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Sunday, February 5, 2023

Rite-Aid Stock Should Benefit From the Company’s Turnaround

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Rite Aid (NYSE:RAD) stock should rise from the Q1 earnings ending May 29 due out on June 25. This is because the company has engineered a major turnaround of its operations and finances.

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For example, in the year ending February 2020, the company produced an adjusted net income of $8 million, or 15 cents per share. That was after a loss in the prior year.

Moreover, Rite Aid produced positive cash flow. On an adjusted EBITDA basis (Earnings before Interest, Depreciation, and Amortization) it made $538 million. In addition, the company generated free cash flow (FCF) of $339 million.

Rite Aid’s Turnaround Strategy

I wrote about the company’s turnaround efforts in February. Since then, the company closed on the sale of a large number of stores to Walgreens (NASDAQ:WBA). It used the cash proceeds to pay down debt. In addition, the company has instituted a new strategy focusing on becoming a pharmacy benefits manager (PBM) company rather than a retailer.

Analysts still expect negative earnings for this year, but the company should still produce positive EBITDA and free cash flow. In addition, the company has been using its stores and drive through areas as COVID-19 testing centers.

This is generating large levels of goodwill with the public. In addition, once a vaccine becomes available, the stores could become major outlets for vaccination distribution. Rite Aid used to be run as a sort of supermarket company by the prior management and board, who have largely been replaced.

Rite Aid stock will likely benefit from the release of the fiscal first-quarter earnings. I believe the market will be looking at the company’s EBITDA and FCF generation. In addition, the COVID-19 impact on earnings has likely already been discounted.

Estimates for This Quarter’s Financials

For the quarter ending May, the Zacks consensus estimate is for revenue of $5.6 billion. This is similar to the estimate at Seeking Alpha, for $5.61 billion. This represents a 4.3% increase in revenue over the quarter ending June 1 last year of $5.38 billion. However, on a quarter-over-quarter basis, it represents a 2% decline from the quarter ending February.

The Zacks consensus quarterly earnings estimate is for a loss of 54 cents per share. Seeking Alpha has an estimate of negative 66 cents per share for the quarter.

What to Do With Rite-Aid Stock

Since my last article, Rite-Aid stock has been more or less flat. However, I expect that the present CEO will make restructuring moves in order to turn the company’s finances around over time. As a result, the stock will rise.

Therefore, now might be a good time to get in on the potential upside for the stock. One reason is that the company has already provided a forecast for its EBITDA for 2020. Rite Aid’s press release for the year ending February 2020 said that adjusted EBITDA for the year ending February 2021 will be between $500 million and $540 million. This will be slightly higher or lower than the year ending February 2020 (i.e., $538 million).

So, if Q1 earnings come in at a run-rate level that’s better than this, expect Rite-Aid stock to do well. Otherwise, I believe that the worst has already been discounted in the stock.

The Wall Street Journal reported that the company expects that its reimbursement rates will fall this year similarly as in the previous year.

The company might revise its outlook compared to prior forecasts. However, I believe that eventually, its restructuring moves will be beneficial to Rite Aid stock.

As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review hereThe Guide focuses on high total yield value stocks.

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