jim hamilton - home - ltp comprehensive...

Running head: LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID CORP1

LTP Comprehensive Financial Analysis Paper of Rite Aid Corporation

Team A: Kate Daisher, Jenny Engle, Jim Hamilton, Kate Hamilton, Ruth Kowalk

Siena Heights University

LDR 640 Financial Systems Management

Prof. Lihua Dishman

May 26, 2014

LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID CORP2

Abstract

This study looks at five types of financial ratios and utilizes them to analyze Rite Aid

Corporation over the last three years. Each of the ratios used were first studied and defined so

that the information generated from their calculations could be pondered and discussed. The

same ratios are used to compare Rite Aid to its two top competitors, Walgreen’s and CVS. After

careful analysis of all the information, recommendations are given as to how Rite Aid might

advance their business model going forward. When looking at the analysis compiled, the study

shows that Rite Aid is currently third behind Walgreen’s and CVS. It was also found that Rite

Aid has had some financial troubles recently within their company. The good news is that they

are currently trending in a positive manner and signs point to a financially sound future. Once on

the brink of disaster, Rite Aid has turned the corner and their future looks bright.


LTP Comprehensive Financial Analysis Rite Aid Corp

Thrift D. Discount first opened in 1982 in Scranton, Pennsylvania and quickly

expanded to be present in five states by 1965. In 1968 Thrift D. Discount officially changed

their name to Rite Aid Corporation. Through mergers and acquisitions Rite Aid Corporation has

grown to be the third largest drugstore chain in the United States. They operate nearly 4,600

stores and have a presence in thirty-one states, as well as the District of Columbia. (“Our Story”,

n.d.). The top two competitors of Rite Aid are CVS and Walgreens. The competition amongst

the three is continuous and they all jockey to become the drugstore of choice. “If there is a

vacant street corner in your neighborhood where a gas station lost its lease, don’t be surprised if

it sprouts a new CVS, Rite Aid or Walgreen’s within a couple of months” (“Competition Heating

Up”, 2013).

Five categories of financial ratios can be used to evaluate and compare the financial

position and stability of a company. By using information from the balance sheet, the income

statement and the statement of cash flows, company executives and investors/bankers are able to

determine the financial state of a company. Investors and bankers are very interested in the

financial ratios of companies, as this is some of the information used in order to make financial

decisions with regards to the company. Financial ratios provide a sense of how well a

company’s resources are being managed. The ratios may also reflect upon the risk factor that is

associated with stock of the particular company. The five categories used to evaluate the

financial state of a company are: liquidity ratios, solvency ratios, asset management ratios,

profitability ratios and market value ratios. Ratios are best utilized, and can reveal much about a

company, when they are shown in comparison “over a period of time and against other

companies” (“How to Use Financial Ratios,” n.d.).


Liquidity ratios measure a company’s ability to meet their short-term obligations with

current assets. Current ratio and quick ratio fall into this category. In both cases, a result that is

above or equal to one indicates that meeting short term obligations should be relatively easy for a

company. Solvency ratios are also called leverage ratios and provide analysis of the ability of a

company to pay their long-term debt. This is done by looking at debt in comparison with equity,

assets and earnings. Common solvency ratios include debt ratio, debt to equity ratio and times-

interest earned ratio. Asset management ratios are used to analyze how well a company

generates revenue with the use of their assets. The inventory turnover ratio and the total asset

turnover ratio are included in this category. High asset turnover ratios indicate that a company is

effectively using assets to produce sales (“Asset Management Ratios,” n.d.). The profitability

ratios of a company measure how efficiently a company is in generating revenue in comparison

with sales, assets and equity. Profitability ratios include return on sales ratio, return on total

assets ratio and return on total equity ratios. The last category of ratios is the market value ratios

which includes earnings per share ratio and price to earnings ratio. These are useful in

evaluating the economic state of a company. “When a stock analyst wants to understand how

other investors value a company, they look at market ratios. These measures all have one factor

in common; they’re evaluating the current market price of a share of common stock versus an

indicator of the company’s ability to generate profits or assets held by the company” (“Market

Ratios,” 2012-2014).

The financial ratios of Rite Aid will be used and then contrasted and compared with

the same financial ratios of their top two competitors, CVS and Walgreens. These three drug

store chains are often present in the same communities. Which is your favorite – where will you

go next to purchase prescriptions, print pictures or pick up that needed greeting card?


Rite Aid Financial Statements

Tables 1 presents the balance sheet, Table 2 the income statement, and Table 3 the

statement of cash flow of our chosen company - Rite Aid.

Table 1

Rite Aid 2014 Balance Sheet ($, in million)

In Millions of USD (except for per share items)

As of 2014-03-01

As of 2013-03-02

Cash & Equivalents 146.41 129.45Short Term Investments - -Cash and Short Term Investments 146.41 129.45Accounts Receivable - Trade, Net 949.06 929.48Receivables - Other - -Total Receivables, Net 949.06 929.48Total Inventory 2,993.95 3,154.74Prepaid Expenses 195.71 195.38Other Current Assets, Total - -Total Current Assets 4,285.12 4,409.05Property/Plant/Equipment, Total - Gross - 4,865.36Accumulated Depreciation, Total - -2,969.71Goodwill, Net - -Intangibles, Net 431.23 464.40Long Term Investments - -Other Long Term Assets, Total 271.19 309.62Total Assets 6,944.87 7,078.72Accounts Payable 1,292.42 1,384.64Accrued Expenses 1,165.86 1,156.32Notes Payable/Short Term Debt - 0.00Current Port. of LT Debt/Capital Leases 49.17 37.31Other Current liabilities, Total - -Total Current Liabilities 2,507.45 2,578.27Long Term Debt 5,632.80 5,904.37Capital Lease Obligations 75.17 91.85Total Long Term Debt 5,707.97 5,996.22Total Debt 5,757.14 6,033.53Deferred Income Tax - -


