Summary
- The media keeps mentioning Rite Aid as a potential Ch.11 bankruptcy filer.
- I don't see any item that would actually trigger a bankruptcy filing until late 2023.
- The current stock price is too high compared to my valuation, which is based on the latest 2021 management's guidance numbers.
- I have a number of issues with the current Rite Aid business model.
Following Rite Aid Corp. (RAD) over the last few years is like watching a TV soap opera-lots of drama and some bad actors. While I currently do not think the company will file for Ch.11 bankruptcy within the next three years, that does not necessarily mean that I think Rite Aid is a buy at current prices. The company faces a very challenging future and bankruptcy is still a very real possibility in late 2023, if they don't create a growing and stabilized business model.
Some People Think Rite Aid May File For Bankruptcy
Investors might think that it is odd that there are frequent statements about a potential Rite Aid bankruptcy in various media publications because usually a stock selling in the low $20's is not considered a bankruptcy candidate. To many, however, Rite Aid is currently selling at $1.10 and was even a "penny stock" earlier this year because they are mentally factoring in the 1-20 reverse stock split from May 2019.
The reason why many investors are afraid that a reverse stock split is an indicator of a future bankruptcy filing is because they look at other companies that had large reverse stock splits and they did in fact eventually file for Ch.11. Chesapeake Energy (OTCPK:CHK) had a 1-200 reverse split and filed for bankruptcy almost immediately after that, which wiped out shareholders. Frontier Communication (OTCPK:FTRCQ) had a 1-15 reverse split in 2017 and filed for bankruptcy in 2020. When their reorganization plan finally becomes effective, it will cancel their shares. Ascena Retail Group's Ch.11 bankruptcy plan also wiped out shareholders in 2020 after the company had a 1-20 reverse split in late 2019. Not all reverse splits result in the company going bankrupt. Citigroup (C), for example, had a 1-10 reverse split and is doing fine now.
Rite Aid reported a loss of $1.35 per share during the last 9 months and remains highly leveraged. They currently have $3.2 billion long-term debt and $2.7 billion long-term operating leases compared to $611 million shareholder equity. Collectively, these are a yellow flag for a potential bankruptcy filing.
Some investors also consider selling assets and leasing them back to raise additional cash is a sign of financial weakness. The company sold a distribution at the end of last year for $65 million in a sale-leaseback transaction.
