Running head: LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
CORP
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
1
LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
CORP
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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
3
LTP Comprehensive Financial Analysis Rite Aid Corp
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 timesinterest 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
LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
CORP
4
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?
LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
CORP
5
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 ($, in million)
In Millions of USD
(except for per share items)
Cash & Equivalents
Short Term Investments
Cash and Short Term Investments
Accounts Receivable - Trade, Net
Receivables - Other
Total Receivables, Net
Total Inventory
Prepaid Expenses
Other Current Assets, Total
Total Current Assets
Property/Plant/Equipment, Total - Gross
Accumulated Depreciation, Total
Goodwill, Net
Intangibles, Net
Long Term Investments
Other Long Term Assets, Total
Total Assets
Accounts Payable
Accrued Expenses
Notes Payable/Short Term Debt
Current Port. of LT Debt/Capital Leases
Other Current liabilities, Total
Total Current Liabilities
Long Term Debt
Capital Lease Obligations
Total Long Term Debt
Total Debt
Deferred Income Tax
As of
As of
2014-03-01
2013-03-02
146.41
129.45
146.41
129.45
949.06
929.48
949.06
929.48
2,993.95
3,154.74
195.71
195.38
4,285.12
4,409.05
4,865.36
-2,969.71
431.23
464.40
271.19
309.62
6,944.87
7,078.72
1,292.42
1,384.64
1,165.86
1,156.32
0.00
49.17
37.31
2,507.45
2,578.27
5,632.80
5,904.37
75.17
91.85
5,707.97
5,996.22
5,757.14
6,033.53
-
LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
CORP
In Millions of USD
(except for per share items)
Minority Interest
Other Liabilities, Total
Total Liabilities
Redeemable Preferred Stock, Total
Preferred Stock - Non Redeemable, Net
Common Stock, Total
Additional Paid-In Capital
Retained Earnings (Accumulated Deficit)
Treasury Stock - Common
Other Equity, Total
Total Equity
Total Liabilities & Shareholders' Equity
Shares Outs - Common Stock Primary Issue
Total Common Shares Outstanding
6
As of
2014-03-01
843.15
9,058.57
0.00
971.33
4,468.15
-7,515.85
-37.33
-2,113.70
6,944.87
965.41
As of
2013-03-02
963.66
9,538.15
182.10
904.27
4,280.83
-7,765.26
-61.37
-2,459.43
7,078.72
904.27
LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
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Table 2
Rite Aid 2014 Income Statement ($, in million)
In Millions of USD (except for per share items)
Revenue
Other Revenue, Total
Total Revenue
Cost of Revenue, Total
Gross Profit
Selling/General/Admin. Expenses, Total
Research & Development
Depreciation/Amortization
Interest Expense(Income) - Net Operating
Unusual Expense (Income)
Other Operating Expenses, Total
Total Operating Expense
Operating Income
Interest Income(Expense), Net Non-Operating
Gain (Loss) on Sale of Assets
Other, Net
Income Before Tax
Income After Tax
Minority Interest
Equity In Affiliates
Net Income Before Extra. Items
Accounting Change
Discontinued Operations
Extraordinary Item
Net Income
Preferred Dividends
Income Available to Common Excl. Extra Items
Income Available to Common Incl. Extra Items
Basic Weighted Average Shares
Basic EPS Excluding Extraordinary Items
Basic EPS Including Extraordinary Items
Dilution Adjustment
Diluted Weighted Average Shares
Diluted EPS Excluding Extraordinary Items
Diluted EPS Including Extraordinary Items
52 weeks
ending 201403-01
52 weeks
ending
2013-03-02
25,526.41
25,526.41
18,202.68
7,323.73
6,561.16
103.75
24,867.59
658.83
15.98
250.22
249.41
249.41
249.41
215.42
215.42
5.46
979.09
0.23
-
25,392.26
25,392.26
18,073.99
7,318.28
6,600.77
211.36
24,886.11
506.15
16.78
7.50
118.11
118.11
118.11
107.47
107.47
0.00
907.26
0.12
-
LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
CORP
In Millions of USD (except for per share items)
Dividends per Share - Common Stock Primary Issue
Gross 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
8
52 weeks
ending 201403-01
52 weeks
ending
2013-03-02
0.00
0.32
0.00
0.26
LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
CORP
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Table 3
Rite Aid 2014 Statement of Cash Flows ($, in million)
52 weeks ending 201403-01
52 weeks ending 201303-02
Net Income/Starting Line
249.41
118.11
Depreciation/Depletion
403.74
414.11
Amortization
-
-
Deferred Taxes
-
-
172.68
64.42
-123.79
222.95
702.05
819.59
-421.22
-382.98
56.30
36.67
-364.92
-346.31
Financing Cash Flow Items
-36.92
-173.82
Total Cash Dividends Paid
-
-
12.18
1.65
Issuance (Retirement) of Debt, Net
-295.44
-333.95
Cash from Financing Activities
-320.17
-506.12
-
-
16.95
-32.83
414.69
482.14
3.19
-0.78
In Millions of USD (except for per share items)
Non-Cash Items
Changes in Working Capital
Cash from Operating Activities
Capital Expenditures
Other Investing Cash Flow Items, Total
Cash from Investing Activities
Issuance (Retirement) of Stock, Net
Foreign Exchange Effects
Net Change in Cash
Cash Interest Paid, Supplemental
Cash Taxes Paid, Supplemental
LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
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Calculation and Analysis of 12 Financial Ratios of Rite Aid
Table 4
Twelve financial ratios of Rite Aid in 2014
Ratios
Liquidity Ratios
Current ratio measures a
company's ability to pay
back its short-term
liabilities with its short-term
assets.
