Retail drugstore chain operator Rite Aid Corporation (RAD) in Camp Hill, Pa., provides an array of whole-being health products and services through more than 2,400 retail pharmacy locations across 17 states. The stock has gained 7.5% in price over the past month.

However, the stock is down 24.4% over the past year and 31.7% over the past six months based on disappointing quarterly results posted by the company over the past months. While RAD continues to witness decent demand for COVID-19 and flu immunizations and other clinical services, its growth prospects look uncertain.

In addition, RAD has announced its plans to shut as many as 63 of its stores to reduce costs and improve profitability. Closing the last trading session at $13.96, RAD's stock is trading 57% below its 52-week high of $32.48.

Here's what could shape RAD's performance in the near term:

Business Headwinds

Last week, RAD announced that it plans to close 63 stores to save approximately $25 million per year and boost its profitability. The company said the closures were decided upon as part of an ongoing evaluation, and it anticipates it will find additional shops to shutter over the next several months. Despite the COVID-19 pandemic having boosted pharmacies’ business over the last 18 months, Rite Aid and other major American pharmacy corporations are struggling and have closed hundreds of outlets in recent years.

Strategic Collaboration

In September, RAD announced the expansion of its collaboration with Uber Technologies, Inc. (UBER) to provide nationwide delivery of Rite Aid items via Uber Eats. This partnership will allow consumers to conveniently order and receive essential healthcare and grocery products straight to their homes.

Mixed Financials

RAD's revenue increased 1.8% year-over-year to $6.23 billion for the third quarter, ended November 27, 2021. Its adjusted EBITDA grew 13.7% from its year-ago value to $154.79 million. The company reported cash and cash equivalents of $155.29 million for the nine months ended November 27, 2021.

However, its operating loss came in at $37.23 million, versus a$4.76 million operating profit in the prior-year quarter. The company reported a  $36.06 million net loss, compared to a net income of $4.32 million in the third quarter of 2020. In addition, its loss per share was $0.67 over this period.

Poor Profitability

RAD's trailing-12-months, 20.5% gross gross profit margin is 40.7% lower than the 34.6% industry average. Also, its ROC, net income margin and ROA are negative 31%, 0.69%, and 1.8%, respectively. And its trailing-12-month cash from operations of $395.58 million is 24.8% lower than the $526 million industry average.

Discounted Valuations

In terms of forward EV/Sales, the stock is currently trading at 0.29x, which is 85.9% lower than the 2.03x industry average. Also, its 1.8x forward Price/Book is 45.9% lower than the 3.32x industry average. Moreover, RAD's 0.03x forward Price/Sales is 97.3% lower than the 1.42x industry average/

POWR Ratings Reflect Uncertainty

RAD has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. RAD has a C grade for Growth and Quality. The company's mixed financial and weak profit margins are consistent with these grades.

Of the four stocks in the A-rated Medical – Drug Stores industry, RAD is ranked last.

Beyond what I've stated above, you can view RAD ratings for Stability, Value, Momentum, and Sentiment here.

Bottom Line

Despite challenges in the labor market, the company has benefited from the high demand for COVID-19 and flu immunizations, COVID testing, and other clinical services. However, we think its weak fundamentals pose a threat to the stock's price performance. Given a slowdown in its operational performance, its growth prospects look uncertain. So, we believe investors should wait for the company’s prospects to stabilize before investing in the stock.

How Does Rite Aid Corporation (RAD) Stack Up Against its Peers?

While RAD has an overall C rating, one might want to consider its industry peers, Walgreens Boots Alliance Inc. (WBA) and Clicks Group Limited (CLCGY), which have an overall B (Buy) rating.

Click here to checkout our Healthcare Sector Report

RAD shares were trading at $14.03 per share on Monday morning, up $0.07 (+0.50%). Year-to-date, RAD has declined -11.37%, versus a 28.59% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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