In Millions of USD (except for per share items)

As of 2014-03-01

As of 2013-03-02

Minority Interest - -Other Liabilities, Total 843.15 963.66Total Liabilities 9,058.57 9,538.15Redeemable Preferred Stock, Total - -Preferred Stock - Non Redeemable, Net 0.00 182.10Common Stock, Total 971.33 904.27Additional Paid-In Capital 4,468.15 4,280.83Retained Earnings (Accumulated Deficit) -7,515.85 -7,765.26Treasury Stock - Common - -Other Equity, Total -37.33 -61.37Total Equity -2,113.70 -2,459.43Total Liabilities & Shareholders' Equity 6,944.87 7,078.72Shares Outs - Common Stock Primary Issue - -Total Common Shares Outstanding 965.41 904.27


Table 2

Rite Aid 2014 Income Statement ($, in million)

In Millions of USD (except for per share items)52 weeks

ending 2014-03-01

52 weeks ending 2013-

03-02Revenue 25,526.41 25,392.26Other Revenue, Total - -Total Revenue 25,526.41 25,392.26Cost of Revenue, Total 18,202.68 18,073.99Gross Profit 7,323.73 7,318.28Selling/General/Admin. Expenses, Total 6,561.16 6,600.77Research & Development - -Depreciation/Amortization - -Interest Expense(Income) - Net Operating - -Unusual Expense (Income) 103.75 211.36Other Operating Expenses, Total - -Total Operating Expense 24,867.59 24,886.11Operating Income 658.83 506.15Interest Income(Expense), Net Non-Operating - -Gain (Loss) on Sale of Assets 15.98 16.78Other, Net - -Income Before Tax 250.22 7.50Income After Tax 249.41 118.11Minority Interest - -Equity In Affiliates - -Net Income Before Extra. Items 249.41 118.11Accounting Change - -Discontinued Operations - -Extraordinary Item - -Net Income 249.41 118.11Preferred Dividends - -Income Available to Common Excl. Extra Items 215.42 107.47Income Available to Common Incl. Extra Items 215.42 107.47Basic Weighted Average Shares - -Basic EPS Excluding Extraordinary Items - -Basic EPS Including Extraordinary Items - -Dilution Adjustment 5.46 0.00Diluted Weighted Average Shares 979.09 907.26Diluted EPS Excluding Extraordinary Items 0.23 0.12Diluted EPS Including Extraordinary Items - -


In Millions of USD (except for per share items)52 weeks

ending 2014-03-01

52 weeks ending 2013-

03-02Dividends per Share - Common Stock Primary Issue 0.00 0.00Gross Dividends - Common Stock - -Net Income after Stock Based Comp. Expense - -Basic EPS after Stock Based Comp. Expense - -Diluted EPS after Stock Based Comp. Expense - -Depreciation, Supplemental - -Total Special Items - -Normalized Income Before Taxes - -Effect of Special Items on Income Taxes - -Income Taxes Ex. Impact of Special Items - -Normalized Income After Taxes - -Normalized Income Avail to Common - -Basic Normalized EPS - -Diluted Normalized EPS 0.32 0.26


Table 3

Rite Aid 2014 Statement of Cash Flows ($, in million)

In Millions of USD (except for per share items) 52 weeks ending 2014-03-01

52 weeks ending 2013-03-02

Net Income/Starting Line 249.41 118.11

Depreciation/Depletion 403.74 414.11

Amortization - -

Deferred Taxes - -

Non-Cash Items 172.68 64.42

Changes in Working Capital -123.79 222.95

Cash from Operating Activities 702.05 819.59

Capital Expenditures -421.22 -382.98

Other Investing Cash Flow Items, Total 56.30 36.67

Cash from Investing Activities -364.92 -346.31

Financing Cash Flow Items -36.92 -173.82

Total Cash Dividends Paid - -

Issuance (Retirement) of Stock, Net 12.18 1.65

Issuance (Retirement) of Debt, Net -295.44 -333.95

Cash from Financing Activities -320.17 -506.12

Foreign Exchange Effects - -

Net Change in Cash 16.95 -32.83

Cash Interest Paid, Supplemental 414.69 482.14

Cash Taxes Paid, Supplemental 3.19 -0.78


Calculation and Analysis of 12 Financial Ratios of Rite Aid

Table 4

Twelve financial ratios of Rite Aid in 2014

Ratios Calculations Rite Aid 2014Liquidity RatiosCurrent ratio measures a company's ability to pay back its short-term liabilities with its short-term assets.(Investopedia, n.d.)

Current AssetsCurrent liabilities

4258.12/2507.45=1.69811.70

Quick ratio measures a company’s ability to meet its short-term obligations with its most liquid asset.(Investopedia, n.d.)

current assets-inventorycurrent liabilities

4285.12-2993.95=1264.17/2507.45= 0.5042

.50

Solvency RatiosDebt ratio is defined as the ratio of total debt to total assets and measures the extent of a company’s leverage.(Investopedia, n.d.)

total debttotal assets

5757.14/6944.87=.8289.83

Debt to Equity ratio measures the proportion of equity and debt the company is using to finance its assets.(Investopedia, n.d.)

total debttotal equity

5757.14/(2113.70)=(2.7237)(2.72)

Times-Interest Earned Ratio(TIE) measures a company's ability to meet its debt obligations.(Investopedia, n.d.)

