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Rite Aid (RAD) stock retreats on recession, growth concerns

The COVID-19 lockdown and isolation has lowered the store footprint at the pharmacies

The concerns have been mounting for Rite Aid Corporation (NYSE: RAD) as the fight against the raging COVID-19 pandemic has lessened the store traffic count and low consumer spending. The lockdown and isolation have hit hard on most of the industries and pharmacies has been impacted by a decline in the store footprint.

The rapid spread of the coronavirus has turned out to be a major concern for all industries as the economy is heading into a recession. The pharmacy sector is also impacted by the virus spread as the majority of the stores are experiencing a dip in the footprint.

Image for representation. Courtesy: Laurynas Mereckas on Unsplash

The Walgreens Boots Alliance’s (NYSE: WBA) earnings call update has confirmed this. On Thursday, Walgreens’ finance chief James Kehoe said that sales weakness has been mounting in the near-term and the situation has been worsening due to the demand-supply imbalance. Recently, Walgreens closed its opticians and hearing care businesses in the UK.

Investors remained concerned about Rite Aid’s space in the market due to sales weakness. The pharmacy sector has been striving to change the long-term growth by implementing strategic initiatives. However, with the current situation becoming worse, consumer habits are expected to change from visiting the stores to heading to the Internet.

Rite Aid is likely to experience an increase in the costs and expenses associated with the store functionality that includes disinfectant services and sanitization practices. Also, the company has been investing in the strategic turnaround for realizing significant benefits in the long-term.

For fiscal 2021, Rite Aid expects strong prescription count growth and growth in revenues in the pharmacy benefit management with aggressive cost-control. Total revenues are expected to be in the range of $22.5-22.9 billion and adjusted per-share results are predicted to be between a loss of $0.22 and a profit of $0.19 for the full year.

The market experts raised concerns over the viability of the projected deleveraging plan due to persistent industry challenges. This includes reimbursement rate pressure, challenging competitive environment, shifting of consumer preferences, and planned capital expenditures ramp over the next two years.

The stock is overvalued and trading at a premium level given the elevated risks posed by its debt levels. Following the third quarter, Rite Aid’s total cash stood at $289.5 million while its total debt remained at $6.82 billion. The company has depended on the deleveraging plan for sufficient liquidity with a transformational period of 2 to 3 years.

Rite Aid’s stock ended Friday’s regular session down 5.45% at $11.45. This is below the 50-day moving average of $14.96 and the 200-day moving average of $11.52. The shares have been trading between $5.04 and $23.88 in the past 52 weeks.

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