Rite_Aid_vs_Walgreens

Executive Summary Rite Aid has had its share of tribulations starting with their former senior executives. The former CEO, CFO, and Vice Chairman were charged with accounting fraud schemes in 2002. From May of 1997 to May of 1999, they overstated Rite Aid’s income by massive amounts. This poor and unethical management is a good reason why Rite Aid is hurting today and quite possibly facing bankruptcy. Rite Aid has trouble concerning their debt issues. The relationship between debt and equity is in complete disarray. They will need to increase their equity and cut back on liabilities as much as possible. The times interest earned ratio showed a trend where they will finally be able to cover interest charges and hopefully keep creditors away in order to avoid legal action against the company. Rite Aid has been able to maintain its liquidity to pay off debts despite operating at a significant debt level over the years. Their cash flow per share and the activity ratios of operating cycle and fixed asset turnover are far below the industry averages. However, considering where they used to be, Rite Aid has improved considerably and they are headed in a positive direction. Rite Aid saw their first profitable year in 2004 after four years of losses. They show very good trends and some signs of improvement in spite of their poor numbers relative to the industry. The former executives left the company in shambles; however, the current management has made some progress based on the financial ratio reports. Leverage Leverage of debt to total equity in 2003 was 420.08 as compared to the industry average of 0.22. Over the past four years, debt to total equity has fluctuated dramatically from year to year with some ratios being negative and others positive. In 2002, debt to total equity was -41.68. The drastic fluctuation from 2002 to 2003 can be attributed to their change in extraordinary items and a gain in common equity of $97.50 million. Creditors may be reluctant to provide Rite Aid with funds unless they find a way to maintain their equity in order to establish some consistency. Though Rite Aid was barely able to pay off its annual interest charges in 2003 with a times interest earned ratio (TIE) of 1.30, they have been steadily improving from previous years. The industry average remained relatively the same from the previous year at 15.00. This was their first positive year after being below zero for three consecutive years. With this trend, Rite Aid is showing signs that they will be able to cover their interest charges with a larger margin of safety in the future. Liquidity The current ratio in 2003 increased slightly at 2.28 as compared to the previous year of 2.07. This marked a five year high and is slightly ahead of the industry average of 1.79. It can be credited to their net income which finally became profitable at $58.49 million largely due to the 43% increase in operating profit. With regard to the low quick ratio of 0.60 in 2003, they have shown a positive trend in their inventory turnover as it has steadily increased over the past five years. Rite Aid needs to maintain this trend in order to increase their quick ratio. The cash flow per share still remains low at $0.67 per share as compared to the industry average of $1.95. Nevertheless, it has been steadily increasing as compared to 2002 cash flow per share of $0.31. This is due to their increase of net income and a smaller increase in common shares outstanding Activity The operating cycle in 2004 has continued its poor history of being well above the industry average. In 2003, the operating cycle was 78 days compared to the industry average’s 57 days and the prior year of 81 days. Both Rite Aid and the industry have decreased their operating cycle significantly in the past several years. The receivables turnover has slightly decreased for three years which has been a factor to the decreasing operating cycle as well as the increase in annual sales. In comparison to the industry, Rite Aid is not using their fixed assets as intensively as their competitors. But, like their operating cycle, they have closed the gap in recent years to 8.80 times, compared to the industry average of 12.40 times. So, 2003 showed a minor improvement from the previous year’s fixed asset turnover of 8.00 times. Rite Aid has consistently increased their total asset turnover and their inventory turnover for the past five years. Profitability Rite Aid’s return on assets (ROA) in 2003, 0.94%, is far below the industry average of 7.78%, but has increased from the previous year’s ROA of -2.51%. This can be attributed to the company’s low earnings power and their high interest costs from debt in the previous years which caused their net income available to common stockholders to be low. However, 2003 marked the first year that Rite Aid gained a profit on their assets as they have gradually increased their ROA over the past four years. In addition, total assets have considerably decreased in those years up to 2003, which is also responsible for the ROA trend. For the past three years, the return on equity (ROE) has exceeded the industry average. This is most likely due to their extremely low level of common equity which has been below zero the past four years and their growing net income which has finally become profitable in 2003. The profit margin has been on the rise each year since 2000. Although it was at 0.50% in 2003, and the industry average was at 2.66%, Rite Aid has improved since 2003’s profit margin of -0.80%. The cost of goods sold has decreased while sales increased. However, their continued use of poor debt management is keeping net income lower than it could be through high interest charges. Their operating profit has also improved significantly from $173.82 million in 2003 to $404.63 million in 2004 which has helped increase their profit margin on sales. Market Information In 2003, the price-earnings (P/E) ratio of 50.73 was well above the industry average of 22.87 and the previous year of -7.74. This can be credited to the company’s steady growth over the past few years. Also, their earnings per share finally became positive after being negative for the past four years which caused the P/E ratio to be negative as well. The earnings per share was at 0.11 in 2003 compared to the previous year of -0.31. The industry average was 1.44, so Rite Aid is still behind the competition. They have not paid out dividends to their shareholders in four years. This is because net income has been negative up until 2004; therefore, extra cash to distribute among shareholders is simply not there. The price close went from $2.40 in 2002 to $5.58 in 2003. This is still well below the industry average of $32.99, but they did increase by 43% which is acceptable for one year.