EBITInterest charges

658.82/424591.00=.0015.0015


Ratios Calculations Rite Aid 2014Asset Management RatiosInventory Turnover Ratio measures many times a company's inventory is sold and replaced over a period.(Investopedia, n.d.)

cost of goods soldinventories

18202.68/2993.95= 6.0796.08

Total Asset Turnover Ratio measures a company's ability to generate net sales from fixed-asset investments. (Investopedia, n.d.)

salestotal Assets

25526.41/6944.87=3.6753.68

Profitability RatiosReturn on Sales Ratio (ROS) evaluates a company’s operational efficiency. (Investopedia, n.d.)

EATSales

249.41/25526.41=.0097.0097

Return on Total Assets Ratio (ROA) measures how effectively a company’s management uses investors’ money.(Investopedia, n.d.)

EATTotal Assets

249.41/69944.87=.0035.0035

Return on Total Equity Ratio (ROE) shows whether management is growing the company’s value at an acceptable rate. (Investopedia, n.d.)

EATTotal Equity

249.41/(2113.70)=(.1179)(.1179)

Market Value RatiosEarnings Per Share Ratio (EPS) is the portion of a company's profit allocated to outstanding shares of stock.(Investopedia, n.d.)

EATNumber of shares of

common stock outstanding

215420/965410= .2231.22


Ratios Calculations Rite Aid 2014Price/ Earnings Ratio (P/E) measures a company's current share price compared to its per-share earnings. (Investopedia, n.d.)

Price per shareEarnings per share

7.16/.22=32.1132.11


Rite Aid 2014 Financial Ratios

In this section, we will define, calculate, and analyze liquidity ratios, solvency

ratios, asset management ratios, profitability ratios and market value ratios for Rite Aid.

Liquidity Ratios

Current ratio

Current ratio identifies a company’s liquidity, which can be calculated by dividing the

current assets by the current liabilities. (Hawawini & Viallet, 2011). The ratio is mainly used to

give an idea of the company's ability to pay back its short-term liabilities (debt and payables)

with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more

capable the company is of paying its obligations (Investopedia, 2014). “The higher the current

ratio, the more liquid the firm and the current ratio should be at least greater than one and

preferably close to two”(Hawawini & Viallet, 2011, pg. 85)

Current assets/ Current liabilities = Current ratio

4258.12 / 2507.45=1.6981

Quick ratio

Quick ratio identifies a company’s ability to meet its short-term obligations with its most

liquid assets (Investopedia, 2014). The quick ratio is calculated by adding cash and accounts

receivable and dividing them by the current liabilities excluding inventories from current assets.

Although it may seem that the current ratio and quick are similar in their concepts, by excluding

the inventories from the assets it provides a better assessment of the company’s liquidity.

(Current assets – Inventories) / Current liabilities = Quick ratio

2993.95-1264.17/2507.45=0.5042


Solvency Ratios

Debt ratio

The debt ratio of a company is the measurement of the total debt compared to the total

assets. As Hawawini & Viallet (2011) state, “debt ratio is the measure of financial leverage”

(p. 618). “Debt ratio ranges from 0.00 to 1.00. Lower value of debt ratio is favorable and a

higher value indicates that higher portion of company's assets are claimed by its creditors which

means higher risk in operation since the business would find it difficult to obtain loans for new

projects. Debt ratio of 0.5 means that half of the company's assets are financed through debts.”

(“Debt Ratio,” n.d.).

Total debt / Total assets = Debt ratio

5757.14/6944.87=.8289

Debt to equity ratio

“Lower values of debt-to-equity ratio are favorable indicating less risk. Higher debt-to-

equity ratio is unfavorable because it means that the business relies more on external lenders thus

it is at higher risk, especially at higher interest rates. A debt-to-equity ratio of 1.00 means that

half of the assets of a business are financed by debts and half by shareholders' equity. A value

higher than 1.00 means that more assets are financed by debt that those financed by money of

shareholders' and vice versa.

An increasing trend in of debt-to-equity ratio is also alarming because it means that the

percentage of assets of a business which are financed by the debts is increasing” (“Debt to equity

ratio,” n.d.).

Total debt / Total Equity = Debt to equity ratio (D/E)

5757.14/ (2113.70) = (2.7237)


Times interest earned ratio

The times-interest-earned ratio “is a solvency ratio measuring the ability of a business to

pay off its debt” (“Times-interest earned ratio,” n.d.). “Higher value of times interest earned

ratio is favorable meaning greater ability of a business to repay its interest and debt. Lower

values are unfavorable. A ratio of 1.00 means that income before interest and tax of the business

is just enough to pay off its interest expense. That is why times interest earned ratio is of special

importance to creditors. They can compare the debt repayment ability of similar companies

using this ratio. Other things equal, a creditor should lend to a company with highest times

interest earned ratio. It is also beneficial to create a trend of times interest earned ratio” (“Times-

interest earned ratio,” n.d.).

Earnings before interest and tax / Interest charges = Times interest earned ratio

658.82/424591.00=.0015

Asset Management Ratios

Inventory turnover ratio

Inventory Turnover Ratio represents the number of times that a company is able to sell its

inventory within a period of time. It measures how efficiently a company can control their

merchandise. A higher number in this category is a good sign and implies that the company is

doing well managing the buying and selling of inventories. Inventory turnover can be an

indicator of how quickly inventory can be turned into cash (“Inventory Turnover Ratio,” n.d.).

