R.I.P. RAD: Is Rite Aid Stock Worth Buying Now?

Throughout the years, retail pharmacy chain stocks have been a fairly safe bet. They've typically paid decent dividends and have been considered recession-proof since people will still need to buy medications even if the economy slows.

Yet, even seemingly recession-resistant stocks can fall by the wayside. For many years, Rite Aid (OTCMKTS:RADCQ) traded on the New York Stock Exchange under the Stock ticker "RAD." However, Rite Aid was recently kicked off that exchange and now trades as "RADCQ" on the over-the-counter (OTC) markets.

Of course, being delisted isn't a good sign, and the story surrounding Rite Aid is one of pain and disappointment for its investors. However, even beyond that, there are warning signs for the retail pharmacy sector in general.

Nevertheless, some intrepid traders might decide to go on a bottom-fishing expedition with Rite Aid stock now. When all is said and done, there's moon-shot potential but also the distinct possibility of total capital loss.

No remedy for Rite Aid's ills

Apparently, being one of the biggest businesses doesn't guarantee success. Even though Rite Aid is reportedly the third-largest stand-alone U.S. pharmacy chain, it still succumbed to numerous problems.

The most pressing issues included a debt burden totaling $3.3 billion, costly litigation pertaining to the company's alleged role in America's opioid crisis, and competition from Walgreens (NYSE:WBA) and CVS (NYSE:CVS). Critically, the number of lawsuits concerning the allegations of Rite Aid's involvement in the opioid epidemic numbered in the hundreds.

These headwinds took a toll on Rite Aid, culminating in the closures of hundreds of stores and the divestment of Elixir, Rite Aid's pharmacy benefit business. The bigger-picture ramification is the creation of "pharmacy deserts," or low-income and rural communities in which there are no nearby pharmacies. It's a serious problem, as a lack of local pharmacies can lead to seniors not taking their prescribed medications.

The widespread shortage of qualified pharmacy workers certainly hasn't made the situation any easier for Rite Aid. It's a sector-wide problem, with allegations of low pay and insufficiently staffed stores prompting worker walkouts at some Walgreens and CVS stores.

With all of those headwinds, Rite Aid and its rivals have had to deal with fierce competition from big-box stores with pharmacies. These include Walmart (NYSE:WMT) and Target (NYSE:TGT), where it's convenient for people to shop for other items and then pick up their medications at the same time.

There's also the e-commerce giant Amazon (NASDAQ:AMZN) jumping into the fray, now offering to fill and deliver prescriptions directly to consumers' doorsteps. Amazon's entry in the pharmacy sector threatens all brick-and-mortar pharmacy chains, and Rite Aid is particularly vulnerable.

The dreaded "B" word

On top of the aforementioned challenges for Rite Aid, we can add macroeconomic factors such as high interest rates, elevated inflation and recession worries. Additionally, the COVID-19 catalyst that benefited pharmacies in 2020 and 2021 isn't as strong in 2023.

There's also another problem known as "shrink," which has hit all types of retailers, including not just pharmacies but Walmart and Target as well. "Shrink" refers to retail theft or shoplifting, which has recently morphed into a form of organized crime and is taking a major toll on retailers' bottom lines.

These issues aren't limited to Rite Aid, of course. For example, Walgreens announced store closures this past summer. However, Rite Aid's $3.3 billion debt load points to a particularly precarious situation for the company.

Thus, the October disclosure of Rite Aid's filing for Chapter 11 bankruptcy protection was almost inevitable, at least in hindsight. The lead-up to the bankruptcy filing doesn't bode well for the company, as Rite Aid posted a $1.02 billion net loss in its most recently reported quarter.

Is it time to buy Rite Aid stock?

Of course, you can still buy Rite Aid shares on the OTC market, but should you? Some speculators might wager on RADCQ stock in hopes of the pharmacy chain being bought out by a larger, better-capitalized chain like Walgreens or CVS.

However, Walgreens and CVS have their own problems to deal with right now and might not be well positioned to make a large acquisition. Moreover, Rite Aid still has the opioid lawsuits and a large debt load to deal with.

Finally, there's the possibility that RADCQ stock will get a bump from meme-stock traders. Yet, the meme-stock phenomenon crested in 2021, and it doesn't seem like retail traders have the same fervor for short squeezes anymore.

Thus, don't count on Rite Aid stock having a miraculous meme-stock rally or the company being bought out in the near future. Anything's possible on Wall Street, but Rite Aid's dire situation doesn't present a favorable risk-to-reward profile for RADCQ stock.

Source valuewalk