from $0.28 per share, 7 days ago. The consensus estimate for the next fiscal year is currently unchanged at $0.37 per share but is likely to move higher as more analysts update their research reports and estimates.

 

The following “Price and Consensus” chart showing the positive earnings momentum for the company.

RAD has beaten estimates in three out of last four quarters (one meet), with an average quarterly surprise of 92%.

Growth Drivers

Ageing US Population: US population has been ageing fast and Rite Aid is well positioned to benefit from this trend.

Affordable Care Act: With Affordable Care Act, total coverage is expected to expand to 25 million in 2016 from 12 million in 2014. This will expand the top-line for the company.

Turnaround: Several initiatives taken by the company to reinvigorate top-line growth and reduce costs are delivering results.

The Bottom Line

With its strong national footprint and recent strategic initiatives like expanding the health care offering, growing Wellness+ and investing in its stores, the company should be able to expand its customer base and continue its strong performance in the coming quarters. Further ageing US population and Affordable Care Act will further support the stock.

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