Many drugstore chains have been in the red for quite some time now, given the shift from brand to generic drugs. Rite Aid (RAD, Financial) and Fred’s (FRED, Financial) are certainly among them. The reason why I have chosen these two companies is that both reported negative same-store sales for the month of June. With Rite Aid’s same-store sales dipping 1%, Fred’s witnessed a drop of 4% in the key metric.
A closer look at the outlook for drugstores
Due to introductions of new generic drugs, the pharmacy segment’s comparable store sales declined 1.6%, which ultimately led to weak store sales for Rite Aid. However, positive results from prescription counts and front-end sales provided some relief to the third-largest drugstore retailer. The total revenue generated from drugstore sales was 1.6% lower at $1.924 billion over last year.
Rite Aid has been trying to expand its pharmacy operations, including clinical services, by offering Wellness+ program. The program, undertaken to fight diabetes and flu, is expected to generate better revenue and expand its customer base. Its efforts for a bright future are not limited to the top line only. It has also taken certain cost-cutting measures to boost the bottom line.
Moreover, the company has benefitted from the rift between its rival Walgreen (WAG, Financial) and Express Scripts (ESRX, Financial) Holdings, a prescription management company. Walgreen, too, is in a soup with the nonrenewal of its contract with Express Scripts and is losing credentials due to its move to expand in Europe through acquisition of Alliance Boots. Also, a lackluster quarter weakened investor confidence further. But as I mentioned in my post on Walgreen, the acquisition is expected to have large potential benefits which might show some better days to the pharmaceutical retailer.
Moving on to Fred’s, though the same store sales dipped more than the year ago period, the total sales for the month were 2% higher at $182.6 million. Though sweet performance in its hardware and house wares segments pushed revenue up, lower sales of general merchandise affected negatively pulling down the same store sales. Even the retail segment witnessed a decline of 0.8% in its comparable store sales.
After having an attractive quarter, the company came out with unfavorable numbers for the month of June mainly because of its pharmacy operations. It closed down 12 stores during the month. Moreover, it expects its quarter to be in the lower range of its guidance.
Apart from the setback due to the shift from brand to generic pharmaceuticals, the retailer experienced low sales in the wake of low demand from budget conscious customers and unusual weather conditions. It could not come up with good strategies against its competitors such as Walmart (WMT, Financial) which has been offering the lowest price possible to snatch market share of many general merchandise retailers. Even a strategy as simple as expanding geographical presence or launching new products can do some bit. Hence, it looks like a dull one when compared to the others.
Conclusion
The shift to generic drugs has indeed affected all the industry players. But what an investor should be interested in is the recovery and the efforts made by each of them to get better. In this regard, Fred’s does not seem convincing enough. On the other hand, Rite Aid looks like the one that we can follow depending on its new Wellness+ initiatives and cost-cutting measures. Walgreen is a safe bet since it looks quite confident of its acquisition and paid increased dividends even after its loss and an unattractive quarter. Hence, this industry has a mixed package for investors and we should be very careful before jumping into most of them.