With a higher number we can deduct that inventory is easy to sell. The inventory turnover ratio

is dependent upon the purchase of inventory and the amount of sales, thus requiring good

communication between the sales force and the purchasing department.


“A ratio showing how many times a company's inventory is sold and replaced over a

period. A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies

either strong sales or ineffective buying” (“Inventory Turnover Ratio,” n.d.).

Cost of goods sold / Inventories = Inventory turnover ratio

18,202.68 / 2,993.95 = 6.08

Rite Aid is able to sell its inventory 6.08 times in a year. This means that, on average,

Rite Aid is able to deplete their inventory every other month.

Total assets turnover ratio

Total Asset Turnover ratio measures the efficiency of a company’s ability to generate

sales with the use of its assets. Companies in the retail industry tend to have high asset turnover

ratios (“Rite Aid Corp (NYSE:RAD) Asset Turnover,” 2014). A consistent asset turnover ratio

shows that a company is doing well.

Sales / Total assets = Total asset turnover ratio

25,526.41 / 6,944.87 = 3.675

Rite Aid is able to generate approximately $3.68 with each dollar of assets.

Profitability Ratios

Return on sales ratio

“ROS is an indicator of profitability and is often used to compare the profitability of

companies and industries of differing sizes. In a survey of nearly 200 senior marketing

managers, 69 percent responded that they found the "return on sales" metric very useful.”

(“Operating Margin,” 2014). Return on Sales Ratio (ROS) evaluates a company’s operational

efficiency.

Earnings after tax / Sales = Return on sales


249.41/25526.41=.0097

Return on assets ratio

Return on Total Assets Ratio (ROA) measures how effectively a company’s management

uses investors’ money. (Investopedia, n.d.). This number looks at what a company can make per

each dollar worth of assets they control. It is a great tool for comparison of two or more

companies within the same industry. (“Return on Assets,” 2014).

Earnings after taxes / total assets= Return on total assets

249.41/69944.87=.0035

Return on total equity ratio

Return on Total equity (ROE) shows whether management is growing the company’s

value at an acceptable rate. (Investopedia, n.d.). “Return on equity (ROE) is a measure of

profitability that calculates how many dollars of profit a company generates with each dollar of

shareholders' equity.” (“Return on Equity,” n.d.).

Earnings after taxes/ total equity=Return on total equity

249.41/(2113.70)=(.1179)

Market Value Ratios

Earnings per share ratio

Earnings per share is a measure of after tax earnings divided by the number of shares in

the market. (Hawawini & Viallet, 2011). For Rite Aid EPS is 0.22 which is improved over the

year prior. This reflects an earnings after tax for Rite Aid for this period of $249,410,000 of

which only $215,420,000 is available to common shares.

Earnings after tax / Shares outstanding = Earnings per share

215,420,000 965,410,000 = 0.22


Price to earnings ratio

Price to earnings ratio is the cost per share divided by the earnings per share. (Hawawini

& Viallet, 2011). Currently Rite Aid stock is trading at $7.16 per share. EPS is 0.22. That

means the price to earnings ratio is $32.11.

Cost per share / EPS = Price to earnings ratio (P/E)

$7.16 / $0.22 = $32.11

This means that stock is trading at almost thirty two times its current earnings. When this

ratio is high, as in the case for Rite Aid, and to a lesser degree, its main competitors who also

have a positive EPS, investors are placing higher values to each dollar of current earnings per

share.


Trend Analysis of Rite Aid 2012- 2014

Table 5

Trend Analysis of Rite Aid in Years 2012-2014

Ratio Calculations 2014 2013 2012

Current Ratio Current AssetsCurrent liabilities 1.70 1.71 1.75

Quick Ratio current assets-inventorycurrent liabilities .50 .49 .53

Debt Ratio total debttotal assets .828977 .852347 .859308

Debt to Equity Ratio

total debttotal equity -2.7237 -2.4532 -2.4463

Times Interest Earned Ratio

EBITInterest charges .001551 .0010145 .0002588

Inventory Turnover

Ratio

cost of goods soldinventories 6.08 5.73 6.16

Total Assets Turnover

Ratio

salestotal assets 3.68 3.59 3.55

Return on Sales Ratio

EATSales .00977 .004651 -.014799

Return on Total Assets

Ratio

EATTotal Assets .003565 .06905 .064312


Ratio Calculations 2014 2013 2012

Return on Total Equity

Ratio

EATTotal Equity -.11799 -.04802 .14944

Earnings Per Share Ratio

EATNumber of shares of common stock outstanding $0.22 $0.12 -$0.43

Price to Earnings Ratio Price per share

Earnings per share $32.11 $13.82 -$3.74

Table 5 presents key financial ratios and values for Rite Aid. The analysis that follows

provides financial trends and insight on these ratios.


Liquidity Ratios

In accordance with recently published financial statements and represented in Table 4,

Rite Aid has a current ratio of 1.70. This would represent that Rite Aid is in good standing to

pay short-term liabilities with its short-term assets due to the ratio being greater than one and

gravitating closer to two. Although the decline could cause some concern, the numbers represent

that Rite Aid is in good standing to pay short-term liabilities with its short-term assets due to the

ratio being greater than one and gravitating closer to two.

As represented in Table 4. Rite Aid has a quick ratio of 0.50. The current ratio being

over three times higher would indicate that Rite Aid is dependent upon its inventory.

