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Rite Aid (RAD) Comps Concerns Prevail: Should You Dump?

Rite Aid Corporation RAD, the third largest retail drugstore in the U.S. based on revenues and the number of stores, has proved itself a winner from the earnings perspective backed by its solid surprise history. Further, the stock has gained about 2.7% year to date, reflecting its strong performance in the market.

For the fourth quarter of fiscal 2016, the company posted better-than-expected earnings, which surpassed the Zacks Consensus Estimate for seventh straight quarter, with an average beat of 42.5% over the four trailing quarters. Results benefitted from strong top-line growth, an improvement in adjusted EBITDA, and solid contribution from the newly formed Pharmacy Services segment.

Though Rite Aid’s impressive earnings surprise history and year-over-year top-line growth both indicate strong fundamentals, a lot of uncertainty has crept in the past two quarters in which the company has reported lower-than-expected sales. A top-line miss in the fourth quarter of fiscal 2016 was attributable to a soft performance at the Retail Pharmacy segment, which was somewhat offset by the results of the Pharmacy Services segment.

Moreover, this Zacks Rank #4 (Sell) company’s comparable store sales (comps) trend have suddenly turned negative since Dec 2015. This resulted in a comps decline of 0.6% in the fourth quarter owing to decreases in front-end and pharmacy comps. Additionally, the company held back its forecast for fiscal 2017 due to the pending merger agreement with Walgreens Boots Alliance WBA. These factors make us somewhat cautious, creating a negative sentiment. Also, risks related to increased industry consolidation and greater competition cannot be ignored.

Nevertheless, Rite Aid’s stringent focus on cost management and strengthening its portfolio of health and wellness services has been impressive. Its constant endeavors to enhance pharmacy and clinical services also bode well.

That said, how far the company’s strategic initiatives will help overcome the soft sales and comps trend remains a wait-and-watch story.

Stocks to Consider

Better-ranked stocks in the related industry include Dollar General Corp. DG and Burlington Stores Inc. BURL, both carrying a Zacks Rank #2 (Buy).

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DOLLAR GENERAL (DG): Free Stock Analysis Report
 
RITE AID CORP (RAD): Free Stock Analysis Report
 
WALGREENS BAI (WBA): Free Stock Analysis Report
 
BURLINGTON STRS (BURL): Free Stock Analysis Report
 
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