Q. Rite Aid Corp. is growing, but will its stock keep on growing?
R.C., via the Internet
A. The nation’s third-largest drugstore chain behind, Walgreen Co. and CVS Corp., is in a growth spurt.
Already operating about 3,300 drugstores in 27 states and the District of Columbia, it intends to purchase 1,858 drugstores under the Brooks and Eckerd names, along with six distribution centers.
These are being acquired from Canada’s Jean Coutu Group Inc. in a deal announced at roughly $3.4 billion in cash and stock. Expected to result in $87 million in one-time costs, the transaction needs approval from the Federal Trade Commission and could require the divestiture of some stores.
Rite Aid contends the move will increase its earnings, sales growth and cost savings, with a projected $150 million in annual synergies.
But some shareholder groups have criticized the expense and high level of debt Rite Aid will incur. Noting that Rite Aid stores have thin operating margins and aren’t as strong as those of its two main competitors, critics say a combination of two less-than-stellar chains doesn’t necessarily add up.
Shares of Rite Aid (RAD) are up 7 percent this year following a 56 percent gain in 2006.
In its recent quarter the company earned $1.1 million, but had a loss of 1 cent per share after paying preferred stock dividends. For its fiscal 2007 that ends in February, it projects results will be somewhere between a net loss of $5 million and a net profit of $40 million.
Separately, Rite Aid plans to open 110 new and relocated Rite Aid stores this fiscal year. Longer-term, it intends to open a total of 800 to 1,000 stores over the next five years, strengthening its No. 3 industry position.
The consensus analyst rating on Rite Aid stock is a “hold,” according to Thomson Financial. That consists of one “strong buy,” three “buys,” two “holds” and four “underperforms.”
Prescription-drug spending nationwide is rising and generic drugs offer profit potential, but the drugstore business also faces discount, grocery and mail-order competitors. Rite Aid only recently said it will offer its own pharmacy-benefit service and has no plans to acquire such a service from another company.
Earnings are expected to decline in the current fiscal year ending in February, and the five-year annualized growth rate forecast is 2 percent, according to Thomson.
New Jersey’s attorney general’s office and its Division of Consumer Affairs recently charged that dozens of Rite Aid stores sold expired infant formula, baby food and over-the-counter medications. The state seeks civil penalties and consumer restitution.
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Andrew Leckey is a Tribune Media Services columnist. E-mail him at yourmoney@tribune.com.
