How could they have screwed up that badly? And is it terminal or is a comeback possible?
Those are the questions I am asking about Sears (SHLD) and Rite Aid (RAD), which are both down badly today. I have to tell you that while both deserve the punishment meted out, I think only one is worth owning.
First, Rite Aid screwed up again this morning. After having a terrific run off its bottom, Rite Aid has now made a series of miscues that are breathtaking. Management totally got their pharmacy business wrong. Totally. They have now estimated incorrectly several times how much reimbursement they would get from the pharmacy benefit managers (PBMs) they work with. They also completely botched the schedule of drugs going generic to the point that they had to guide down immensely --10% -- from the previous guide down, which was not that long ago. This calls into question how well they are running the pharmacy, and I think the answer is, quite poorly.
There are a lot of new wrinkles in the drug store business but it isn't like they couldn't be forecasted. I called up a Dec. 9, 2013 article from DrugStoreNews, the industry bible, entitled, "Generic Drug Prices Spike, but PBMs' Reimbursement Rates don't keep up, NCPA Study Finds. (NCPS stands for National Community Pharmacists Association.) In this article, the CEO of the trade organization said, "Pharmacy acquisition costs for more and more generic drugs are rising in rapid, breathtaking fashion." The article then continues, "Meanwhile reimbursement from pharmacy benefit managers is not keeping up, leaving pharmacists out in the cold."
The article included a bunch of drugs that are crushing the margins of drug stores and the fact that 86% of pharmacists surveyed saw this as a problem.
Eight-six percent and Rite Aid didn't see it? Rite Aid did get a new chief financial officer in July, who was from Roundy's. This is inauspicious because that supermarket chain has been a disaster right out of the chute -- missing numbers repeatedly and cutting a hefty dividend not long after it came public. But this is inexcusable.
The good news, and there is good news, is that the turn that we first flagged where a remodeled store does so much better than an old one, continues. So, I am not willing to write Rite Aid off. But it does push the profitable scenario I have outlined on my show, "Mad Money," (since the stock was trading around $3) out further than I would like. The company has to get its pharmaceutical act together now. Let's hope this is the wake-up call that is needed. Or else maybe they've just turned zombie on us.
Second, I don't feel the same way about Sears, however, after its disastrous quarter. There is a well-reasoned note by Gary Balter that discusses thinking about the end when it comes to Sears in which he actually references that fabulous song, "The End," by the Doors. Gary, an old friend of mine, has pretty much laid out a story where Sears is pretty much worthless as a chain. If, as the bulls say, there is value in the company's real estate, than it should be liquidated because it is losing about $10 a share in value each and every year.
For Rite Aid, this surely is not the case. I want to stick with RAD as painful as it is, but I think that after reading this Credit Suisse report about Sears it does seem that the late, great Jim Morrison is right and "This is the end, my only friend, the end."