Solvency Ratios

Rite Aid’s debt ratio for this past year was 0.8289 which is an improvement over the past

two years of 0.8524 last year and 0.8593 the previous. This shows that although it is relatively

high, “a debt ratio of 0.5 means half of the company’s assets are financed though debt” (Debt

Ratio, 2014) Rite Aid is moving in the right direction.

The debt-to-equity ratio of Rite Aid for 2014 is -2.724, while in 2013 it was -2.453 and in

2012 it stood at -2.446. This is very evident that Rite Aid has a large debt and that it therefore is

not very solvent. Despite this trend the company is moving in the right direction overall. Rite

Aid’s accounting scandal of 1999 led to large debt which it is still trying to recover. According to

Moskowitz, “the balance sheet for Rite Aid is dreadful, but the direction is more important, and

Rite Aid is headed in the right direction” (para. 5).

Rite Aid has a TIE of 0.00155 and has been moving in an upward trend over the past

three years, which is very positive. From 0.00025 where it was in 2012 to 0.0010 in 2013 to its


current ratio today is an upward trend. The trend for the company though is that all of the

solvency ratios are moving in a positive direction.


Rite Aid has remained relatively constant with their inventory turnover ratio for the past

three years after a high of 6.16 in 2012, followed by a dip to 5.73 in 2013 and rebounding to a

6.08 in 2014. This shows a stable trend in the cost of goods sold and inventories.

Rite Aid’s total asset turnover ratio has shown a slight increase in each of the last three

years. It has increased from 3.55 to 3.68. While there has not been significant growth, this ratio

has remained consistent which puts Rite Aid heading in the right direction.


The profitability ratios of a company measure how efficiently a company is in generating

revenue in comparison with sales, assets and equity. Return on sales and return on assets have

improved and gone from a negative in 2012 to a positive in 2014. Return on equity though has

taken a hit and gone from a positive in 2012 to a negative in 2014. Analysts remain positive that

Rite Aid has turned the corner on what could have been disaster for the company a few years ago

and are now out of the woods. Alan Stacy (2014) says, “The Company has moved beyond the

turnaround phase and is not clearly focused on growth.”

Market Value Analysis

After five straight years of poor market value performance Rite Aid is trending positive

with a substantial EPS gain in the marketspace. In 2014, EPS increased 54% year-over-year.

While it is fair to say that Rite Aid is currently appreciating EPS growth, they are also benefiting

from the swell of growth within their market as noted by the fact that their major competitors

CVS and Walgreens have also seen increases. (“RAD Solid Choice,” 2014 ).


The reason for increased earnings can be attributed to manay factors. Specific to EPS and

price to earning ratio are the means by which revenue increases and are the by-product of a

targeted growth plan, diversification of income, acquisitions and partnerships, and management

of debt. The impact of these factors on stock price is a critical component in this ratio. Each

component of these strategic pillars will impact the stock price .

In early 2014 Rite Aid reported continued growth of earnings from both the branded

prescription drug market and generic prescription market. The former accounts for nearly 70% of

Rite Aid revenue and the generic prescription and general store merchandise make up the

remainder sources of business. (“RAD Solid Choice,” 2014 ).

Rite Aid has entered into a partnership with McKesson. McKesson is on one of the

nations largest distribution channels in the industry. According to Rite Aid management this

partnership will result in a working capital savings of $150M.

Two notable acquisitions were made by Rite Aid that will strengthen fiscal guidance

through 2015: Health Dialog and RediClinic. It is believed that the synergies with these

acquisitions will translate to increased revenue for Rite Aid. (“Rite Aid’s 4th Quarter Earnings

Release,” 2014).

The Rite Aid model in 2014 established several ventures that would commit capital

investment to diversification. These include but are not limited to: the purchase of prescription

business from other distributors, remodeling and expansion of stores in targeted markets to serve

greater customer needs, expansion of loyalty programs, creation and sale of store brand products,

and inclusion of some health and wellness services such as immunizations and counseling.

The company had 1, 215 Wellness stores (out of 4,587 total stores) at the end of Q4. The

Wellness stores continue to outperform the traditional store formats in both Rx Script count


(+1%) and front-end sales (+3.2%). RAD will also be increasing the # of Wellness remodels

from 400 to 450 in 2015. (“Rite Aid’s 4th Quarter Earnings Release,” 2014). “Rising cash flow

enabled Rite Aid to pay off roughly 10% of its $6.3 billion debt load while setting the stage for a

debt restructuring at a lower interest rate.” (Sterman, 2014).

During the Q4 earnings period Rite Aid announced an aggressive debt refinancing

strategy that they anticipated would translate to a positive impact on the stock price in 2014. This

did in fact have the desired result: “Notably, the closing price of the shares [in June of 2013] was

$3.03, up approximately 4.5% from the day-ago figure of $2.90” (“Rite Aid to Refinance Debt,”

2013). Q1 2014 was up further with a stock price increase to $7.16 per share. This represents a

42% growth in share price.


Peer-Group Analysis of Rite Aid and Two Top Competitors

Table 6 presents a peer-group comparison among RAD, CVS, and WAG from their most

recent financial statements.

