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Rite Aid (RAD) recovers on optimistic future after a lackluster run

Rite Aid Corporation (NYSE: RAD) stock opened higher on Friday and is recovering from the multi-year low on August 15. Investors turned optimistic about the future after upbeat second-quarter results. The drugstore chain remained under the hands of new CEO Heyward Donigan, who is likely to aid in achieving growth in the upcoming quarters.

The company has in the past been struggling to survive in the drugstore industry due to stiff competition. Rite Aid refocused its strategy to adapt its business segments like eCommerce and drug store prescription fillings. As part of ongoing business activities, the company assesses stores and distribution centers for potential closure or relocation.

Image for representation. Courtesy: freestocks.org/Unsplash

Retail remained the main focus of Rite Aid with a majority of the revenue was coming through the sale of prescription drugs and front-end products at the company’s 2,464 retail stores. However, the company has been facing a shortfall in the stores’ traffic due to mounting pressure from e-commerce. Hence, the company opted for store closing in order to face higher costs and expenses.

The margins were hurt by reimbursement rate declines despite generic purchasing efficiencies and the increase in same-store prescription count. The company has strong labor and expense control at the stores as well as labor savings and expense management relating to the recent corporate restructuring. This has aided in the bottom-line growth, which is expected to continue in the future.

For the second quarter, the company swung to a profit from a loss last year, helped by lower costs and expenses. In the Retail Pharmacy segment, revenues edged down 1.6% hurt by store closures, even though same-store sales modestly increased 0.4%. Pharmacy sales have been negatively impacted by new generic introductions.

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As of August 31, 2019, Rite Aid has $142.18 million of cash and cash equivalents while long-term debt stood at $3.83 billion and the accumulated deficit remained at $4.95 billion. The company has been aggressive in financing its growth with debt due to high risk. The share value is pressurized by the cost of debt financing outweighing the bottom-line results.

The company plans to use cash flow from operations along with available borrowings and other sources of liquidity for meeting working capital, debt, and capital expenditures requirements until the end of next year. Rite Aid’s liquidity position is expected to remain strong throughout fiscal 2020.

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