Rite Aid Corporation (NYSE:RAD), one of the big three drugstore chains, reported another losing quarter last week, and although the losses were trimmed from the same second quarter a year ago, it was the ninth straight losing quarter for the beaten down drugstore chain. Investors looking for encouraging signs found few, as the company also lowered expectations for the rest of the year.

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Rite Aid's Numbers
The drugstore chain lost $120.4 million, or 14 cents per share, this quarter after figuring in preferred dividends, compared to loses of $227.4 million or 27 cents a share for the second quarter of 2008. Revenue fell to $6.3 billion, from $6.5 billion, but more of a concern was the forecast for the full year income which projected wide losses from $390 million up to $615 million, or 48-74 cents per share. Analysts suggest these losses would be on the lower end of that estimate at 47 cents per share, but that's still not good. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks)

Comparison with the Leader
Walgreen (NYSE:WAG), the leading drugstore chain, posted earnings of $436 million, or 44 cents a share, for its quarter ending August 31, compared to $443 million or 45 cents a share in last year's same quarter. Overall sales rose 7.6 percent to $15.7 billion. Although the troubled economy was in place for both chains, Walgreen has done a consistently superior job of fighting through this. Rite Aid, which is still having digestive troubles over its acquisition of the Eckerd chain in 2007, has been mentioned as "struggling to stay solvent" Rite Aid's stock is currently trading at around $1.64.

CVS/Caremark's Ace
Rite Aid's other main rival, CVS/Caremark (NYSE:CVS), is due to report earnings in November, and its business and stock has also consistently outperformed Rite Aid. CVS, which acquired Caremark in 2007 for $26.5 billion, has continued to grow profits robustly, and has a unique advantage in the drug store competition, as Caremark, a giant pharmacy benefit manager (PBM), gives CVS another strong conduit of growth beyond the traditional retailing store. Think of a PBM, which negotiates drug purchases from pharmaceutical companies for health plans, as a giant funnel of prescription drugs that can provide high-volume continuous revenue, which has meant strong growth. CVS is growing as both a drugstore and a PBM, and this dual approach looks to continue to payoff handsomely.

Other Competitors
As if Rite Aid's task wasn't hard enough, there are other often overlooked competitors such as discount chains. Kmart, part of Sears Holdings (Nasdaq:SHLD), has announced discount assistance for families hit hard by the economy, and this can include purchases of drugstore items in its stores. Meanwhile, other large discounters, such as Costco (Nasdaq: COST), continue to run their own pharmacies which remain attractive to customers already in the store for other items. (Read Analyzing Retail Stocks to learn about the most important metrics to look at when analyzing retail stocks.)

Rite Aid's Challenge
Rite Aid has attempted to cut costs, but needs to do a better job of integrating the Eckerd stores, making them productive and contributing positively to the bottom line and fast. Rite Aid also needs to grow sales in the stores it has - a challenge also faced by its rivals - but in addition to new efficiencies such as the customer loyalty programs, perhaps should explore some sort of beneficial alliance or innovative approach which would give it a new business aspect. Walgreen is selling more non-traditional drugstore items, while CVS has its one-two punch of the traditional drugstore identity plus its heavyweight PBM business.

The Outcome?
Although things look bleak for Rite Aid, the core of the drugstore and pharmacy business remain possible turnarounds, as the drugstore space should do well even in healthcare reform as the pharmacy trade will remain vital, with increasing demand. But Rite Aid needs to accelerate its operational improvements, and the stock is right now a highly speculative, even risky one. If you want to trade or play it as a high-risk turnaround, that's one thing. As an investment with value, you'll want to see significant operations improvements, earnings turnaround and progress from quarter to quarter. Rite Aid has a difficult, though not impossible, road ahead.

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Tickers in this Article: RAD, WAG, CVS, SHLD, COST

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