Pandemic keeps Rite Aid (RAD) busy after mixed Q4; underlying weakness to persist

Rite Aid Corporation (NYSE: RAD) recently witnessed a spurt in store traffic as people rushed to stock up on medicines amid disruptions caused by the coronavirus outbreak. But, the uptick in sales did not help the stock, which continues to underperform the market. The drugstore chain lost significant market value this week after it reported a wider loss for the fourth quarter.

Check Rite Aid’s Q4 2020 earnings infographic

Being an essential service, healthcare is one of the few industries that has survived the COVID-19 attack so far. For Rite Aid’s shareholders, the long-term outlook offers nothing much to cheer about. Reaffirming its earlier projection, the company currently expects to incur a loss in fiscal 2021, despite the positive sales trend.

Membership Growth

One positive sign, as far as a potential recovery is concerned, is the solid membership growth for the Medicare Part D plans, which resulted in a double-digit growth in Pharmacy Services revenue in the latest quarter. There has been an uptick in the sales of critical drugs like hydroxychloroquine. However, the current uptrend might not be sustained during the remainder of the quarter and beyond as front-end sales could be affected by lower prescriptions due to social distancing.

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The Camp Hill, Pennsylvania-based company is set to embark on a store remodeling drive with the aim of cutting costs. Recently, it expanded the home delivery and drive-through pickup facilities to deal with the spike in demand. A program to conduct self-swab coronavirus tests at multiple locations, under the supervision of Rite Aid pharmacists, is gathering momentum.

Q4 Loss Widens

In the final months of fiscal 2020, adjusted loss widened to $0.37 per share, hurt by a marked increase in operating expenses. Meanwhile, revenues moved up 7% to $5.7 billion as both operating segments registered positive comparable store sales. Prescription sales accounted for nearly two thirds of total drugstore sales. The results, however, missed the Street view.

Turnaround Strategy

During his post-earnings interaction with analysts, Rite Aid CEO Heyward Donigan said his primary target this year is to take the company to consistent profitability, by providing better retail and digital experience to customers.

Today, in coordination with @HHSGov, we are expanding our drive-thru, public COVID-19 testing locations to Harrisburg, PA, and more store locations coming soon. Read more about our plans for testing here: https://t.co/tdivz5nKTq pic.twitter.com/xIoVKh5Tg5

— Rite Aid (@riteaid) April 14, 2020

The management has often highlighted Rite Aid’s transition to a full-fledged health and wellness provider, by overhauling merchandise, boosting e-commerce capabilities and remodeling stores. It needs to be seen to what extent the company will be successful in achieving the goals, in an atmosphere of unprecedented uncertainty.

“We are committed to redefining our industry by launching a bold pharmacy first strategy that we call Rx evolution. This strategy focuses on becoming the dominant mid-market PBM unlocking the value of our pharmacists and revitalizing our retail and digital experience.”

Heyward Donigan, CEO or Rite Aid

Among peers, Walgreens Boots Alliance (WBA) earlier this month said it is expecting a decline in store traffic in the current quarter. The company reported a decline in earnings for the second quarter, despite a modest increase in sales. CVS Health (CVS), which expanded its coronavirus testing sites recently, will be releasing first-quarter results next month.

Stock Pulls Back

Rite Aid’s shares ended 2019 on an upbeat note, after staying almost flat throughout the year. However, the momentum waned in the early weeks of 2020 and the stock entered a phase of high volatility. It has lost about 20% since the beginning of the year, with the post-earnings plunge reversing most of the recent gains.