Rite Aid Corp’s CBD products are a plus

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Cannabis-Connected

This major U.S. drugstore chain has begun selling CBD (cannabidiol) skin creams, lotions and lip balms in Oregon and Washington State. The firm hopes to expand these sales as more U.S. states legalize cannabis. Meanwhile, it’s losing money and has huge debt.


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RITE AID CORP., $7.28, symbol RAD on New York (Shares outstanding: 53.8 million; Market cap: $447.1 million; www.riteaid.com), operates 2,464 drugstores stores in 18 U.S. states. It also operates walk-in health clinics, and provides processing services to operators of drug benefit plans.

Rite Aid recently began selling sell skin creams, lotions and lip balms containing CBD, short for cannabidiol, through its 200 stores in Oregon and Washington State.

CBD is a non-psychoactive compound extracted from both marijuana and other cannabis varieties. In 2018, the U.S. Congress passed a new farm bill that makes it legal for hemp growers to extract CBD. However, the Food and Drug Administration (FDA) has so far banned companies from adding CBD to food or selling it as a dietary supplement.

Rite Aid is in a strong position to profit as more U.S. states legalize cannabis. That’s because its pharmacy operations have experience distributing controlled substances and counselling customers about their effects.

Meanwhile, Rite Aid’s sales in its fiscal 2020 second quarter, ended August 31, 2019, fell 1.0%, to $5.37 billion from $5.42 billion a year earlier. Revenue from its retail stores (72% of total revenue) declined 1.6% on fewer stores, but same-store sales improved 0.4%. Revenue from its pharmacy services division (28%) increased 1.1% due to higher revenue from government-funded Medicare drug plans.

If you exclude unusual items, the company earned $6.29 million, or $0.12 a share, in the latest quarter. That’s a big improvement over the year-earlier loss of $7.88 million, or $0.15 a share. (Note—all per share amounts adjusted for a 1-for-20 reverse stock split on April 22, 2019.)

The higher earnings are largely due to lower labour expenses, offset by new investments in its stores and distribution networks.

As part of that plan, the company has a new deal with Amazon.com to install Amazon Lockers inside more than 900 of its stores in the next year. Rite Aid feels this will help improve customer traffic and sales as Amazon shoppers come to its stores to pick-up or return their Amazon packages.

As of August 31, 2019, Rite Aid held cash of $142.2 million, and its long-term debt was $3.8 billion. That’s a very high 8.6 times its market cap. However, as the result of recent refinancing, it does not have to begin repaying those loans until fiscal 2024.

The company will probably lose $0.02 a share for all of fiscal 2020. It does not pay a dividend.

We don’t recommend Rite Aid.

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