Rite Aid’s (RAD) outlook is a hot mess — so hot the company may not be in business much longer.
At least that’s the word from Deutsche Bank analyst George Hill, who issued a damning downgrade of the struggling retailer on Thursday.
Hill slashed his rating on Rite Aid to Sell and slapped the stock with a $1 price target. Most worrisome — at least if one still owns Rite Aid’s stock — is that Hill suggests Rite Aid may go under.
„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 Rite Aid shares,“ Hill said.
Shares of Rite Aid were rocked on the scathing critique of the company’s business.
The stock crashed 24% to $6.45 on the session. Shares are now down 50% over the past two years, badly lagging pharmacy rivals CVS Health (+70%) and Walgreens (+1%) — both of which have put up much stronger results as people visited to get COVID-19 vaccines.
A Rite Aid spokesman didn’t return Yahoo Finance’s request for comment on Hill’s analysis.
Hill says Rite Aid — which has a bloated $3.2 billion in debt after years of aggressive expansion that hasn’t panned out — simply may not generate enough cash to stay viable.
Explained Hill, „The key investor focus will be Rite Aid’s guidance for fiscal 2023, where the company has previously indicated it could generate well in excess of $430mm in EBITDA. This figure is important because Rite Aid needs to generate $190 million to $200 million in cash annually to cover its debt service costs, plus another $200 to $250 million to cover its store maintenance capital expenditure requirement, meaning Rite Aid needs to generate ~$400 to $450 million in annual adjusted EBITDA to continue as an operating company. At a number below $400mm, the equity arguably has no value as the company is not in a position to generate real returns to shareholders. 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 Rite Aid shares as this preliminary fiscal 2023 outlook seems to be unattainable.“
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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