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What’s behind Rite Aid’s Deteriorating Margins?

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Dec. 4 2020, Updated 10:53 a.m. ET

RAD’s margins have deteriorated over the years

Rite Aid (RAD) is expected to post adjusted loss of one cent per share when it reports first-quarter 2019 results on June 27 in comparison to an adjusted loss of five cents per share in the same quarter last year.

Rite Aid has witnessed a continuous deterioration in its profitability over the years. The company recorded a gross margin of 21% during fiscal 2018 as compared to 29% in fiscal 2013. The fading margins have mainly been a result of lower reimbursement rates and a fall in the prescription count over the years.

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Comparing Rite Aid’s profitability to peers

Rite Aid has weaker margins than other major drug stores. Its trailing 12-month operating margin of 0.2% is lower than that of CVS Health (CVS) at 5.2% and Walgreens Boots Alliance (WBA) at 4.6%.

In order to improve its financial position, Rite Aid’s management has been looking for strategic alternatives. Initially, the company decided to sell all its assets to Walgreens in October 2015. However, the deal fell apart due to regulatory hurdles, and Walgreens finally managed to get approval for about half the number of stores and three distribution centers.

In February this year, the company took another step towards bringing about a turnaround. It announced its intention to merge with privately held Albertsons. The deal includes 2,569 stores and its pharmacy benefit manager business. The deal is likely to conclude by the end of this calendar year.

Investors looking for exposure to Rite Aid through ETFs can invest in the First Trust Consumer Staples AlphaDEX Fund (FXG), which invests 2.3% of its portfolio in the company.

Move on to the next section to read about RAD’s stock price performance and Wall Street recommendations.

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