Rite Aid Corp. (NYSE: RAD) is finding itself in an odd situation. After a failed merger that crushed its stock, Rite Aid may never be able to get back to its highs of recent years, now that it has been shrinking its footprint. Or is that view false?

The news flow around Rite Aid showed that the retail pharmacy completed the pilot closing, and first subsequent closings under the amended and restated asset purchase agreement entered into on September 18, 2017. This resulted in the transfer of 97 Rite Aid stores and related assets to Walgreens Boots Alliance Inc. (NASDAQ: WBA).

Walgreens will purchase a total of 1,932 stores, three distribution centers and related inventory from Rite Aid. The all-cash purchase price is $4.375 billion, and this was said to be on a cash-free and debt-free basis.

Rite Aid, even after the gains seen in the past two days, had a market cap of just $2.26 billion. Rite Aid’s fiscal 2017 annual revenues were $32.8 billion. The company previously showed that it operated approximately 4,500 stores in 31 states and in the District of Columbia as of June 20, 2017.

What is very hard for investors to analyze is when a company goes into a “shrink to grow” model. Rite Aid’s future revenues and future balance sheet will be quite different from recent years, and investors cannot ignore the notion that Rite Aid shares were exponentially higher two decades ago. The former glory days seem nearly impossible under the current model when you consider how much Rite Aid is shrinking its footprint.

Unfortunately, Rite Aid’s balance sheet as of September 2, 2017, also included long-term debt of $7.12 billion. Until the full asset sale is completed, evaluating its balance sheet for property, goodwill, intangible assets and deferred charges is going to be more than difficult (see below). Its total assets of $11.498 billion were against total liabilities of $10.764 billion.

What remains to be seen is when these other handovers will come. Rite Aid and Walgreens have said that they expect to continue to transfer ownership of the stores in phases over the coming months. The stated goal is to complete the store transfers in the spring of 2018.

The companies also have noted that the majority of the closing conditions have been satisfied. That being said, the subsequent transfers of Rite Aid stores and related assets still remain subject to minimal customary closing conditions.

As far as how Rite Aid will use the funds, the company has said that it plans to use a substantial majority of the net proceeds from these transaction to pay down debt and to improve its leverage levels. Rite Aid also said that it expects to incur a minimal cash tax payment from a gain on this transaction, but this will is expected to be largely offset by its net operating loss carryforwards. Rite Aid’s September 2, 2017, balance sheet showed that its retained earnings (or loss carryforwards) was −$5.12 billion.

Again, until you see how this appears on the books, you will not know how it really looks on the balance sheet.

Cowen issued an update earlier in November on how it views Rite Aid after the store sales are completed. The firm assumed the completion of the roll-off of the divested stores in the first quarter, and its updated DCF analysis yielded a price target of $2.15 (down from $2.75 previously).

CFRA (S&P) gave an update on Rite Aid in October with a Buy rating and a $3 price target. The firm sees 2018 sales declining by 8.5% after reflecting the store sales to Walgreens. It also expects retail comparable store sales to decline by 3.0%, considering the exclusion from pharmacy benefit networks and from increased non-pharmacy competition and new generic drug launches.

Positive views were noted around the company’s loyalty card program and benefits from its new Wellness store remodels.

There is another consideration here. It is very possible that Rite Aid is experiencing massive short covering. The short interest was last seen at a whopping 179.5 million shares — up from 169.3 million at the prior reporting period. That is listed as about 17.3% of Rite Aid’s float of all common shares, and it is a days-to-cover ratio of 8.6.

Rite Aid shares closed up a sharp 16% at $1.89 on Tuesday alone and the trading volume was 51 million shares. The current average daily volume is about 26 million shares.

What stood out here is that Rite Aid shares were up another 14% at $2.16 on Wednesday morning, but the trading volume was already more than 45 million shares trading hands in the first 90 minutes alone.

Rite Aid shares have not traded more than 50 million shares in a day since September. Sometimes short sellers add handily to news that might have otherwise been noise. And sometimes things get so bad that even “less bad news” is treated as good news.

What feels obvious is that it will be close to impossible to get Rite Aid shares back up to the prior $8.77 high when company was still going to be acquired.

There is a caveat here that could drive Rite Aid shares much higher in the years ahead. What if Rite Aid’s earnings get back to normal or start to get much better? Rite Aid will be spending far less on debt servicing, and analysts expect earnings for 2017 (early 2018) of −$0.08 per share to go back to profitability the following year. Thomson Reuters shows consensus estimates of $0.06 per share in earnings the following year, followed by $0.13 and $0.19 a year out.

Rite Aid’s run in the past two days has been massive, but its shares are up an even sharper 45% from the $1.48 share price on ‎November ‎15. Rite Aid’s 52-week trading range is $1.38 to $8.77, and the Thomson Reuters consensus analyst target price is $2.18.

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