Table 6

Peer-Group Analysis of RAD, CVS, and WAG in Years

Ratio Calculations Rite Aid CVS Walgreens

Current Ratio Current AssetsCurrent liabilities 1.70 1.64 1.34

Quick Ratio current assets-inventorycurrent liabilities .50 .84 .53

Debt Ratio total debttotal assets .82898 .18737 .14225

Debt to Equity Ratio

total debttotal equity -2.72373 .352786 .259073

Times Interest Earned Ratio

EBITInterest charges .001551658 .015789784 .023878788

Inventory Turnover Ratio

cost of goods soldinventories 6.08 9.32 7.46

Total Assets Turnover Ratio

salestotal assets 3.68 1.77 2.04

Return on Sales Ratio

EATSales .009770665 .036288764 .03392553

Return on Total Assets Ratio

EATTotal Assets .003565808 .064312278 .069051041

Return on Total Equity Ratio

EATTotal Equity -.117996878 .121087683 .125763564

Earnings Per Share Ratio

EATNumber of shares of

.22 3.76 2.84


Ratio Calculations Rite Aid CVS Walgreenscommon stock

outstanding

Price to Earnings Ratio Price per share

Earnings per share 32.11 19.63 23.51


Peer Group Analysis Narrative

The peer analysis below evaluates the ratio performance of the Rite Aid Corporation

relative to its main competitors in the sector, CVS and Walgreens.

Liquidity Ratios

Rite Aid’s current ratio over the last three years has been consistently higher than its two

competitors’ CVS and Walgreens. Although the three companies all have encouraging current

ratios indicating that they are in good standing to pay short-term liabilities, Rite Aid is more

favorable as it is closer to two. Rite Aid and Walgreen’s quick ratio has stayed consistent and

satisfactory. CVS shows encouraging signs with a quick ratio slightly higher than its two other

competitors. All three companies have a current ratio higher than the quick ratios, which

indicates that they rely heavily on efficient inventory turnover to keep them afloat in the short-

term.

Solvency Ratios

Debt, debt-to-equity, and times-interest-earned, the three solvency ratios are far inferior

to that of Rite Aid’s two major competitors, which are Walgreens and CVS. The company still

has very bad numbers but it seems to be closing the gap. The growth of the solvency ratios for

Rite Aid has helped convey a sign of good things for Rite Aid even though it is not close to the

same level as Walgreens or CVS.


With an inventory turnover ratio of 6.08 Rite Aid is behind their competitors. CVS has

an inventory turnover ratio of 9.32 followed by Walgreen’s with a ratio of 7.46.

Peer analysis with CVS and Walgreens shows Rite Aid on top with a total asset turnover

ratio of 3.68 followed by Walgreens with a total asset turnover of 2.04 and CVS with a 1.77.



Amongst its peers, Rite-Aid is number three behind CVS and Walgreen’s. Both CVS and

Walgreen more than triple the return on sales numbers above Rite-Aid. Where return on assets

and return on equity is concerned, they are even further ahead leaving Rite-Aid a distant third.

Walgreen’s and CVS are very similar in their profitability, but Rite-Aid has nowhere to go but

up and is making strides to do so.

Market Value Analysis

EPS is positive for the main competitors CVS and Walgreens. The EPS for CVS year

over year was only 8% compared to the robust 43% increase realized by Rite Aid. Although

positive, Walgreens had the least amount of growth during this period and the EPS has not yet

returned to what it was in 2011.

EPS and PE are driven by the stock price. When looking back over the past five years,

the most stable of the stocks in this sector was CVS. Figure 1. highlights the historic

performance of the past five years for Rite Aid and it’s primary competitors CVS and Walgreens.

We included in this trend graph the S&P and NASDAQ performance for the same period. Rite

Aid was the least stable and until mid 2013 did not sustain performance above it’s competitors or

the market indexes. Since that point the stock has had an incredible trajectory suggestive that

investors are very confident with future cash flow and the implementation of strategic plan under

new leadership. Walgreens stock price has been the most stable and has seen steady but small

incremental growth for the past three years within the sector. In the last three years Walgreens

stock has failed to consistently outperform the market.


Figure 1. Historic Stock Price: RAD, CVS, WAG, S & P500, NASDAQ

EPS Revisions and Guidance

In 2013 investor upgrades in the market value of Rite Aid was consitent practice

throughout the year. Q1 2014 earnings did not disappoint and Rite Aid has convinced wallstreet

investors that they are able to sustain strong EPS performance. As shown in Figure 2. guidance

has remained unchanged in recent months and wall street is expecting modest incremental

growth in EPS through FY2015.


Figure 2. 2015 EPS Consensus Revisions: last 18 months


Diagnostic Report

Rite Aid’s net income for 2014 has increased by $131.31 million from 2013 going from

$118 million to $247 million growth. The general feeling at the Rite Aid company is one of

optimism, as Rite Aid Chairman and CEO John Standley stated in April, "Our recent acquisitions

of Health Dialog and RediClinic, our expanded partnership with McKesson and our continued

commitment to investing in our store base have positioned us to transition our strategy from

turnaround to growth as we more aggressively pursue opportunities to become a growing retail

healthcare company." (“Quarterly Report,” 2014, para. 5). The company is still in very much in

debt and some the numbers look terrible. Compared to the two peer companies of Walgreens and

CVS, Rite Aid still has a long way to go.

Rite Aid may has more favorable numbers when it comes to current and quick ratios,

which are in a group of liquidity ratios. This means that Rite Aid is in good condition to pay off

short-term liabilities. The same cannot be said for the solvency ratios of Debt, debt-to-equity,

and times-interest-earned ratios. The debt that Rite Aid has is very large and thus their solvency

ratios are far inferior to both Walgreens and CVS. Having these types of ratios is a sign that they

are not able to quick eliminate their debt.

