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RallyCry (< 20)

Rite Aid needs more than a band-aid

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March 14, 2011 – Comments (4) | RELATED TICKERS: RAD , WAG , CVS

Rite Aid Corp is sporting a Long Term Debt to Cash ratio of 62 to 1 with negative earnings and cash flow for as far as the eye can see. How do they survive? Again 6.2 billion in long term debt versus 100 million in cash. Imagine the dilution that would need to take place at $1.11 per share to pay down the debt? With 887 million shares outstanding, reducing LTD through a new equity offering at market price would send the stock into the basement. Even if they double the share count, this would reduce long term debt by 984 million or only 16%. 

How about an asset sale, scaling down operations, and raising cash?  Seemingly impossible, unless forced by creditors. They need the 4,700 stores to generate the roughly 25 billion in annual revenue to cover COGS and SG&A expense. In 2010 these items swallowed up all but 12 million in operating income.The most recent quarter interest expense was roughly 2.9x operating income 133 M vs 46 M.

In Walgreens most recent quarter they had 941 M in opearing income and no interest expense. CVS had 1.7 billion in operating income and no interest expense. Most revealing is CVS revenue number was 24 billion in the DEC 2010 quarter with 3.69 billion in SG&A while Rite Aid had 25.6 billion in revenue in 2010 with 6.81 billion in SG&A. Thats a 6.6% diff in rev and 84.5% increase in SG&A when comparing Rite Aid's 2010 to CVS most recent quarter!

Rite Aid is bleeding red and the numbers reveal no band-aid will heal their balance sheet.

Disclosure: I have no positon in RAD

4 Comments – Post Your Own

#1) On March 15, 2011 at 8:17 AM, lemoneater (86.26) wrote:

I don't usually red thumb stocks, but I did RAD a while back.They been having problems for quite a while. Just anecdotal, but in comparison with my local CVS and Walgreens its parking lot is never full. Somehow Rite Aid needs to figure a way to get customers into the stores and buying. My husband even dislikes the store name and its primitive font on signage. Perhaps he's not the only one. I wonder which percentage of customers have a negative impression of its branding.

 

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#2) On March 15, 2011 at 8:34 PM, RallyCry (< 20) wrote:

I think they need to determine land value at every store location, determine the sales tragectory of every store and where the two are not in agreement, either sell the asset or invest more in making the high performing store even more profitable. I think to be competitive they need atleast to cut the long term debt in half to 3 billion and increase the cash position to 1 billion. I would asign about a 10% chance of this happening. The stock should move up if bold moves are taken and this would give them a real chance to do mesurable equity offerings if they prove they are fully commited to debt reduction. The other issue is benchmarking against CVS and WAG. They need to get their SG&A in line with their peers and that means a major corporate restructuring.

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#3) On March 17, 2011 at 12:43 PM, lemoneater (86.26) wrote:

I agree that it's important for RAD to evaluate which stores are succeeding and which aren't and "why"? I'm sure that they have a criterion for where they locate a store, but the company needs to have the flexibility to realize a store location can look good on paper, but somehow fail in real life for a variety of factors.  

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#4) On March 18, 2011 at 5:16 PM, havvey (< 20) wrote:

We stopped using the local rite aid. The service and people was horrible!

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