The Fixers: Rite Aid meets challenge of integration head on

While the current leadership team has fought hard to manage its debt situation and has managed to reverse the sins of previous leadership, Rite Aid still gets no respect. And now Sammons-Mastrian & Co. have a new daunting challenge in front of them—turn around the same troubled Northeast Eckerd stores that were initially mismanaged under J.C. Penney and later helped drive the Jean Coutu Group out of the U.S. market altogether, with the exception of its current 32 percent stake in Rite Aid.

And yet it seems the only ones bullish on Rite Aid’s future is the chain’s aforementioned Canadian stakeholder, a handful of analysts and, of course, the Rite Aid executives themselves—who not only know what needs to be done, but know that it can be done.

After all, they did it with Rite Aid.

If the chain’s recent history under its current leadership is a reliable indicator of what’s to come, don’t assume the No. 3 retailer will be making its exit from the drug store scene anytime soon, if ever, or will even remain comfortable at No. 3 for that matter.

Indeed, news on the chain going forward ought to be both positive and stock-price friendly. Here’s why:

The Brooks/Eckerd stores will soon be more an asset than an albatross, and that’s because those stores, purchased in June, will hit comp sales this summer. Sales at the acquired stores have been low compared with industry standards for years—that was part of the attraction for Rite Aid in acquiring the stores in the first place. Average front-end sales at core Rite Aid locations pre-acquisition were 35 percent higher, with an average 13 percent private-label penetration, compared with the less-than 9 percent penetration achieved by Eckerd stores before the acquisition.

That’s low-hanging fruit, and improved results across the Brooks/Eckerd stores compared with pre-Rite Aid soft numbers ought to have a positive impact across Rite Aid’s comp numbers this year—and in the years ahead.

While those comp numbers ought to be better than the year before, they will still include the temporary disruption in stores on account of systems conversions and remodels, not to mention Rite Aid’s discontinuation of certain inventory and unprofitable promotions. And that means at least a second year of strong comp results across more than 31 percent of Rite Aid’s store base through 2009.

Rite Aid’s Customer World prototype works, and the Brooks/Eckerd acquisition enables Rite Aid to grow that concept across its store base a lot faster than organic plans announced in 2005—1,000 new or relocated Customer World stores by 2010.

Without Brooks/Eckerd, approximately 26 percent of Rite Aid’s store base would have been comprised of Customer World stores by 2010. With Brooks/Eckerd, significant Customer World elements will be evident in more than 47 percent of its stores, according to Drug Store News calculations. And that ought to be an improvement on top of the 35 percent disparity between core Rite Aid and core Eckerd stores prior to the acquisition.

And it’s the same management team, more or less, that transformed Rite Aid from a drug store bust to a formidable pharmacy player in the past eight years. It’s a management team that focuses on the deliverables reminiscent of any successful retailer—steadily improving EBITDA coupled with cost containment and supply chain synergy.

And if anything, that management team has only gotten stronger with the additions of Brian Fiala from Target, John Coster from the National Association of Chain Drug Stores and Robert Easley from H-E-B. And late last year, Rite Aid brought on Robert Thompson, also a former Target executive, to manage the chain’s more than 900 West Coast locations.

All executives with successful careers coming out of successful organizations to join Rite Aid. You can bet they didn’t all jump on a bandwagon that’s not going places.