• Rite Aid clearly is heading in the right direction, as front-end sales have improved and market share has expanded.
• But industry conditions, most notably reimbursement rate pressure, still represent a significant roadblock.
• Execution seems good enough that Rite Aid can eke out some upside if the status quo holds.
• Meanwhile, thin margins and a still-leveraged balance sheet suggest explosive upside if the external environment finally stabilizes.
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Over the last year, Rite Aid's (RAD) stock has gained 112%, which is impressive in its own right. What's really impressive, however, is that Rite Aid's performance has been far better than that of its larger peers:

Data by YCharts

Indeed, when I last wrote up RAD on this site, almost exactly a year ago, I saw the possibility of substantial upside. Thin margins and a heavily leveraged balance sheet suggested that modest improvements in the underlying business could lead to a material improvement in the equity value.

But I didn't believe that those improvements could, or would, arrive without some abatement of the headwinds facing the entire sector. The bull case for RAD stock at that point seemed to be that it likely would outperform if and only if the sector rallied. In that scenario, Rite Aid's higher leverage and thinner margins would be pluses. Yet it appeared enormously unlikely that the stock could rally much, let alone double, over a stretch where its two larger peers saw a contraction in their combined equity value.

Obviously, on that front I was wrong. Rite Aid has managed to drive some still-modest improvement while Walgreens Boots Alliance (WBA), in particular, has struggled. In my defense, I wasn't alone. Literally the first question Heyward Donigan answered on an earnings call as Rite Aid CEO addressed precisely that argument. Donigan insisted that Rite Aid could and would overcome industry headwinds — and over the past nine months her company is building confidence that it indeed will do so.

What's interesting from a fundamental standpoint is that the rally doesn't change the fundamental story all that much. Despite the huge rally, RAD stock really isn't any more expensive than it's been. Rite Aid's enterprise value actually only has risen about 6% over the past year. Yet over that stretch, it seems like the story has been de-risked, and at worst the company appears headed in the right direction.

As a result, to invert a common saw, if you liked RAD stock at $8, you should love it at $15. And if you were skeptical at $8, like I was, you should at least be considering RAD at $15.

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