Third-Largest U.S. Pharmacy Chain May Go Under, Analyst Warns
Analyst George Hill slashed his price target for Rite Aid from $16 to $1 and warned that the company may go under, Yahoo Finance reported. The stock plunged by 24% Thursday on the news, bringing its value down to $6.45/share.
“We believe COVID has hastened the decline of the retail pharmacy segment and we see the potential for a dramatic negative inflection point for [Rite Aid] shares,” Hill wrote in a research note issued on Thursday.
Rite Aid is the third-largest pharmacy chain in the country with more than 2,500 retail outlets across 17 U.S. states. But in recent years, the drugstore has felt the heat from its competitors, Walgreens and CVS, each with more than 9,000 stores nationwide. And with pharmacy profits sliding as the pandemic subsides, Rite Aid’s attempted expansions in recent years have resulted in the company taking on $3.2B of debt, Yahoo Finance reported. Hill said this now threatens to permanently dent its profitability rather than helping Rite Aid against its competitors.
Investors in the drugstore chain are now waiting for its 2023 fiscal guidance. Rite Aid needs to generate between $190M and $200M to cover its debt service costs as well as $200M to $250M for store maintenance capital expenditure requirements, according to Hill.
“Rite Aid needs to generate $400 to $450 million in annual adjusted EBITDA to continue as an operating company,” wrote Hill. “At a number below $400M, the equity arguably has no value as the company is not in a position to generate real returns to shareholders.”
Rite Aid has been in trouble for some time, surviving two failed merger attempts within the last five years at serious cost.
The first, a planned $10B acquisition of Rite Aid by the Walgreens Boots Alliance, was stamped out by the FTC in 2017. The result was a consolation prize: Walgreens bought approximately half of all Rite Aid’s stores for $5.2B, CNN Business reported at the time.
And in 2018, Rite Aid’s second merger plan — a deal with food and drug retailer Albertsons Cos. worth $24B — died at the hands of shareholders over equity concerns, Supermarket News reported at the time.
The coronavirus pandemic gave the big U.S. pharmacies a boost, as pharmacists joined the ranks of frontline workers and reached new customers by becoming vaccination and testing sites. But with foot traffic low and customer ability to order hair care, skin care and dental care goods online, big-box stores like Target were usurping a portion of traditional drugstore customer bases, CNBC reported in January 2021.
Lower foot traffic hurt Rite Aid’s mid-pandemic attempts to lure in customers via store revamps that prioritized its pharmacy offerings via virtual care rooms for customers to connect with pharmacists remotely. And by December 2021, Rite Aid’s struggles had been amplified: The pharmacy chain announced that it would be closing 63 stores over the next two years.
Analyst sentiment on Rite Aid has continued to decline in recent months, Barron's reported. Year-to-date gains for the drugstore fell by more than 50%, MarketWatch reported, compared to minimal 0.4% gains for rival CVS.