Rite Aid: E-Cigs Bad, Tobacco and CBD Rad

Rich Duprey, The Motley Fool

Rite Aid (NYSE: RAD) says it's fine with customers buying cigarettes in its stores, and it's willing to stock products made with cannabidiol (CBD) even though there's little scientific data to back up their efficacy, but it will absolutely, positively draw the line when it comes to electronic cigarettes.

The drugstore operator says over the next 90 days it will remove e-cigs from all 2,469 stores in 18 states because of the "epidemic" of teen use of the devices. COO Bryan Everett said Rite Aid would be removing them even though "many feel these products are beneficial to those of legal age who are trying to quit the use of tobacco."

Marijuana leaf and oils.

Rite Aid will soon sell cannabidiol-based products while banning e-cig sales. Image source: Getty Images.

The fog of war

The Food and Drug Administration has been waging a battle against e-cig makers and tobacco companies over teen usage for more than a year. The Centers for Disease Control and Prevention says between 2017 and 2018, high school students' use of electronic cigarettes jumped 78% and middle school student usage rose 48%.

What's been left unsaid is that teen smoking rates are at historic lows. A study by the University of Michigan's Institute for Social Research found teen use of cigarettes at the lowest level since it began recording data in 1991. Use began tumbling significantly lower starting in 2017 -- the same year it began recording e-cig usage. While there is a concern over casual e-cig use by nonsmoking teens, it seems the devices could be doing what they're intended to do.

It doesn't make sense that Rite Aid's decision to ban e-cigs is over teens buying them in its stores -- though the drugstore was one of 1,300 retailers hit with warning letters from the agency for selling e-cigs to minors, it also routinely receives warning letters for selling cigarettes to minors. It raises the question why Rite Aid believes it is able to keep tobacco out of kids' hands, but not e-cigs?

The answer may have to do with money. E-cigs, despite their tremendous growth, still represent a small portion of the cigarette industry and the billions in revenue it generates for retailers. When CVS stopped selling cigarettes five years ago, it gave up some $2 billion in sales. It's estimated Walgreens generates a similar amount of revenue from tobacco and convenience stores are also said to derive around 30% of their sales from cigarettes.

Rite Aid doesn't say how much it makes from tobacco sales. Soft tobacco sales caused the pharmacy's front-end sales to fall 1.9% in the fourth quarter while contributing to a $20.8 million decline in adjusted earnings before interest, taxes, depreciation, and amortization.

Cannabi-doubtful

The drugstore operator also said it would begin selling CBD-infused creams, lip balms, and lotions in several hundred stores in Oregon and Washington. It is the third major drugstore chain to begin selling cannabis-based products, joining CVS Health and Walgreens, which previously announced their intention to do so.

Yet the benefits of CBD products are dubious since it greatly depends on the quality of the CBD being used and how it is being applied. Studies showing positive results from the compound have only used pharmaceutical-grade CBD, which is very different from and more expensive than what is found on store shelves. Most topical applications can't penetrate the epidermis without special formulations, which might end up making them a drug and require regulation.

Outgoing FDA chief Scott Gottlieb also warned drugstores wanting to cash in on the soon-to-be-$16 billion industry that the agency will be monitoring their conduct. He tweeted, "We'll be contacting them to remind them of #FDA obligations and our commitment to protect consumers against products that can put them at risk."

Odd man out

With the intense scrutiny e-cigs are getting, Rite Aid likely didn't want the hassle. Tobacco still provides a strong, recurring stream of revenue, even if it messes with front-end sales from time to time, while CBD's growing popularity might just make up any difference in lost e-cig sales.

Even if tobacco carries proven health risks and CBD products offer customers sketchy value, eliminating e-cigs was an easy choice to make from a bottom-line perspective.

More From The Motley Fool

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool recommends CVS Health and Designer Brands Inc. The Motley Fool has a disclosure policy.