Rite Aid shares plunged on Thursday after Deutsche Bank downgraded the pharmacy retail chain and cut the stock’s price target ahead of the release of its quarterly results next week.
|WHEEL||RITE AID CORP.||7.44||+0.45||+6.44%|
The big bank downgraded Rite Aid from “hold” to “sell” and cut its price target to $1 per share from $16. Shares fell more than 20% to $6.61 on Thursday.
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According to Deutsche Bank analyst George Hill, Rite Aid’s guidance for fiscal year 2023 will be investors’ key focus. The company previously indicated it could generate well over $430 million in earnings before interest, taxes, depreciation and amortization (EBITDA).
Hill notes that the company needs to generate about $400 million to $450 million in annual adjusted EBITDA to continue as an operating company, including $190 million to $200 million in cash annually to cover its debt service costs, plus another $200 million to $250 million to cover its store maintenance capital expenditure requirement.
“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,” he wrote in a note to clients Thursday. “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 RAD shares as this preliminary F2023 outlook seems to be unattainable.”
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Deutsche Bank warned that Rite Aid faces operational challenges on multiple fronts, including rising labor costs, higher retail shrink and continued reimbursement pressure.
“We are also increasingly concerned with 340B derived earnings as we expect more manufacturers will decide to pull back providing discounts to 340B contact pharmacies going forward,” Hill continued. “Rite Aid could also have some exposure to opioid litigation and related penalties/settlements, as the prosecution of these cases has now moved on from the drug wholesalers and downstream to the retail pharmacies, with CVS announcing a near half-billion dollar settlement with the state of Florida last week.”
The firm estimates that Rite Aid’s adjusted EBITDA for 2023 will come in at $377 million.