Morgan Stanley Gives Color On Rite-Aid Following Meeting With Management

Morgan Stanley came away from its visit to Rite Aid RAD feeling encouraged by strong early adoption of the new Wellness Plus loyalty card and this year's commitment for 500 remodels as well as early efforts to boost front-end sales at underperforming stores. Morgan Stanley maintains its Underweight rating as it believes RAD shares could remain stalled in a trading range as 3 quarters of the fiscal year could be under margin pressure given a lack of new generics and investments this year to support Wellness Plus, advertising, store labor and training. Management underscored that 3000 of its 4700 stores are good stores with sales productivity and margins approaching peers Walgreens and CVS. It's the bottom 1700 stores that drag down Rite Aid to 35-40% lower sales/square foot, 30% lower Rx counts/store and lower margins. New “value store” remodels should help some of these underperformers, and Morgan Stanley views the Save-A-Lot/Rite Aid grocery plus drugstore test as promising. RAD closed Tuesday at $1.01