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Not Big Enough To Not Fail?

09 August 2018 by jbchevrel

Rite Aid (RAD) CDS is wider by c6pp this week, now at the YTD wide, just below 1,000bp. This week, the company lowered its earning guidance (on Aug 6) and the shareholders rejected a merger with ABS (on Aug 8), after ABS refused to raise their bid. Leverage (Tot Debt/EBITDA) now looks settled north 5x in the near future, since RAD has cut its F19 EBITDA guidance from $615-675M to $540-590M. The next bond maturity is not too close (Apr 23s), but the outlook for RAD does not look bright either. Mainly because RAD is subscale (compared to its peers CVS Health and WBA) in a competitive retail pharmacy industry where scale is crucial from a CoGS standpoint. The sale of 1,932 stores to WBA was good news in the short term, as it improved RAD’s stability, but longer term that makes RAD less competitive. Now that the merger with ABS is also off the table, years ahead look challenging for profitability.