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?