(Investopedia, n.d.)
Quick ratio measures a
company’s ability to meet
its short-term obligations
with its most liquid asset.
(Investopedia, n.d.)
Solvency Ratios
Debt ratio is defined as the
ratio of total debt to total
assets and measures the
extent of a company’s
leverage.
(Investopedia, n.d.)
Debt to Equity ratio
measures the proportion of
equity and debt the
company is using to finance
its assets.
(Investopedia, n.d.)
Times-Interest Earned
Ratio(TIE) measures a
company's ability to meet
its debt obligations.
(Investopedia, n.d.)
Calculations
Rite Aid 2014
Current Assets
Current liabilities
4258.12/2507.45=1.6981
1.70
current assets-inventory
current liabilities
4285.122993.95=1264.17/2507.45
= 0.5042
.50
total debt
total assets
5757.14/6944.87=.8289
.83
total debt
total equity
5757.14/(2113.70)=(2.7237)
(2.72)
EBIT
Interest charges
658.82/424591.00=.0015
.0015
LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
CORP
Ratios
Asset Management Ratios
Inventory Turnover Ratio
measures many times a
company's inventory is sold
and replaced over a period.
(Investopedia, n.d.)
11
Calculations
Rite Aid 2014
cost of goods sold
inventories
18202.68/2993.95= 6.079
6.08
sales
total Assets
25526.41/6944.87=3.675
3.68
EAT
Sales
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.)
EAT
Total 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.)
EAT
Total Equity
249.41/(2113.70)=(.1179)
(.1179)
EAT
Number of shares of
common stock outstanding
215420/965410= .2231
.22
Total Asset Turnover Ratio
measures a company's
ability to generate net sales
from fixed-asset
investments.
(Investopedia, n.d.)
Profitability Ratios
Return on Sales Ratio
(ROS) evaluates a
company’s operational
efficiency.
(Investopedia, n.d.)
Market Value Ratios
Earnings Per Share Ratio
(EPS) is the portion of a
company's profit allocated
to outstanding shares of
stock.
(Investopedia, n.d.)
LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
CORP
Ratios
Price/ Earnings Ratio (P/E)
measures a company's
current share price
compared to its per-share
earnings. (Investopedia,
n.d.)
Calculations
Price per share
Earnings per share
12
Rite Aid 2014
7.16/.22=32.11
32.11
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.
LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
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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-toequity 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.
LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
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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” (“Timesinterest 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
LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
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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
LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
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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
LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
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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.
LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
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Trend Analysis of Rite Aid 2012- 2014
Table 5
Trend Analysis of Rite Aid in Years 2012-2014
Ratio
Calculations
2014
2013
2012
Current Assets
Current liabilities
1.70
1.71
1.75
Quick Ratio
current assets-inventory
current liabilities
.50
.49
.53
Debt Ratio
total debt
total assets
.828977
.852347
.859308
Debt to Equity
Ratio
total debt
total equity
-2.7237
-2.4532
-2.4463
Times Interest
Earned Ratio
EBIT
Interest charges
.001551
.0010145
.0002588
Inventory
Turnover Ratio
cost of goods sold
inventories
6.08
5.73
6.16
Total Assets
Turnover Ratio
sales
total assets
3.68
3.59
3.55
Return on Sales
Ratio
EAT
Sales
.00977
.004651
-.014799
Return on Total
Assets Ratio
EAT
Total Assets
.003565
.06905
.064312
Current Ratio
LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
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Ratio
Calculations
2014
Return on Total
Equity Ratio
EAT
Total Equity
-.11799
Earnings Per
Share Ratio
Price to
Earnings Ratio
EAT
Number of shares of
common stock outstanding
Price per share
Earnings per share
19
2013
2012
-.04802
.14944
$0.22
$0.12
-$0.43
$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.
LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
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Liquidity Ratios
In accordance with recently published financial statements and represented in Table 1,
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
LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
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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.
Asset Management Ratios
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.
Profitability Ratios
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 ).
LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
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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
LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
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23
(+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.
LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
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24
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 Assets
Current liabilities
1.70
1.64
1.34
Quick Ratio
current assets-inventory
current liabilities
.50
.84
Debt Ratio
total debt
total assets
.82898
.18737
.14225
Debt to Equity
Ratio
total debt
total equity
-2.72373
.352786
.259073
Times Interest
Earned Ratio
EBIT
Interest charges
.001551658
.015789784
.023878788
6.08
9.32
7.46
3.68
1.77
2.04
EAT
Sales
.009770665
.036288764
.03392553
EAT
Total Assets
.003565808
.064312278
.069051041
-.117996878
.121087683
.125763564
.22
3.76
2.84
Inventory
Turnover Ratio
Total Assets
Turnover Ratio
Return on Sales
Ratio
Return on Total
Assets Ratio
cost of goods sold
inventories
sales
total assets
Return on Total
Equity Ratio
EAT
Total Equity
Earnings Per
Share Ratio
EAT
Number of shares of
common stock
outstanding
.53
LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
CORP
Ratio
Price to Earnings
Ratio
25
Calculations
Rite Aid
CVS
Walgreens
Price per share
Earnings per share
32.11
19.63
23.51
LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
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26
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 shortterm.
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.
Asset Management Ratios
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.
LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
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27
Profitability Ratios
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.
LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
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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.
LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
CORP
Figure 2. 2015 EPS Consensus Revisions: last 18 months
29
LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
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30
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
LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
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31
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).
LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
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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).
LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
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33
“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.
LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
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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.
LTP COMPREHENSIVE FINANCIAL ANALYSIS RITE AID
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35
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