valuation

Rite Aid Corp. (RAD) reports preliminary financial results for the quarter ended 2012-08-31.

Rite Aid Corp. (RAD) recently reported its preliminary financial results based on which we provide a unique peer-based analysis of the company. Our analysis is based on the company’s performance over the last twelve months (unless stated otherwise). For a more detailed analysis of this company (and over 40,000 other global equities) please visit www.capitalcube.com.

Rite Aid Corp.’s analysis versus peers uses the following peer-set: Sugi Holdings Co. Ltd. (7649-JP), COSMOS Pharmaceutical Corp. (3349-JP), Tsuruha Holdings Inc. (3391-JP), Brazil Pharma S.A. (BPHA3-BR), Ain Pharmaciez Inc. (9627-JP), cocokara fine Inc. (3098-JP), MEDIQ N.V. (MEDIQ-NL), Create SD Holdings Co. Ltd. (3148-JP), WELCIA HOLDINGS CO. LTD. (3141-JP) and PetMed Express Inc. (PETS). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Quarterly (USD million) 2012-08-31 2012-05-31 2012-02-29 2011-11-30 2011-08-31
Revenues 6,230.9 6,468.3 7,146.8 6,312.6 6,271.1
Revenue Growth % (3.7) (9.5) 13.2 0.7 (1.9)
Net Income (38.8) (28.1) (161.3) (52.0) (92.3)
Net Income Growth % N/A N/A N/A N/A N/A
Net Margin % (0.6) (0.4) (2.3) (0.8) (1.5)
ROE % (Annualized) N/A N/A N/A N/A N/A
ROA % (Annualized) (2.2) (1.6) (8.6) (2.8) (4.9)

Valuation Drivers

Rite Aid Corp. currently has a negative book value and its current Price/Assets ratio of 0.2 is lower than its peer median (0.5). RAD-US’s book value of equity is not positive and suggests that that it is not meaningful to analyze its ROE versus P/E in order to determine whether the company has an operating or growth advantage.

The company’s net profit margins have been relatively poor (currently -1.1% vs. peer median of 2.8%) while its asset efficiency is better than the median (asset turns of 3.6x compared to peer median of 2.4x). This suggests a volume driven operating model relative to its peers. RAD-US’s net margin is its highest relative to the last five years and compares to a low of -11.1% in 2009.

Economic Moat

The company’s top line performance is not as good as its peers (year-on-year change in revenue is 3.6%) but its earnings performance (33.6% change year-on-year) has been similar to the peer median. Unless the company maintains or improves this relative earnings growth, it is in danger of lagging its peers. RAD-US currently converts every 1% of change in revenue into 9.4% of change in annual reported earnings.

RAD-US’s return on assets is less than its peer median currently (-3.9% vs. peer median 6.0%). It has also had less than peer median returns on assets over the past five years (-11.8% vs. peer median 6.1%). This performance suggests that the company has persistent operating challenges relative to peers.

The company’s gross margin of 28.0% is around peer median suggesting that RAD-US’s operations do not benefit from any differentiating pricing advantage. In addition, RAD-US’s pre-tax margin is less than the peer median (-1.4% compared to 5.2%) suggesting relatively high operating costs.

Growth & Investment Strategy

RAD-US’s revenues have grown more slowly than the peer median over the last few years (-0.2% vs. 6.7% respectively for the past three years) and the stock price’s relatively low Price/EBITDA ratio of 1.7 implies relatively low future growth as well (Note: We use Price/EBITDA instead of PE due to negative earnings). Overall, we classify the company’s growth expectations as substandard relative to its peers.

RAD-US’s annualized rate of change in capital of -8.0% over the past three years is less than its peer median of 9.8%. This below median investment level has also generated a less than peer median return on capital of -11.0% averaged over the same three years. This outcome suggests that the company has invested capital relatively poorly and now may be in maintenance mode.

Earnings Quality

RAD-US reported relatively weak net income margins for the last twelve months (-1.1% vs. peer median of 2.8%). This weak margin performance and relatively conservative accrual policy (2.4% vs. peer median of 0.9%) suggest the company might likely be understating its net income, possibly to the extent that there might even be some sandbagging of the reported net income numbers.

RAD-US’s accruals over the last twelve months are around zero. However, this modestly positive level is also greater than the peer median which suggests some amount of building of reserves.

Trend Charts

Graph of Revenues Trend for Rite Aid Corp. (RAD)
Graph of Revenues Trend for Rite Aid Corp. (RAD)
Graph of Net Margin Trend for Rite Aid Corp. (RAD)
Graph of Net Margin Trend for Rite Aid Corp. (RAD)
Graph of Accruals Trend (% revenues, Quarterly) for Rite Aid Corp. (RAD)
Graph of Accruals Trend (% revenues, Annual or TTM) for Rite Aid Corp. (RAD)

Company Profile

Rite Aid Corp. operates retail drug stores. It sells a full selection of front end products, including over-the-counter medications, health and beauty aids, personal care items, cosmetics, household items, beverages, convenience foods, greeting cards, seasonal merchandise and numerous other everyday and convenience products, as well as photo processing. The company’s wellness remodels offer expanded clinical pharmacy services and new health and wellness product offerings. It also offers a wide variety of products under its private brands. The company operates its stores in California, Connecticut, Georgia, Indiana, Massachusetts, Michigan, Pennsylvania, Vermont and Washington. Rite Aid was founded in September 1962 and is headquartered in Camp Hill, PA.

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