Summary
- Rite Aid disappointed many with its lackluster turnaround efforts.
- However, recent and not-so-recent developments have me slightly more optimistic about the future of the company.
- I remain neutral but cautiously optimistic on the company relative to its current valuation.
In February of this year, I first laid out my thoughts on Rite Aid (RAD) and its prospects of returning to any form of growth after it lost a core revenue stream to online giants like Amazon (AMZN) and others.
Since then, multiple developments which include the ousting of its CEO and recent news of a partnership with Amazon have shifted the landscape to favor some form of a comeback for the company in the coming years.
The Rite Aid Story
Rite Aid was once a brick-and-mortar powerhouse and currently operates under several businesses and trademark names, including Rite Aid Home, Rite Aid Pharmacy, Thrifty, Simplify, Big Win, Tugaboos and Day Logic. Although the former drugstore giant has in no doubt faced very tough headwinds over the past few years, it has refocused its strategy to accommodate its fast-growing and profitable business segments like eCommerce and drug store prescription fillings through the Medicare D expansion program.
The company also revamped its eCommerce offerings to allow for a higher-margin ship-from-store and prescription fulfillments offerings alongside the increase of drive-through pharmacies and mobile applications for easy use.
The company’s new wellness rewards bonus cash program, which increased customer retention in its pharmacies and stores, is another longer term tailwind which seems to be working with most retailers across the board. The company is keeping margins on the high end with store and labor efficiency, assessing underperforming stores and closing them alongside a shift in its workforce as more of its sales shift online and the need for in-store employees subsides.
All in all, the company's turnaround efforts have been, especially with the industry-wide headwinds, insufficient for it to reach its longer term goals yet slow and steady, the company seems to be heading in the right direction.
Long-Term Tailwinds
The company's EnvisionRx is the primary long-term growth driver as it takes part of the Medicare Part D expansion and future expansions as healthcare debates rage on. As prescription sales continue to grow, the company will without a doubt benefit greatly from the increase in overall spending on drugs and healthcare services in the United States.
The other tailwind is its recent partnership with Amazon which allows the company to hold products which were ordered by customers in return for an undisclosed percentage fee from each package. Given the volume of deliveries which Amazon deals with, this can provide expense-free income for Rite Aid, which in turn can be used to jumpstart its other programs.
I'll do a disservice to Rite Aid's tailwinds if I don't mention the ousting of its CEO after years of reports of driving the company into the ground with high expenses and moving it away from its core growth markets in favor of higher bonuses for executive management and the likes of things you see in failing companies. With that headwind out of the way, the company does have more leeway to tackle future growth prospects.
