With a leaner, stronger store base, Rite Aid goes to work

CAMP HILL, Pa. — Last week, Walgreens Boots Alliance and Rite Aid ended their merger dance with a new deal that will see 2,186 Rite Aid stores — primarily located in the Northeast, Mid-Atlantic and Southeastern regions of the United States, along with three distribution centers —  sold to WBA for a sum total of $5.5 billion, including the termination fee associated with the merger.

So what's next for Rite Aid?

Rite Aid keeps 2,337 stores, primarily along the West Coast, Pennsylvania, Ohio, Michigan and New Jersey.

"The transaction will transform Rite Aid into a smaller but stronger company that will have less exposure to the pharmacy reimbursement rate pressures that have had such a negative impact on our business," John Standley, Rite Aid chairman and CEO, told analysts last week.

It won't be business as usual, Standley acknowledged, but the termination of the WBA merger does mean Rite Aid will again pick up the charge as a cutting-edge front-end merchant with its Wellness format.

“This is an important time for us now that it's clear we're going to continue as an independent company to re-engage with our strategic partners,” Standley said. “We worked hard over the last 20 months to keep people engaged, but you know as you would expect with the prospects of the merger were hanging out there, it certainly made life a little more complicated.”

Rite Aid expects to use a substantial majority of the net proceeds from the transaction to repay existing indebtedness, significantly reducing Rite Aid's leverage levels. Presently, approximately $5.1 billion in Rite Aid debt will mature in 2020.

Mizuho Securities has Rite Aid's debt levels dropping by 75% following this deal, according to reports. Rite Aid also expects that the federal tax gain on the sale of the assets will be largely offset by its net operating loss carryforwards, resulting in a minimal cash tax payment on this transaction.

As a result, Rite Aid emerges as a much leaner, multi-regional chain and with a much smaller debt load, a factor that leaves the door open to capital commitments, including the continued refreshing of the company's store base to its Wellness format, which already makes up 60% of Rite Aid's legacy store base, as well as the continued expansion of its RediClinic retail clinic model.

"We have added retail clinics in stores and we're continuing to look at that business," Standley said. "We've worked very hard to develop the Rite Aid Health Alliance, which has historically allowed us to partner with healthcare providers in the marketplaces we compete to provide additional services to chronic patients," he said. "That's something we'll go back and revisit."

And Rite Aid is not surrendering its best stores to the Walgreens transaction. To the contrary, the legacy store base remaining with Rite Aid is a stronger store base, Standley told analysts last week.

“[This store base] is a financially stronger group of stores on a per-store basis than the store base today,” he said. “We will have higher front-end average sales, script count and EBITDA per store,” he said. “ Almost 60% of the stores have been remodeled to the groundbreaking Wellness format, and these stores are in cities and communities where we have strong market share.”

As a footnote to the deal, Rite Aid has signed a two-year noncompete, agreeing not to re-enter or build new stores in markets where the divested stores are located.

Another caveat to the deal, Rite Aid gains greater purchasing power than it had even before the 2,186 stores were sold to Walgreens Boots Alliance. That’s because as part of the deal, Rite Aid still has the option of joining Walgreens Boots Alliance’s generic buying consortium, giving it the buying strength of a much larger company.

“This provides us with an important tool for us to mitigate the reimbursement rate pressure we expect to continue,” Standley said. “The option to purchase from [Walgreens Boots Alliance Development] in the future is important in that it helps ensure that we continue to have access to competitive drug [pricing], whether it’s through that option or through McKesson or otherwise,” Standley added.

Following the completion of the transaction, Rite Aid will continue to operate EnvisionRx, its pharmacy benefit manager, RediClinic and Health Dialog and leverage the capabilities of these subsidiaries to deliver a higher level of care in the communities it serves. Standley noted its PBM EnvisionRx has the potential to grow at a faster rate than it's retail business.

A map of Rite Aid's new store base is below, included as part of the company's presentation to investors last week, with the stars representing retained distribution centers.