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Rite Aid shares a 'hold'

The nation's third-largest retail drugstore chain carries more debt than industry leaders Walgreen and CVS Caremark and has less productive stores.

August 21, 2011|By Andrew Leckey

Question: I have been encouraged and then discouraged by my shares of Rite Aid Corp. What does the future hold?

Answer: It's not easy being No. 3. The nation's third-largest retail drugstore chain has less productive stores and carries more debt than industry leaders Walgreen Co. and CVS Caremark Corp.

Supermarket chains, discount stores and mail-order pharmacies are also providing fierce competition. The company is trying out several new store formats and increasing promotional activity to try to lure consumers worried about unemployment and high fuel costs.

Rather than help it gain ground on competitors, the company's acquisition of the Brooks and Eckerd drugstore chains in 2007 produced a morass of store closures and impairment costs that increased its debt load.

Rite Aid stock closed Friday at 99 cents a share, up from 88 cents a share at the end of 2010. It lost $63.1 million in its fiscal first quarter, compared with a net loss of $73.7 million in the year-earlier quarter.

Zacks Investment Research, which expects the stock to underperform, noted the company's focus on improving store-level performance as part of its turnaround strategy. However, it added: "Wal-Mart's foray into the retail generic drug market is putting pressure on Rite-Aid's pharmacy margin."

The consensus Wall Street analyst opinion on Rite Aid shares is "hold," according to Thomson Reuters, consisting of one "strong buy," one "buy," six "holds," one "underperform" and one "sell."

The company said it had 4,704 stores at the end of the first quarter, in which it closed 10 stores. Revenue at stores open at least a year increased 1.9% for the four-week period ended July 23, compared to the year-earlier period.

John Standley, former chief executive of the Pathmark Stores grocery chain, became president and chief operating officer in 2008 and CEO in June 2010.

Rite Aid recently agreed to pay $2.1 million in a settlement with the Massachusetts attorney general's office over alleged overcharges for prescription drugs under the workers compensation insurance system. The state attorney general's office says on its website that it had reached similar agreements with Walgreen and CVS, among others.

Vanguard Windsor II is for value investors

Question: I own shares of Vanguard Windsor II Investor Fund. Should I continue to hold them?

Answer: This giant, $35-billion fund is run by several investment advisory firms that espouse various shades of value investing.

Vanguard Windsor II Investor Fund is up 4.8% over the last 12 months and lost an average of 1.8% a year over the last three years. Both results placed it in the upper 35% of large value funds.

"The fund typically buys stock that is out of favor and people haven't been that excited about in a long time," said Dan Culloton, mutual fund investor with Morningstar Inc. "The managers believe these companies will come back and, in the meantime, they have decent businesses that pay dividends and aren't going to go away overnight."

Culloton said he thinks the fund has broad enough diversification to be a core holding for an investor with value-investing sympathies. But because it favors less-popular stocks, it might lag in aggressive markets led by growth stocks, he added.

Jim Barrow of subadvisor Barrow, Hanley, Mewhinney & Strauss has been with the fund since 1985. He has a tendency to make more contrarian stock choices than some of the other subadvisors. According to filings, he has more than $1 million of his own money invested in the fund.

Vanguard Windsor II Investor's portfolio has more than 250 stocks. Financial services represents more than 20% of assets, with other concentrations in industrial materials, energy and healthcare. Top stocks were recently ConocoPhillips, IBM, Pfizer Inc., JP Morgan Chase & Co., Wells Fargo Co., Microsoft Corp., Philip Morris International Inc., Occidental Petroleum Corp. and Raytheon Co.

This "no-load" (no sales charge) fund requires a minimum initial investment of $3,000 and has an annual expense ratio of 0.35%, which is lower than the vast majority of its peers. Vanguard Group, a $1.4-trillion mutual fund family, has a positive long-term record with regulators.

Andrew Leckey answers questions only through the column. Write to him at yourmoney@tribune.com.

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