On Jan 2, 2014, we downgraded our long-term recommendation on drugstore chain retailer, Rite Aid Corporation (NYSE:RAD) to Neutral, with a target price of $5.25. Moreover, the stock carries a Zacks Rank #3 (Hold).
Why the Downgrade?
Disappointing third-quarter fiscal 2014 results and a lowered guidance compelled us to downgrade our long-term recommendation on Rite Aid.
The company’s streak of posting improved quarterly results for six consecutive quarters broke in the last reported results. Rite Aid Corporation (NYSE:RAD)’s third-quarter earnings of 4 cents per share was significantly lower than 7 earned in the year-ago comparable quarter. The fall was primarily due to lower margins and higher number of outstanding shares.
Looking ahead, citing a possible rise in pharmaceutical costs, lower benefit from new generic drugs (as most of these drugs are included within the company’s portfolio) and persistent reimbursement rate pressure, Rite Aid lowered its current fiscal earnings outlook, which added to the company’s woes.
Rite Aid Corporation (NYSE:RAD) lowered its fiscal 2014 earnings guidance range to 17–23 cents per share, compared with 18–27 cents projected earlier. Currently, the Zacks Consensus Estimate stands at 22 cents per share, which is inclined toward the company’s higher-end guidance range.
Furthermore, Rite Aid’s generic drug sales could be dented by Wal-Mart Stores, Inc. (NYSE:WMT)‘s entry into the retail generic drug market. Due to Wal-Mart’s wide array of manufacturers in India, Israel, and the U.S., the mass merchant can offer the particular drugs at a more discounted price when compared to the prices of Rite Aid Corporation (NYSE:RAD).
However, the company’s sustained focus on expanding pharmacy and clinical services through its Wellness+ customer loyalty program and remodeling of wellness stores raises our hopes. We believe that such measures will enable the company to broaden its customer base and boost top and bottom-line performance.
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Disclaimer: This article is written by Zacks Equity Research and originally published at Zacks.com.