Rite-Aid: From Worse to Awful

Implications: Perpetual also-ran Rite-Aid (RAD) reported another quarter of weak results. When Rite-Aid Brooks/Eckerd came together in August 2006, the deal seemed to make sense given the marketplace dynamics although none of the companies were as well run as CVS or Walgreens. However, the company’s ongoing struggles support the folk wisdom saying: “If you tie two rocks together, they still won’t float.”  The widespread $4 generics strategy will hurt the company even more.

Analysis:

Last February, Rite-Aid’s stock had the dubious honor of being named the Worst 10-Year Performer when the stock was still a comparatively lofty $2.79 per share. Industry analyst Larry Abrams calculated at the time that Rite-Aid was worth more closed than as an ongoing concern. (See Rite Aid: Worth More Closed Than Open.)

Rite-Aid’s stock closed at $1.35 after its earnings release. A Goldman Sachs analyst is quoted in the Wall Street Journal article as saying “it is hard to find compelling long-term value even at the $2 level.” That must be very demoralizing for the pharmacists there.

FYI, McKesson (MCK), Rite-Aid’s primary wholesaler, generated about 15% of its U.S. distribution revenues from Rite-Aid. Their contract runs until April 2010. I presume that McKesson is keeping a tight hand on accounts receivable here.