Asset Management ratios are also considered to be behind both CVS and Walgreens

using the inventory turnover ratio while ahead of both CVS and Walgreens using the total asset

turnover ratio which leads to conflicting messages. The profitability ratios of CVS and

Walgreens leave Rite Aid as a distant third in these categories as both companies are very

profitable and Rite Aid is making noise but nowhere near its competitors. In the last category of

ratios, market value, Rite Aid has shown significant growth while CVS and Walgreens have both

have also shown growth just not to the extent of Rite Aid. Both Walgreens and CVS are


considerably larger than Rite Aid and thus have more to offer investors in terms of stability, but

with the growth of Rite Aid and the direction the company is heading it is definitely worthwhile

to invest into. The market trends show that Rite Aid will continue to grow in the future making

an investment in it a smart move.

Assessment

It is easy to look back and say that Rite Aid should have acted sooner to take aggressive

action to improve trends. However, our analysis reveals that they have in fact done what many

companies fail to do and that is recover from near bankruptcy.

“Rite Aid had completed its fiscal year back in February 2012, and in that year, the

company had just $128 million in operating income and $529 million in interest expense. Adding

insult to injury, Rite Aid was in the midst of a sales slump, as revenues fell in three of the four

years leading up to fiscal 2013” (Sterman, 2014).

Taking action to reduce debt via refinancing and improving cash flow was key to their

turn around and insight should have been sooner. As stated previously in this report, our research

revealed that Rite Aid was burdened by stores that were not profitable. This translates to higher

operating expenses and a decrease in cash flow. Liquidation of these stores may have alleviated

this burden.

As a means of improving cash flow Rite Aid was late getting into the “wellness game”

like their competition CVS and Walgreens. This continues to be a threat to their success as these

competitors continue to maximize partnerships with healthcare companies. “Hospitals

and health systems are negotiating more clinical deals with retailers like CVS/Caremark (CVS)

and Walgreens” (Japsen, 2014).


Recommendations on Rite Aid Global Business Strategy 2014- 2017

Rite Aid Corporation is one of the nation's leading drugstore chains. With approximately

4,600 stores in 31 states and the District of Columbia, they have a strong presence on both the

East and West Coasts. Rite Aid is the largest drugstore chain on the East Coast and the third

largest in the United States behind CVS and Walgreens (Our Story, n.d.).

Rite Aid and General Nutrition Companies (GNC), a leading global specialty retailer of

health and wellness products, formed a partnership in January of 1999. This partnership brought

GNC mini-stores within the Rite Aid pharmacies locations across the country.

The partnership between the two companies is mutually beneficial. Recently Rite Aid

and GNC announced the extension of the partnership through 2019 (“Rite Aid and GNC

Announce Extension of Partnership”, 2013).

“Rite Aid’s strategic partnership with GNC is a point of differentiation, both in the chain

drug industry and with our customers,” said Ken Martindale, Rite Aid president and chief

operating officer. “With the extension of our retail agreement with GNC, we will be able to

continue bringing our customers the outstanding lineup of highly popular GNC products they

trust while delivering on our mission of helping our customers meet their unique health and

wellness needs.” (“Rite Aid and GNC Announce Extension of Partnership”, 2013)

Currently there are more than 2,200 GNC stores-within-a-stores operating in Rite Aid

stores across the country. The extension of this agreement enables Rite Aid to add at least 300

additional GNC LiveWell store-within-a store locations inside it stores over the next five years

(“Rite Aid and GNC Announce Extension of Partnership”, 2013).

“Rite Aid has long been an important part of GNC’s growth strategy, serving as an

invaluable partner as we’ve worked to grow our brand,” said Tom Dowd, GNC executive vice


president, chief merchandising officer and general manager. “As a leading global specialty

retailer of vitamins, minerals, and herbal supplement products, sports nutrition products and diet

products, GNC shares Rite Aid’s commitment to improving the health and wellness of its

customers. We look forward to working together to bring our successful ‘store-within-a-store’ to

more Rite Aid pharmacies over the next five years, making it easier than ever for people to live

well.” (“Rite Aid and GNC Announce Extension of Partnership”, 2013)

GNC Holdings, Inc., headquartered in Pittsburgh, PA, is a leading global specialty

retailer of health and wellness products, including vitamins, minerals, and herbal supplement

products, sports nutrition products and diet products, and trades on the New York Stock

Exchange under the symbol "GNC.” The Company – which is dedicated to helping consumers

Live Well – has a diversified, multi-channel business model and derives revenue from product

sales through company-owned retail stores, domestic and international franchise activities, third

party contract manufacturing, e-commerce and corporate partnerships. As of September 30,

2013, GNC has more than 8,400 locations, of which more than 6,300 retail locations are in the

United States (including 984 franchise and 2,206 Rite Aid franchise store-within-a-store

locations) and franchise operations in 54 countries (including distribution centers where retail

sales are made (“Rite Aid and GNC Announce Extension of Partnership”, 2013).

Rite Aid’s strategy to extend the partnership with GNC is a keen move to obtain global

positioning in the market. Rite Aid should also seek additional opportunities for expansion in the

global market to develop and cultivate its business.


Conclusion

After years of financial struggle, Rite Aid has made incredible strides to improve

performance. The key success components of their turn around have been debt refinancing,

liquidation of unprofitable stores resulting in reduction of operating costs, capital investment in a

strategic wellness model, and diversification of income through the successful partnerships and

acquisitions. This paper highlights the positive trends of Rite Aid and suggests that execution of

their current strategic plan will have them poised for continued growth and position them to be a

more formidable competitor to CVS and Walgreens.


