Wal-Mart Stores (NYSE: WMT) has been losing market share in the United States to smaller, more convenient rivals such as Dollar General (NYSE: DG), Family Dollar (NYSE: FDO), and Dollar Tree (NASDAQ: DLTR).

wal-mart-logo

 A takeover of Rite Aid (NYSE: RAD) would do much to buttress the retail giant against further slippage in these areas, especially with Family Dollar now a takeover target of both Dollar General and Dollar Tree. There are three major reasons why Wal-Mart should acquire Rite Aid.

Buying Rite Aid would fix an immediate problem and augment a growing strength of Wal-Mart. The immediate problem is that Wal-Mart is losing sales to Family Dollar, Dollar Tree and others due, in large part, to the smaller stores being more convenient. Wal-Mart’s more modest-sized stores also outperform their “Big Box” brethren.  Bringing in stores from Rite Aid would unleash more of the higher performing, smaller units for Wal-Mart.  The drive-through windows at Rite Aid stores would be another nice addition, especially for picking up packages ordered through Wal-Mart’s website.

The acquisition would also increase the geographic footprint of Wal-Mart; Rite Aid operates nearly 4,600 stores in 31 states. As these are currently taking away market share from Wal-Mart, the physical locations are obviously appealing to consumers.  The chart below shows how much stronger growth is projected to be for Rite Aid and others.

Company Earnings per Share Growth this Year Earnings per Share Growth next Year Earnings per Share Growth Next 5 Years Number of Stores Market Cap
Wal-Mart -3.20% 4.80% 5.67% 11000 @$280 billion
Dollar General 11.20% 14.31% 14.47% 11000 @$20.5 billion
Rite Aid 91.70% 23.50% 39.71% 4587 @$7.25 billion
Family Dollar -35.00% 9.39% 7.35% 8100 @$8.6 billion
Dollar Tree 1.5% 14.77% 15.20% 5080 @$13.7 billion

Source: Finviz

Obviously, Wal-Mart’s massive size has much to do with slower growth, but the stark difference cannot be ignored. In addition, much of Wal-Mart’s growth is projected to come from abroad.

Wal-Mart’s move deeper into health care would also be enhanced by an acquisition of Rite Aid.

Prescription Drugs: Profitable and Booming

Nearly 70% of Rite Aid’s drug store sales come from prescription purchases, which are burgeoning.  The chart above shows how bullish Wall Street is about the future for those. The aging population in the United States and greater spending on health care from The Affordable Care Act is leading Wal-Mart to open its own onsite health-care clinics. Rite Aid would increase the lucrative prescription sales business. The chain would bring in thousands of new possibilities for Wal-Mart to sell health-care goods and services.

It’s not as if Wal-Mart has to buy a competitor or wither and eventually collapse. But the world’s largest retailer still needs to continue to adapt to the evolving consumer marketplace in the United States. That obviously favors smaller stores such as Rite Aid. As the chart shows, it would not cost much for Wal-Mart based on the comparative numbers involved.  But a purchase of Rite Aid would do much to help Wal-Mart increase growth and decrease weaknesses in its current business model.

Jonathan Yates does not have a position in any of the stocks mentioned in this article.

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