Shares of drug retailer and my employer Rite Aid (Disclosures: I work for RAD &
own shares of restricted stock) have been under considerable pressure during the
last year, plunging from just below $7/share to their current level near
$2/share. Glancing at a 10-year chart of Rite Aid reveals several previous
occasions where the stock tanked to around this level, providing investors and
traders with the opportunity to earn returns of 2X to 5X their money as the
stock subsequently rebounded to the $5 to $10/share level. Whether the current
downturn in Rite Aid will provide similar returns remains to be seen, but
overall market weakness, economic uncertainties, and a huge increase in the
short interest of the Company at the end of December to 56.7 million shares
(from 44.4 million in mid-December) suggests that a wait and see approach may be
prudent in this downturn. Specifically, I am waiting for a meaningful decline in
short interest to a level that is below the average over the last 12 reporting
periods (44.5 million shares) and at least a 10% rebound from the 52-week low,
which the stock continues to drift around during recent trading.

The most recent sell-off in Rite Aid was triggered by weak, industry-wide
same-store sales for December, which declined by 0.5% on flat prescription drug
sales and front-end sales that were down by 1.2%. The decline in December
same-store sales followed increases in the previous two months of 0.4% for
October and 0.9% for November. Drug retailers cited a slow start to the flu
season and increased sales of lower-priced generic drugs (which ironically
result in higher profit margins) for the poor results. Specifically, an
unexpected recall of children’s cough and cold medications and anemic demand
for seasonal items put a dent in sales for December across the entire industry.
Despite concerns over a recession and other economic uncertainties, Rite Aid is
poised to capitalize on convenience as it expands several initiatives to improve
sales and customer service, including the following: in-store health
clinics/services, expanding the number of drive-thru locations, and in-store
digital photography services. Also, with pharmacy sales accounting for over
two-thirds of total sales and a shift to higher-margin generic drugs, the
Company will benefit from demographic trends in an aging population with an
increased reliance on prescription drug therapies.

Before the same-store results, Rite Aid dropped from the $4/share level to below
$3/share after reporting disappointing 3QFY08 results with a wider than expected
loss and a sales shortfall. The Company also lowered its guidance for
profitability (or lack thereof with a wider than expected loss of $161 to $192
million now expected from $78 to $161 million), sales ($24.3 to $24.6 billion
now expected from $24.5 billion to $25.1 billion), same-store sales growth (1%
to 2% growth now expected from previous 1.3% to 3.3%), and EBIDTA ($950 million
to $1 billion now expected from previous $1 to $1.1 billion). Rite Aid ended the
quarter with 5,089 stores in operation and expects the Brooks/Eckerd acquisition
of over 1,850 stores to be fully integrated by the Fall with expected
cost-saving synergies of $200 million in FY08 and $300 million in FY09. CEO Mary
Sammons has defended concerns over the Company’s liquidity, stating that Rite
Aid has a $1.7 billion revolving credit facility with virtually no restrictions
and cash/equivalents of $173 million on the balance sheet. Also, the CEO
exercised options to buy 200,000 shares of common stock at $2.75 per share in
mid-October 2007, bringing her total stake to 1.4 million shares.

Looking ahead, the expected cost/operating synergies from the Brooks/Eckerd
acquisition, favorable demographic trends, increased sales of
prescription/generic drugs, and a focus on customer service/convenience makes
Rite Aid a stock to buy once the stock shows signs of recovery from making new
52-week lows and short interest begins to decline below the average of the last
12 reporting periods (44.5 million shares). For FY09, I believe Rite Aid can
achieve EBIDTA of at least $1 billion, resulting in a price target of $5/share
based on an enterprise value (EV) to EBIDTA ratio of 10X, which includes about
$6 billion in outstanding debt and a market cap of about $4 billion at $5/share
for a total EV of $10 billion. The EV/EBIDTA ratio of 10X is in-line with peers
such as Walgreens (WAG) at 9.1X, CVS at 12.6X, and Longs Drug (LDG) at 7.1X,
compared to Rite Aid’s current multiple of 12.3X. Alternatively, Rite Aid
could become part of industry-wide consolidation with private equity as the most
likely buyer given the leverage of the Company’s high debt load and anti-trust
concerns associated with an acquisition by industry giants Walgreens or CVS.
Also, a point often overlooked is that Jean Coutu Group is now Rite Aid’s
largest shareholder with about 252 million shares or about one-third of the
Company. However, as part of the transaction for over 1,850 Brooks/Eckerd
stores, Rite Aid benefited from an inflated stock price of $4.54 to $4.71 per
share, resulting in a deal that included $1.45 billion in cash and $1.1 billion
in stock that would not be feasible today with Jean Coutu’s stake deflated to
a value of just over $500 million. Now, it just remains to be seen whether Rite
Aid can capitalize on the deal by effectively integrating the Brooks/Eckerd
stores in the form of cost savings, increased sales, and profitability.

mikehav.com

Cramer told people not to buy this...

Rad is Bad.Correction. Very Bad. Jim Cramer have you even been in a Rite-Aid.
Shame on you on this one.Its a trade only so be man enough and tell the masses
sell this stinker.Or do a buy and hold then fold.Ex Rite-Aid stock holder

If your in RAD for the long term, great buy at these levels. Look at a 20 year
chart for CVS. They were at 2.50 to 3.00 at one time also. And back then,
everyone would have said the same thing they are saying about RAD now. CVS split
3 times and are at 30-40 dollar levels right now. RAD is a great long term spec
play. No reason why they could not do the same. However, RAD still is only
speculative, alot can happen in 20 years.

I heard Jim's interview with Rite Aid's Ceo Mary Sammons after the disappointing
quarter and I was actually encouraged. It was pretty honorable that she faced
the music with Jim the SAME DAY the stock was down almost 20 percent. It appears
the acqusition of the Eckerd and Brooks pharmacies has temporarily set them back
but in the long run, this could be a winner. It's not that often you see people
in her position go right into the public fire so quickly so I take that as a
positive. I think you have to look past a few quarters and think that in a few
years this will be a good investment and right now the stock is as cheap as I've
ever seen it.

I can be wrong...but sometimes it's all about the CEO...who said she didn't like
her or the SIX Flags CEO...since August. Nymph

You have to see a good couple of quarters out of these guys because right now
without asset sales the viability of the company is in question. Man would that
be great for CVS although as i made it clear CVS is not done going down.
Thestock is facing multiple downgrades...i still like it alot because of the
multiple versus the growth .. reminds me of UNH in the 40s.

Its bloody baby. I just looked at it. Had to punch it in, because its off my
list, but damm. Now a whole bunch of buys coming in @ 2.30 Glad that I got
out in August.

i would take a pass on RAD per Jim's interview with the CEO