Rite Aid's Many Headaches Mean 'Investors Beware'

Shares in Rite Aid (RAD) tanked Wednesday after the nation's third-largest drugstore chain badly missed Wall Street's fourth-quarter earnings estimate and fiscal-year outlook. If you're a high-roller looking for a little action, Rite Aid's sell-off could offer a buying opportunity in a wickedly volatile hot stock.

But if you're the sober type, you'd best stay away. Never mind that Rite Aid shares more than quadrupled over the last year -- the company is bleeding red ink, its balance sheet is a mess, sales are falling and it's closing stores.

The lousy economy and relentless pressure from bigger rivals Walgreen (WAG) and CVS (CVS) -- not to mention Walmart (WAG) -- are partly responsible for Rite Aid's woes. But the big drag on the bottom line and balance sheet is the company's ill-timed acquisition of the Brooks Eckered chain, in 2007. The deal seemed to make sense at the time. After all, competition among the national chains is fierce and strategic acquisitions are commonplace.

Too bad for Rite Aid that 2007 was a spectacularly bad time to close a big deal. It was both the top of the stock market and the beginning of the Great Recession. The drugstore chain has been posting losses ever since, and analysts see the red ink flowing until at least 2013, according to Thomson Reuters.

Negative Book Value Per Share

With no trailing or forward earnings, there's no way to value Rite Aid's stock by its price/earnings (P/E) multiple. As for the balance sheet, shareholders have no equity, so there's also no way to determine return on equity. Oh, and the company's book value per share is negative. As of the end of the most recent quarter, Rite Aid had $103.6 million in cash and cash equivalents versus $2.2 billion in current liabilities -- and $6.2 billion in long-term debt.

True, shares in Rite Aid have popped 330% in the last year, but then that's up from a penny-stock level of 36 cents. Ouch. Furthermore, the stock made that run in gut-wrenching fashion: with a beta of 2.74, Rite Aid is almost three times as volatile as the S&P 500 ($INX). That means it's a perilously easy stock to buy high.

In short, this is a debt-burdened company with a low-quality stock -- a fingers-crossed turnaround story, or maybe a buyout play. No wonder two of the largest shareholders are Leonard Green & Partners -- a private equity shop specializing in turnarounds and restructurings -- and Avenue Capital, a hedge fund.

The bottom line? At best, Rite Aid is a hold. Only speculative investors should consider initiating or adding to positions.