Why Rite Aid Shares Jumped
Feb 1st 2013 8:16PM
Updated Feb 2nd 2013 12:00PM
Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of drugstore-chain Rite Aid were getting high off their own supply, climbing as much as 10% on improved same-store sales in January.
So what: Any sign of life is good news for the debt-laden retailer, apparently. Comparable sales grew by just 0.3%, but that was enough to spark the bull rush. You might think Rite Aid benefited from this winter's especially bad flu season, but even as flu shots and related prescriptions increased, pharmacy revenue still fell 1.4%. Comparable sales from the rest of store gained 4.2%, benefiting, in part, from over-the-counter flu-related sales. Overall revenue declined by less than 1%, as the company continues to close stores.
Now what: Rite Aid is going to need more than a 0.3% increase in same-store sales to get back to profitability. The company has nearly $6 billion in long-term debt, and continues to lose money. It's hard to see how the company will get back to financial health without selling a significant amount of real estate to pay off its debt. It racks up over $500 million in interest expenses a year, enough to kill any operating profit. Investors can hope for a buyout from one of its more-prosperous rivals, like Walgreen's or CVS, but that seems unlikely with Rite Aid's debt load. I'm keeping my distance.
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The article Why Rite Aid Shares Jumped originally appeared on Fool.com.Fool contributor Jeremy Bowman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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