Regulators finally gave Rite Aid (NYSE: RAD) clearance for an asset sale last week, but it's apparently a case of "too little, too late" for investors who have seen the drugstore operator get pummeled in recent months. Rite Aid stock tumbled 9% last week, and while it didn't revisit last month's multiyear low,s this is clearly bad momentum heading into Thursday's quarterly report.
Wall Street pros aren't holding out for much. Analysts see Rite Aid breaking even. They also see revenue of $7.83 billion, 2.5% below where it clocked in a year earlier. Revenue will naturally fall sharply in the future after it unloads nearly half of its stores to Walgreens Boots Alliance (NASDAQ: WBA), but Thursday will give Rite Aid its best shot to prove to investors that a scaled-back asset sale can be a good thing for its battered investors.
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Rite turns on red
Rite Aid shares slumped last week after announcing that the Federal Trade Commission approved a deal for the drugstore operator to sell 1,932 stores and three distribution centers to Walgreens Boots Alliance in a $4.375 billion transaction. Investors were disappointed because this deal was for 254 fewer stores -- and more importantly, $800 million less -- than the original $5.175 billion it was supposed to be collecting. It's more salt to an already open wound since Rite Aid's original deal was to sell the entire company to Walgreens for $17.2 billion in late 2015.
It's easy to see why investors are disappointed. Every revision has resulted in less money and less money per store for Rite Aid. However, let's not dismiss that $4.7 billion -- Rite Aid is also collecting $325 million from Walgreens Boots Alliance as a result of the original deal not going through and it has said that it has enough net operating loss carryforwards to offset most of the tax bite on the asset sale gain -- will go a long way toward eating into Rite Aid's mammoth debt load.
Rite Aid will be keeping roughly 2,600 stores, more than enough units to steer its way back to profitability once it can focus again on its operations instead of asset sale distractions. Rite Aid will also be keeping its EnvisionRx, RediClinic, and Health Dialog subsidiaries as well as buying generic drugs at cost from Walgreens Boots Alliance for several years.
Thursday is going to be huge for Rite Aid. Investors are no longer concerned about the probabilities of a deal going through. Walgreens will start absorbing the stores into its bloodstream as early as next month through early next year. The windfall behind the 10-figure transaction should give Rite Aid's creditors a chance to exhale. Rite Aid announced last week that it was renewing its supply chain contract with Core-Mark (NASDAQ: CORE) for another three years.
It hasn't been easy to be a Rite Aid investor this year, but it seems as if the chain has earned the right to some calm after the storm. The market will be more concerned about any insight into Rite Aid's future than its past when it steps up on Thursday. Last week's sell-off, while fair in theory, makes an already cheap stock even more of a bargain.
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