Investors will be closely following Rite Aid's financial guidance for the year, expected on Thursday with the company's fourth quarter and annual earnings release.
The drugstore chain needs to generate about $400 million to $450 million in annual adjusted EBITDA just to survive as an operating company, Deutsche Bank analysts led by George Hill said in a recent research note.
Management estimates that fall short of that threshold would suggest that the company's stock "has no value" and it might not be able to stay in business.
Hill based the figure on the annual cash Rite Aid needs to service its debt (up to $200 million) and the capital it needs to maintain its stores (another $200 million to $250 million).
The Deutsche Bank analysts lowered their rating for Rite Aid's stock, saying that "we see a likely risk that the company provides guidance next week that causes investors to question the company's ability to sustain itself as a going concern."
Rite Aid declined to comment on the note. The drugstore retailer has long underperformed alongside its larger rivals in the space, namely CVS and Walgreens. The retailer lacks the scale and deep national footprints of those chains.
As of late November, the company had nearly $3.2 billion in long-term debt on its books. Its net loss for the first nine months of its fiscal year more than doubled from a year ago, to $149.4 million. It hasn't posted positive annual net income from continuing operations since the fiscal year covering 2016.
In December, Rite Aid said it would close roughly 60 locations in an effort to cut costs and boost its profitability, and would continue evaluating its footprint. At the time of the announcement, the company had more than 2,400 retail pharmacies.
The Deutsche Bank analysts estimate that COVID-19 vaccines and tests have contributed well over $200 million to Rite Aid's earnings. A "sharply lower COVID contribution" to Rite Aid's profits would make it all the more difficult for the retailer to meet its cash needs, according to Hill's team.
Rite Aid benefitted from extra foot traffic during the pandemic. Its losses shrunk in the fiscal year covering 2020 before rising again last year. In the first nine months of 2021, Rite Aid's losses had already exceeded losses for the entirety of 2020.
But recently, according to analytics firm Placer.ai, Rite Aid's foot traffic has remained below pandemic levels, while at Walgreens and CVS traffic has exceeded 2019 volume nearly every week since October. Since mid-January, weekly foot traffic at Rite Aid has been down by double digits from 2019.
