Yesterday’s Walgreen-Duane Reade news sent hearts aflutter on Wall Street about potential deals to come—especially for poor ol’ Rite-Aid. Rite-Aid’s stock was up 6.1% yesterday, while Walgreen’s stock only ticked up 0.3%.But let’s face facts…Rite-Aid remains the turnaround that never turns around. I don’t think the company is “acquirable” given its debt load, business performance, and lease obligations.
So what happens next? I see two basic options, described in detail below:
- Option 1: Limp into the Future
- Option 2: Get Smaller…Fast
Sounds good, but reality is more likely to remind us of a fifth marriage—the triumph of hope over experience.
WHEEEEE
Rite-Aid has closed more than 400 stores in the past few years and restructured its debt to give the company some breathing room until 2012. It’s now the fourth-largest national pharmacy behind Walgreen (NYSE:WAG), CVS Caremark (CVS), and Walmart (NYSE:WMT).
Alas, there is no more compelling indictment of the company’s management than a chart of its stock price. Despite yesterday’s “rally,” Rite-Aid’s stock is down by 97% since January 1, 1999.
For some odd reason, I always feel like skiing (downhill followed by cross-country) whenever I see this chart:
DECISIONS, DECISIONS
Here’s my quick take on the two fundamental options in front of recently promoted CEO John Standley.
Option 1: Limp into the Future
The inertia of prescription refills can sustain Rite-Aid for a surprisingly long time. Why does their same store pharmacy sales growth significantly lag CVS and Walgreen? I speculate it’s because they are not attracting many new customers, so their average customer is slowly dying off. Put another way, the biggest source of value locked up in Rite-Aid—the prescription files of current customers—is slowly depreciating every day. There is also the looming mega-debt load that will need to restructured again in 2 years.
Option 1? Been there, done that. Tick tock.
Option 2: Get Smaller...Fast
Rite-Aid could become a Mega-Regional chain by exiting many markets, something management seems reluctant to do. Rite-Aid has tentatively shed stores here and there and even exited Nevada in 2008 (except 1 store) by selling its prescription files to Walgreen.
Just my $0.02, but they need to drop about 1,000 stores to get into fighting shape.
Easier said than done because Rite-Aid leases 95% of its stores under what it describes as “non-cancelable leases” with original terms of 10 to 22 years. These could have significant value for other retailers if rents are below market, but who knows given today’s commercial real estate overcapacity. Have they even run the numbers?
Here's an idea: Why not sell off individual stores to pharmacists? I bet McKesson (NYSE:MCK)—Rite-Aid’s biggest wholesale supplier—could set up a whole bunch as Health Mart franchises. McKesson even runs a website called RxOwnership so pharmacists can “learn how to pursue your goal of pharmacy ownership.”
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What do you think? Any chance that Rite-Aid's current team can turn things around? What other options should they try?
Put a fork in them, they are done!
ReplyDeleteDr. Fein,
ReplyDeleteDid you see this story in Drug Store News?
http://www.drugstorenews.com/story.aspx?id=131093&menuid=333
"Walmart may be one of the more likely suitors, Currie suggested, especially given the mass merchant’s potential urban and pharmacy business aspirations."
What do you think the chances are that Walmart will buy Rite-Aid?
Thank you.
It seems unlikely that Walmart would want to acquire Rite-Aid. They have had mixed success with their smaller store format (Neighborhood Market) and probably don't want the headaches of fixing RAD.
ReplyDeleteA viable would be for Rite-Aid to sell off prescription records in areas where patients could visit a Walmart. The leases would be sold to other retailers. This is how RAD exited the Las Vegas Market.
Keep in mind that Wal-Mart has very little history with acquisitive growth in the U.S. market, so it would be a radical departure and therefore have higher risk.
In contrast, CVS has been an aggressive acquirer (and successful integrator) over the years. I suspect that investors would demand progress on Caremark and full integration of Longs before supporting a CVS acquisition of Rite-Aid.