References

Asset management ratios. (n.d). Retrieved May 23, 2014, from

http://www.readyratios.com/reference/asset/

Balance Sheet. (n.d.). Retrieved May 22, 2014, from http://finance.yahoo.com/q/bs?

s=RAD+Balance+Sheet&annual

Cash Flow. (n.d.). Retrieved May 22, 2014, from

http://finance.yahoo.com/q/cf?s=RAD+Cash+Flow&annual

Competition heating up between CVS, Walgreens and Rite Aid (2013, September 21).

Retrieved May 26, 2014 from http://medcitynews.com/2013/09/competition-heating-cvs-

walgreens-rite-aid/

Current Ratio Definition | Investopedia. (n.d.). Investopedia. Retrieved May 23, 2014, from

http://www.investopedia.com/terms/c/currentratio.asp

Debt ratio. (n.d.). Formula. Retrieved May 21, 2014, from

http://accountingexplained.com/financial/ratios/debt-ratio

Hawawini, G. A., & Viallet, C. (2011). Finance for executives: managing for value creation (4th

ed.). Mason, Ohio: South-Western Cengage Learning.

How to Use Financial Ratios. (n.d). Retrieved May 23, 2014, from

http://news.morningstar.com/classroom2/course.asp?docId=145093&page=2

Income Statement. (n.d.). Retrieved May 22, 2014, from http://finance.yahoo.com/q/is?

s=RAD+Income+Statement&annual

Inventory turnover ratio. (n.d.). Retrieved May 23, 2013 from

http://www.myaccountingcourse.com/financial-ratios/inventory-turnover-ratio


Is Rite Aid (RAD) a solid choice right now? (2014, April 17). Yahoo Finance. Retrieved from

http://finance.yahoo.com/news/rite-aid-rad-stock-solid-104300685.html?

soc_src=mediacontentstory

Japsen, Bruce. (2014, May 14). In era of Obamacare, Hospitals increase links to Walgreen,

CVS. Forbes Pharma & Healthcare. Retrieved from

http://www.forbes.com/sites/brucejapsen/2014/05/17/in-era-of-obamacare-hospitals-

increase-links-to-walgreen-cvs/?partner=yahootix

Market Ratios. (2012-2014). Retrieved May 23, 2014, from

http://www.money-zine.com/investing/investing/market-ratios/

Moskowitz, D. (2013, January 14). Will Rite Aid Double In 2013?. Wall St. Cheat Sheet.

Retrieved May 21, 2014, from http://wallstcheatsheet.com/stocks/will-rite-aid-double-in-

2013.html/?a=viewall

Quarterly Results. (2014, April 10). – Rite Aid. Retrieved May 22, 2014, from

https://www.riteaid.com/corporate/investor-relations/quarterly-results?

p_p_id=riteaidpressreleases_WAR_riteaidpressreleasesportlet&p_p_lifecycle=0&p_p_st

ate=normal&p_p_mode=view&p_p_col_id=column-

3&p_p_col_count=1&_riteaidpressreleases_WAR_riteaidpressreleasesportlet_action=get

CorporateDetail/

Quick Ratio Definition | Investopedia. (n.d.). Investopedia. Retrieved May 23, 2014, from

http://www.investopedia.com/terms/q/quickratio.asp

New York Stock Exchange. (2014) Trend analysis of stock price for CVS, Rite Aid, Walgreens,

S &P and NASDAQ from 2010 to present. Retrieved from

http://finance.yahoo.com/q/bc?s=RAD+Basic+Chart


Operating Margin. (2014). Retrieved May 24, 2014, from

http://en.wikipedia.org/wiki/Operating_margin

Our Story. (n.d.). – Rite Aid. Retrieved May 23, 2014, from

https://www.riteaid.com/about-us/our-story

Return on Assets. (2014). Retrieved May 24, 2014, from

http://en.wikipedia.org/wiki/Return_on_assets

Return on Equity. (n.d). Retrieved May 24, 2014, from

http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/

return-equity-roe-916

Rite Aid and GNC Announce Extension of Partnership Through 2019. (December, 19, 2013).

Press release distribution, EDGAR filing, XBRL, regulatory filings. Retrieved May 23,

2014, from http://www.businesswire.com/news/home/20131219005663/en/Rite-Aid-

GNC-Announce-Extension-Partnership-2019#.U3zxn_ldVu4

Rite Aid Corp (NYSE:RAD) Asset Turnover (2014). Retrieved May 23, 2014 from

http://www.gurufocus.com/term/turnover/RAD/Asset%2BTurnover/Rite%2BAid

%2BCorp

Rite Aid Disclosure Watch. (n.d.). Rite Aid Disclosure Watch. Retrieved May 21, 2014, from

http://ritetoknow.org/backstory

Rite Aid to refinance debt. (2013, June 13). Yahoo Finance. Retrieved from

http://finance.yahoo.com/news/rite-aid-refinance-debt-141005069.html

Stacy, Alan. (2014, April 17). Rite Aid’s 4th quarter earnings release: The growth story starts.

Seeking Alpha. Retrieved from http://seekingalpha.com/article/2150013-rite-aids-4th-

quarter-earnings-release-the-growth-story-starts


Sterman, D. (2014, May 14). This simple move can unlock massive gains. Street Authority.

Retrieved from http://finance.yahoo.com/news/simple-move-unlock-massive-gains-

150000531.html

Thomson Reuters. (2014) EPS consensus revisions on 2015 guidance: last 18 months.

Retrieved from http://www.4-traders.com/RITE-AID-CORPORATION-14185/revisions/

Times Interest Earned Ratio. (n.d.). Formula. Retrieved May 21, 2014, from

http://accountingexplained.com/financial/ratios/times-interest-earned

jim hamilton - home - ltp comprehensive...

Documents