Rite Aid divestiture a “transformative” event for Fred’s

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Rite Aid divestiture a “transformative” event for Fred’s

By Brian Berk - 12/20/2016

MEMPHIS, Tenn. — Fred’s Pharmacy is about to transition from a regional Southeastern retailer to national pharmacy powerhouse, starting with the bottom line.

In a statement, Fred's stated it expects the acquired stores gained from the Walgreens-Rite Aid announced store divestiture “would be accretive to earnings and generate substantial cash flow.” Net sales at Fred’s totaled $2.15 billion for the year ended January 30, 2016. Net loss came in at $7.37 million during this period.

But based on Drug Store News estimates, acquiring the 865 stores could add approximately $5 billion in revenues to Fred’s bottom line. Although results could be altered based upon integrating the old stores into a new company, these figures could likely remain constant based upon Fred’s Tuesday statement: “In aggregate, the 865 stores are generally representative of Rite Aid's pre-divesture store performance with respect to both sales and EBITDA.”

Once the Walgreens-Rite Aid divestiture is concluded, DSN estimates Fred’s will operate 1,475 stores, including about 1240 pharmacies, making it the third-largest, pureplay U.S. drug store chain by store count and the sixth largest retail pharmacy chain overall behind Albertsons/Safeway (includes 40 underperforming stores Fred's CEO Mike Bloom said earlier this month the retailer will divest in the first half of 2017).

"This will be a transformative event for Fred's Pharmacy that will accelerate our healthcare growth strategy through our acquisition of 865 new stores located in highly attractive markets,” said Bloom. “We believe that this transaction will also create tremendous opportunities for both our new and existing front of store and pharmacy team members. We look forward to realizing the considerable benefits this transaction will bring to our customers, patients, payors, supplier partners, team members and shareholders."

Clearly, Wall Street agrees with Bloom’s comments. In Tuesday afternoon trade on the NASDAQ National Market, Fred’s traded higher by more than a whopping 81% to just over $20 per share. But this transaction is not only about Fred’s simply adding stores. The Memphis-based retailer is also expected to shift its focus to become an even bigger pharmacy player, a path the company is already on. For the year ended January 30, 2016, slightly more than half of Fred’s sales came from its pharmacy operations, an increase of 12.5 percentage points in just two years.

Walgreens and Rite Aid will officially name the locations of the divested stores when the U.S. Federal Trade Commission approves the merger and divestiture plan. States that have more than 100 Rite Aid stores that could be divested include current Fred’s markets, such as Georgia, Kentucky and North Carolina, complementary markets, such as Ohio, Maryland, Virginia and West Virginia, and states that would allow Fred’s to enter new markets, such as California and Washington on the West Coast and Massachusetts, New York, New Jersey and Pennsylvania on the Eastern seaboard.

Of Fred’s current 647 stores in 15 states, a majority are located in six states (which Fred’s calls its core markets), with the most in Mississippi, followed by Georgia, Tennessee, Alabama, Louisiana and Arkansas, respectively.

“The strategic plan that the leadership team developed includes four major levers, retail pharmacy expansion, specialty pharmacy, getting back to growth in front store, and acquisitions and partnerships,” Bloom stated during the company’s fiscal third-quarter earnings call earlier this month. “We see great growth potential for our retail pharmacy through a variety of initiatives: improvement in payer relationships, expansion of revenue-generating healthcare services offered through the pharmacy, a significant investment in pharmacy marketing focused on driving customer retention, and acquisition resulting in script growth, and an increase participation in 340B programs.”

For more on the transaction, click here.

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