Adam
Maybe take your idea another similar direction, RIte-Aid could sale stores to existing independents in each area. I'm an independent drug store owner with 2 stores. I would consider purchasing a couple of Rite-Aids in my area. As a former employee of Rite-Aid (9yr) before opening my first store in 2003, I think your idea of selling to the store pharmacist is almost impossible. Several reasons; store size, lease, etc...Most independents are 93% rx sales..TOO MUCH SQ FT in Rite-Aid...Most independents are in 2500 sq ft or less...
ReplyDeleteI DO LOVE YOUR 'blog/page'...THANKS
Sounds like a good idea, but one would think that if it was feasible, Rite-Aid would have jumped at the chance to improve their bottom line. I don't think that they have any options left.
ReplyDeleteI wrote a few years ago that Rite-Aid wouldn't make it, specifically because of it's debt load. To tell you the truth, I'm amazed that they're still around. But, why kill the golden goose? It's in insiders best interests to keep it going as long as they can.
While Rite-Aid is a terrible investment, the price has fluctuated just enough for it to be a trader's delight. I guess that's why their stock price hasn't yet fallen all the way to zero. Eventually though, they'll have to file for bankruptcy. JMHO..
OBusinesses on the Brink: Change or Fail?
ReplyDeleteby Mark Riddix
Thursday, April 1, 2010
provided by
Many major companies like Circuit City and Linens 'n Things went bankrupt during the economic crisis of 2008-2009. These companies folded under high debt levels and a decline in sales. Just because some companies were able to survive the economic downturn of the past few years doesn't mean they are out of the woods yet. Companies like Blockbuster (NYSE: BBI) and Borders (NYSE: BGP) are going down with their industries, meaning that making drastic changes is their only option. Here are five major companies that are struggling -- it is unlikely that all will survive.
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Blockbuster
Associated Press
The former king of video rentals is on life support. Blockbuster's shares are trading under 30 cents per share and the firm is saddled with debt. Blockbuster has over $963 million in debt. The company's biggest problem is that its business model no longer works. Blockbuster rose to prominence by renting videos and DVDs to customers from its traditional brick and mortar stores.
However, Netflix has become the new king of movie rentals with its DVD by mail strategy. To make matters worse, Redbox is quickly gaining market share with its $1 DVD rentals from kiosks set up at grocers, fast food chains and convenience stores. Blockbuster is trying to change its business by adopting a DVD rental kiosk model and offering mobile movies via smartphone. But unless Blockbuster can rid itself of its onerous debt burden, these changes may be too little, too late.
Rite Aid
Associated Press
Things haven't been right at Rite Aid (NYSE: RAD) in quite a long time. Rite Aid's biggest problem is that the drug store giant just doesn't make money. Rite Aid has been losing money and is expected to have negative earnings for the foreseeable future. Add in that Rite Aid has only $150 million in cash and more than $6 billion dollars in debt and you can see why the outlook isn't so rosy.
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The ill-advised Brooks Eckerd acquisition has buried the company under a mountain of debt. Rite Aid has seen its same store sales decline for nine consecutive months. With Walgreens, CVS and Wal-mart all competing for pharmaceutical sales, it doesn't appear that there is any viable plan that can save Rite Aid.
Borders Group
I work at Rite Aid,I know the pharmacists have bours have been cut down to 38 hours a week, and they aren't very happy about it. Also, the floater pharmacists have been let go. Our store is very busy,so I hope they won't close. We have had customers that have left ?Walmart because of the service. I hope that Rite Aid stays afloat for the sake of the employees that have been there for yhears.
Associated Press
The printed book
r
Rite aid does generate billions in sale. The problem is they are too big and cumbersome. They need to downside their company and do it fast. Time is running out for them. Sell assets, close down stores, cut payroll, consolidate positions, put on hiring freeze. Cut store inventory, waste and unnecessary. Focus on selling basic necessities items in competitive prices. Focus stores closures in states with fiscal deficits and high unemployment like california, las vegas, arizona, illinois, ohio, michigan, florida, north carolina, kentucky. 1000 closures initially then another 500-1000 maybe necessary if economy doesnt turn around. In the end, rite aid can be profitable again with new business model focus on selling necessities like bread, milk and groceries as a chain of 2500-3000 not 4800.
