Rite Aid's latest programs show an eye on the future

Rite Aid announced its third-quarter 2014 sales Thursday, showing higher total and same-store sales and profits than third quarter 2013, as well as continued growth in programs like the Wellness store format, Wellness65+ and others.

The main story surrounding Rite Aid over the past couple of years has been its efforts to engineer a turnaround, but the message from Thursday was, "Rite Aid more or less has turned around, so what's next?"

The chain's stock was trading at $5.18 per share in late-afternoon trading on the New York Stock Exchange Thursday, down from $5.43 at the start of the day after it issued a lower earnings-per-share and narrower adjusted EBITDA guidance for fiscal year 2014, attributing the lower expectations to reimbursement rate and generic pricing pressure, as well as a promotional selling environment on the front end. Much of Thursday's media coverage of Rite Aid following the release of its earnings focused on this aspect, but these are largely industry-wide problems, not a reflection of Rite Aid's health as a company.

The 4,595-store chain's programs are continuing to show promise: Wellness stores, which now account for nearly a quarter of all its stores, are showing noticeably better performance on the front-end and in the pharmacy; the company is investing heavily in initiatives designed to benefit the front-end, including pilot programs like Beauty Vision and a merchandising initiative centered on health products; in addition to its earnings, Rite Aid also announced Thursday an extension of its long-standing partnership with GNC, with president and COO Ken Martindale noting that it would focus much more closely on that partnership than it had before due to having been distracted by its turnaround program.

Much of Rite Aid's same-store sales growth as of late has come from the pharmacy, but as the numbers from the Wellness stores show, improving the look and feel of its stores can help benefit the front-end as well, and innovative programs like these will probably help drive sales as well; it's worth noting that early on, one of the stores with a Beauty Vision section had already seen a lift in cosmetics sales.

But there's a lot to crow about on the financial side too. TheStreet gave Rite Aid's stock a "Hold" rating, noting a mixture of strengths and weaknesses, one weakness being a gross profit margin of 30.14% that the financial information company called "lower than what is desirable," and a net profit margin of 0.52% that's behind the industry average. But here's the good news: Its sales growth has "slightly outpaced" the industry average of 6.3%; the company has seen earnings growth of 160% over the past year, while its stock price has increased by 427.35%, outpacing the rise in the Standard & Poor's 5000 Index during the same period; and its net operating cash flow has grown by 341.63%, at a time when the industry, on average, has seen it decline by 54.43%.

Notwithstanding the pressures that the industry has been feeling and will continue to feel in the near future, let alone the vagaries of the stock market, Rite Aid's programs are already panning out, and that's what really matters in the long run.