Rite Aid Corp.’s shares dropped by 13% on Tuesday, falling to a record low following a Bloomberg report stating that the company is working with lawyers and banks to restructure its debts. Rite Aid, which had about $2.9 billion of outstanding debt as of Q4, may try to extend the rate and duration of their bonds, lowering the near-term obligations but increasing their long-term ones. However, it is unclear if the mechanics of the operation are possible in the near future.
Deutsche Bank analysts who have a sell rating on the stock expressed concerns that Rite Aid’s equity holders may not emerge unscathed from the restructuring process. The company’s bonds are trading at around 50 to 60 cents on the dollar, according to Deutsche Bank. The chart below from data provider BondCliQ shows that Rite Aid’s bonds are trading at distressed levels:
Moreover, Deutsche Bank’s George Hill said that the company’s cash position is looking vulnerable. Hill remarked that Rite Aid needs to almost double its core pharmacy business to return to positive free cash flow, which he views as almost impossible.
Rite Aid is due to report its fiscal first-quarter earnings on Thursday. We’ll be closely monitoring this situation and its potential impact on the pharmacy chain.
Rite Aid Struggles to Reverse Membership Losses
Rite Aid’s Elixir pharmacy benefits management company, acquired in 2015 for approximately $2 billion, is taking longer than expected to reverse membership losses. A research note suggests that the company’s pharmacy script files are worth $1.7 billion to $2.0 billion, while the PBM may fetch around $1.0 billion-$1.1 billion, versus the company’s $2.9 billion in debt and current equity value of ~$100 million.
Adding to the company’s struggles, competitor Walgreens Boots Alliance posted weak fiscal first-quarter earnings that fell far below expectations causing the stock to hit its lowest level since 2010. Rite Aid has also had to cut its full-year per-share earnings forecast by 40 cents due to skittish consumers, declining rates of COVID-19 vaccines and testing, which dampened the company’s full-year outlook.
According to FactSet consensus based on just three analyst estimates, Rite Aid is expected to swing to a loss of $1.50 for the quarter through June 3, after earnings per share of 38 cents a year ago. Furthermore, sales are expected to fall to $5.324 billion from $6.161 billion.
This year alone, the stock has fallen by 53%, while the S&P 500 has gained 14%.