ReplyDeleteThe Rite Aid store in my town does exceptionally good business. It's always busy and the pharmacy at the back of the store is always packed with customers. My family has ran a supermarket in Kentucky for over 60 years. We built a new store across the street from the old one and Rite Aid bought our old store in 1986. They constructed a brand new unit and over the last few years have been looking for somewhere to replace the 1986 store in our town. At the time they opened, they bought the towns biggest pharmacy out for their prescription files. We have plenty of competition in the area including Wal Mart, CVS, Walgreen's, and a large amount of independents but Rite Aid still does very well. In our metro area of 300,000, Rite Aid has many stores and all do well, I would imagine that there are many other places that has the same situation with Rite Aid as our area does. Stores do well but corporate does not. Here's what I think they need to do: Evaluate every store location for profitability. If it doesn't make money, try to group it with a bunch of similar Rite Aid stores in the same region that
ReplyDeletearen't profitable. Then go to regional chains in that particular area that might be interested. Try to recover inventory costs and have them buy out the lease at a small premium. If the regional chains aren't interested, look to CVS and Walgreen's. If that still doesn't work, close the stores and liquidate assets. If they own the real estate try to sell it to a real estate holding firm to raise cash flow. I know the store building in our town(all brick in the best of locations would sell for way over a million). If Rite Aid owns only 5% of their stores, that would raise as much as 240 million at the least. Then by also liquidating under performing locations, they should be able to pay off debt or at least refinance it at a reasonable payoff and return to profitability. I think it is a matter of Rite Aid execs of the past trying to grow the company too fast being reckless with expansion efforts that has brought this corp. to it's knees. Many executives move from corp. to corp. raiding what they can get.
Rite Aid id the worst company ever to work for I was there for about 14 years thank god I left. When I go in there now they still look like they are in the 80s with no employees, and dirty it's a shame that the old thrifty came to this.They waste money sending other employees to clean up stores that they can't run right fire them if they can't run them it's no wonder cvs and Walgreen took over they are much cleaner and way better customer service.
ReplyDeleteyou've got 3 rite aid board members who used to be at Kroger, and Kroger has cash and wants to dive into greater pharmacy mkt share.
ReplyDeleteToo many VP's, too many chefs in the kitchen. Bad marketing plans, dated catagory management, reactionary thinking. Working for a company like this is difficult when you can see what is wrong with operations and no one is available, or willing to listen, or hushes you up so the boat isn't rocking. Some stores running with less labor dollar and %age than 5 or more years ago when sales $$ are up 50% or more over same timeframe. = Horrible customer service, poor conditions, stressed and frustrated employees. Seems a new VP is added every other week, with focus and strategy changes with each new VP's whim. Talk about a rudderless ship! It sometimes seems that they're TRYING to fail. Four things needed to make a turn around. 1. Close stores, no matter the cost. Find someone creative to unload the leases. 2. Cut heads....More VP's than states = too many 6-7 figure incomes. 3. Focus on price and consumables, not useless strategies that customers don't pay attention to anyway. 4. Get rid of the old boy middle management network.
ReplyDeleteOnly the people work at the front line who know the problem, those people stiing at corportae center do not see what is worng with the company. Just a simple example, since the pharmacy is the major business but the company just can not direct those phone not related to pharmacy to its customer service instaed pharmacy will receive the phone call asking dowe sell ice cream, hahahahahaha.
ReplyDeleteWhat can you say, Camphill needs to take down the US Flag and replace it with a White one. The top level will keep sucking the life out until its gone. At best we have Two years left. Start calling Walgreens & CVS see if they have any openings.
ReplyDeleteRite Aid has several issues that need corrections. 1)They are too top heavy with VP's and corporate persons. None of these individuals are on the same page with each other. 2) They are always introducing new programs to attract customers, one is not yet up and running before another hits the market. 3) There are no service personel in the stores to assist customers. One or two people at the front of the store can not assist customers. 4)There is never enough seasonal products in the store(I was in one store 3 weeks before Halloween and it had 3 costumes) 5) They have one person trying to answer phones, wait on the drive thru and fill prescriptions. If you can not service the needs of your customers, you loose the customer.
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