August 18, 2022

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Rite Aid plummets 25% after Deutsche Bank slashes price target to $1 as COVID-19 ‘hastens the decline’ of the company’s retail pharmacy business

Willy Churchill leaves a Rite Aid store in Oakland, California.Reuters/Noah Berger

  • Rite Aid shares dropped as much as 25% on Thursday following a ratings and price-target downgrade at Deutsche Bank.

  • The retail pharmacy chain may miss its 2023 indication to bring in $430 million in annual adjusted EBITDA.

  • “Unfortunately, we believe Covid has hastened the decline of the retail pharmacy segment,” the investment bank said.

Rite Aid shares sank to their lowest price in more than two years on Thursday after Deutsche Bank downgraded the company to a sell rating and drastically reduced its price target to $1 a share, flagging “going concern” worries among investors in the pharmacy chain.

Rite Aid’s 2023 guidance will be in focus when the company releases fourth-quarter earnings on April 14, and Deutsche Bank foresees Rite Aid falling short of its own indication to bring in more than $430 million in annual adjusted EBITDA. The investment bank cut its rating to sell from hold and its price target by 94% to $1 a share from $16.

Rite Aid’s stock dropped as much as 25% to $6.11, the lowest price since August 2019. Volume was heavy with nearly 12 million shares exchanged by late morning compared with the average 65-day volume of 2.4 million shares.

“Unfortunately, we believe Covid has hastened the decline of the retail pharmacy segment and we see the potential for a dramatic negative inflection point for RAD shares as this preliminary F2023 outlook seems to be unattainable,” Deutsche Bank analyst George Hill said in a note published Thursday.

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“We are downgrading RAD shares to Sell, where we see a likely risk that the company provides guidance next week that causes investors to question the company’s ability to sustain itself as a going concern, leading to a sharp reduction in the value of RAD shares,” said Hill.

Rite Aid needs to generate about $400 million-$450 million in annual adjusted EBITDA to continue as an operating company. That amount of money is needed to cover debt servicing costs and to cover store maintenance capital expenditure requirements. “At a number below $400 million, the equity arguably has no value as the company is not in a position to generate real returns to shareholders, said Hill.

Rite Aid had previously guided for 2022 adjusted EBITDA of $500 million to $520 million, with contributions coming from COVID vaccines and at-home and PCR tests. Deutsche Bank expects the company’s Elixir pharmacy benefit management unit to generate $130 million to $135 million in adjusted EBITDA, leaving the core pharmacy business at the $110 million to $125 million range.

“If we assume Elixir stays flat, the core pharmacy business needs to roughly double next year to achieve the target of north of $450 million in F2023, which we think is highly unlikely, especially with sharply lower COVID contribution,” the bank said. “We estimate RAD could miss the $430 million bogey by more than $100 million, calling the value of the equity into question.”

The retailer is facing operational challenges on multiple fronts including rising labor costs and reimbursement pressures, the bank said.

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Rite Aid shares year-to-date through Wednesday’s session had lost about 43%.

Read the original article on Business Insider