Can Rite Aid Survive The Battle of the Last Mile?

Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Up more than 50% for the last quarter, Rite Aid Corp. (NYSE: RAD) is performing well despite competition from retail rivals such as Walgreen (NYSE: WAG), Wal-Mart (NYSE: WMT), Amazon (NASDAQ: AMZN), and Costco (NASDAQ: COST).  But there are three reasons that Rite Aid, a drug store chain, could be an eventual casualty in The Battle of the Last Mile.

The Battle of the Last Mile is the fierce struggle for retail home delivery services with competitors that are simply too powerful for Rite Aid.  This match spills over for a company in the retail sector as the rivals vie to take away customers from the others, whether the shopping is done on-line or at the store.  For instance, it is difficult to see how Rite Aid can survive against competition such as Amazon, the Internet giant. Wal-Mart and Costco are also inflicting damage on Rite Aid.  As the largest drug store chain in the country, Walgreen is a direct rival for Rite Aid.

Even though the share price of Rite Aid has soared in recent market action, the company is still losing money with a negative net profit margin of 0.60% for the trailing twelve months.  Over the past five years, the negative net profit margin for Rite Aid has been 4.30%.  By contrast, the net profit margin for the trailing twelve months for Wal-Mart is 3.70%; for Walgreen it is 2.80%; for Costco it is 1.80%; and for Amazon it is a negative 0.10% (Amazon is undergoing a very expensive, massive expansion program to expedite home deliveries).  With its competitors so much bigger and making money, it is very challenging for Rite Aid to overcome them as it continues to lose money.  These companies have the "deep depth" in financial resources that Rite Aid does not.

Rite Aid's biggest revenue source, pharmaceuticals products, is a key target area in The Battle for the Last Mile, particularly for Wal-Mart and Walgreen.  For Rite Aid, pharmacy comps are down 1.4%.  Wal-Mart is expanding even more in this market in 2013 with the Humana Wal-Mart Preferred RX Plan, which has grown more than 50% over the last year to almost 1.5 million members. For Walgreen, pharmaceutical sales grew by 8.7% in January.  Prescriptions filled at comparable stores jumped 14% for Walgreen for the same period.

There are too many terrible financial indicators for Rite Aid. As the table below shows, Rite Aid is far weaker than its competitors in The Battle of the Last Mile in both its balance sheet and income statement.  Particularly troubling for Rite Aid is its high level of debt compared to the others.  In addition, with an interest coverage ratio of just 0.50, Rite Aid barely has enough earnings to pay just half of the interest due on the debt (an interest coverage ratio below 1.5 is considered to be troubling for a company).  As a result, Rite Aid does not have the financial depth to expand operations or meet pricing challenges from the others that have capital structures that are so much better.

Metric Rite Aid Amazon Wal-Mart Target Costco
Sales 5-Year Growth Rate 1.41% 33.72% 4.12% 2.39% 8.11%
Return on Assets 5-Year Avg (12.70%) 3.30% 8.40% 6.00% 5.70%
Return on Investments 5-Year Avg (22.10%) 9.00% 13.90% 8.80% 10.80%
Long Term Debt-to-Equity Ratio 1.77 0.38 0.57 0.89 0.11
Interest Coverage Trailing Twelve Months 0.50 5.20 12.20 7.80 35.60

Source: The Motley Fools CAPs and Forbes

While Rite Aid is up a significant amount as a percentage, it is still only trading at around $1.70 a share.  It has a high short float and low institutional ownership compared to its rivals, too.  For those Foolish investors looking to buy shares at penny stock prices, pay particular attention to the interest coverage ratio of Rite Aid.  Until it rises to at least 1.5, the concerns about cash flow are just too foreboding when the competition is so well-financed.


jonathanyates13 has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Costco Wholesale. The Motley Fool owns shares of Amazon.com and Costco Wholesale. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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