The third largest pharmacy chain in the United States could go bankrupt, warns an analyst
Rite Aid could disappear as investors doubt its profitability.
Pharmacy giant Rite Aid is at risk of bankruptcy, according to a Deutsche Bank analyst who downgraded the retailer and said its stock could be worthless.
Analyst George Hill cut his price target for Rite Aid from $16 to $1 and warned the company could go bankrupt, Yahoo Finance reported. The stock plunged 24% on Thursday on the news, bringing its value down to $6.45/share.
“We believe COVID has accelerated the decline of the retail pharmacy segment and we see the potential for a dramatic negative inflection point for [Rite Aid] stocks,” Hill wrote in a research note published Thursday.
Rite Aid is the nation’s third-largest drugstore chain with more than 2,500 locations in 17 US states. But in recent years, the pharmacy has felt the heat from rivals Walgreens and CVS, each with more than 9,000 stores nationwide. And with drugstore profits declining as the pandemic wanes, Rite Aid’s attempts to expand in recent years have led the company to take on $3.2 billion in debt, Yahoo Finance reported. Hill said this now threatened to permanently damage its profitability rather than help Rite Aid against its competitors.
Investors in the drugstore chain are now awaiting its 2023 budget forecast. Rite Aid is expected to generate between $190-200 million to cover its debt servicing costs as well as $200-250 million for spending needs. investment for store maintenance, according to Hill.
“Rite Aid must generate $400-450 million in annual adjusted EBITDA to continue as an operating company,” Hill wrote. “At numbers below $400 million, equity arguably has no value because the company is unable to generate real returns for shareholders.”
Rite Aid has been struggling for some time, having survived two failed merger attempts in the past five years at great expense.
The first, a planned $10 billion acquisition of Rite Aid by the Walgreens Boots Alliance, was canceled by the FTC in 2017. The result was a consolation prize: Walgreens bought about half of all Rite stores. Aid for $5.2 billion, CNN Business reported at the time.
And in 2018, Rite Aid’s second merger plan – a deal with food and pharmaceutical retailer Albertsons Cos. worth $24 billion – died at the hands of shareholders over equity concerns, Supermarket News reported at the time.
The coronavirus pandemic has given major US pharmacies a boost as pharmacists have joined the ranks of frontline workers and reached new customers by becoming vaccination and testing sites. But with low foot traffic and the ability for customers to order hair care, skin care and dental products online, big box stores like Target were usurping some of the traditional drugstore customer base, reported. CNBC in January 2021.
Declining foot traffic has hurt Rite Aid’s mid-pandemic attempts to lure customers through store redevelopments that have prioritized its pharmacy offerings via virtual treatment rooms so customers can connect to distance from pharmacists. And by December 2021, Rite Aid’s struggles had escalated: the pharmacy chain announced it would close 63 stores over the next two years.
Analyst sentiment on Rite Aid has continued to decline in recent months, Barron reported. Year-to-date, the pharmacy’s earnings have fallen more than 50%, MarketWatch reported, compared to a paltry 0.4% gain for rival CVS.