The Time Is Right For Brave Investors To Start Accumulating Rite Aid – Seeking Alpha

 In Business
Long-term investors in Rite Aid (RAD) have every right to be cynical that management can turn around the company and its shares after a decade of highs and lows, turnarounds and fumbles and acquisitions and divestitures. After losing more than $4 billion between 1999 and 2003 and doubling its share count, the company appeared to have relatively stabilized its operating performance, being able to cover its interest expense for four years.

And then management decided to make a large acquisition of a competitor in 2007. With this acquisition, the company issued 250 million new shares, took on another $2.3 billion in debt and once again put itself in the position of not being able to make interest payments with operating earnings. The company lost another $4 billion between 2008-2012 (not all cash losses) until operating income significantly improved in 2013 and beyond. As the company’s operating profitability soared, shares increased from $1 in 2012 to nearly $9 in 2015.

In February 2015, as its income profile was as strong as it had been in its history, the company decided to take on more debt and issue more shares in order to acquire a pharmacy benefit management (PBM) business at a multiple that made it GAAP dilutive from day one and didn’t work to bring down the company’s leverage profile. In October 2015, as the EBITDA for its legacy business began to decline from increasing pharmaceutical pricing, Walgreens (NASDAQ:WBA) agreed to acquire the company for $9 per share.

This was the peak for Rite Aid shareholders as the Federal Trade Commission would drag their feet over the next twenty months, causing volatility for shareholders, a reduction in the purchase price from 9 to 6.50-7.00 in early 2017 and the ultimate decision for Walgreens to significantly scale back the purchase to less than half of the stores and not the PBM segment. This leaves Rite Aid with a growing PBM business, mostly greater geographic concentration in its store base and a greater EBITDA per store profile.

In summary, over nearly twenty years, here is a list of Rite Aid’s achievements:

  • Nearly $7 billion in cumulative losses
  • A share count that quadrupled
  • A modest rise in debt
  • Sales increase of 160%
  • Significant growth in pre-tax, pre-charge, pre-interest expense income

(Millions $s) 1999 2000 2001 2002 2003 2004 2005
Sales 12,438 13,338 14,516 15,171 15,800 16,600 16,816
Operating Income

(before closures/impairments)

-138 -526 -50 50 285 402 486
Charges 253 55 585 423 122 55 58
Interest Expense 274 543 649 396 330 313 294
Pre-Tax Income -665 -1,124 -1,284 -769 -167 34 134
Diluted Shares 258 259 314 474 515 525 634
Total Debt 5,922 6,612 5,894 4,056 3,862 3,891 3,311

(Millions $s) 2006 2007 2008 2009 2010 2011 2012
Sales 17,270 17,399 24,326 26,289 25,669 25,214 26,121
Operating Income

(before

closures/impairments)

385 348 271 40 221 235 261
Charges 65 56 95 2,145 185 233 125
Interest Expense 277 275 450 478 516 548 529
Pre-Tax Income 43 17 -274 -2,583 -480 -546 -393
Diluted Shares 677 525 724 841 880 883 886
Total Debt 3,051 3,100 5,985 6,011 6,370 6,219 6,328

(Millions $s) 2013 2014 2015 2016 2017
Sales 25,392 25,526 26,528 30,736 32,845
Operating Income

(before

closures/impairments)

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