Rite Aid: Four goals for 2009
CAMP HILL, Pa. —It’s a new year for Rite Aid, and with that comes the opportunity to shift the general perception of the company back toward reality—from a debt-riddled, underperforming pharmacy operator to a viable competitor with plenty of upside.
But if Rite Aid wants to show analysts and vendors what it’s all about, there are four key areas it needs to improve in 2009: continue improving on its Brooks/ Eckerd store base; continue to improve store results through effective marketing and merchandising; continue to control costs, i.e., inventory levels and capital expenditures; and continue to effectively manage its debt load.
Improve Brooks/Eckerd
Performance across the Brooks/Eckerd store base was moving in the right direction before the economy slowed things down for most retailers. Front-end same-store sales shifted positive at the close of the company’s third quarter ended Nov. 29, 2008. “Comps at the acquired stores were showing solid progress between June (minus 6.2%) and October (plus 0.4%) before turning negative again in November…and December,” said analyst Bill Dreher, Jr., of Deutsche Bank.
The economic slowdown “appears to be offsetting the benefits of the grand reopenings and from cycling last year’s remodeling-related disruption,” he said. For the third quarter, same-store sales at the former Brooks/ Eckerd operations fell 1% over the period (up 3.7% in front-end and down 2.6% in pharmacy).
And Rite Aid’s pharmacy business has a lot of room to grow. Meredith Adler, research analyst for Barclay Capital, told Drug Store News, “There is a lot of operating leverage [within Rite Aid]. If you add 200 prescriptions per week, you’re going to see a big improvement in profitabilitcy because they don’t have to add any more pharmacists,” she said.
That’s not necessarily the case for Rite Aid’s competition, which means Rite Aid is in a position to generate a lot of EBITDA momentum. “If Eckerd Rx comps turn positive, EBITDA would benefit disproportionately,” noted Goldman Sachs’ John Heinbockel.
Improve merchandising and marketing
“The key to unlocking store productivity in our front-end business is to improve our merchandising and marketing processes,” John Standley, president and COO, told analysts last month. Former Pathmark vet Ken Martindale, brought in last month as senior EVP merchandising, marketing and logistics, is tasked with tailoring Rite Aid’s mix market by market.
“We [have] 4,900 stores that are all a little different for some reason or another. Figuring out which reasons are important and grouping customers and stores with common attributes … will allow us to focus our investment in labor, inventory, advertising, promotional markdowns and distribution costs in the stores that will provide the highest returns,” Standley said.
Rite Aid will target cost reductions through such areas as inventory reduction and SKU rationalization, labor management and the delivery of goods to the store.
Improve cost controls
These types of cost-cutting activities already have helped Rite Aid drive strong EBITDA performance during the third quarter ended Nov. 29.
“In these unprecedented times, it’s important to focus on what we can control, and our team did an excellent job of doing just that,” said chairman and CEO Mary Sammons, “improving operating efficiency throughout our company, in the stores, distribution centers and corporate office.
“We significantly reduced working capital and responsibly pared CapEx,” Sammons said. “We did a better job of managing labor to sales, while at the same time continued to improve our customer satisfaction scores year-over-year and quarter-over-quarter,” she added, suggesting that improving cost controls, a definite priority, will not necessarily undercut customer service and customer retention.
Improve debt load
The soonest any significant amount of Rite Aid’s debt comes due is September 2010, when it’s senior secured credit facility of $1 billion matures. However, the consensus among analysts is that it will be effectively renegotiated sometime in the coming year. “We’re committed here to getting some debt reduction and generating some free cash flow next year,” Standley said.
In the meantime, the company is not necessarily capital challenged. “They have a bank facility that had plenty of available [funds] at the end of the third quarter…during their peak inventory period,” Adler said. “So they had plenty of liquidity before the Christmas holidays,” she said, and any demand on available cash flow will not be as high again until Christmas 2009. At the close of the third quarter, Rite Aid carried $149 million in cash and had an additional availability of $495 million under its revolver.
It’s certainly been tough going for Rite Aid in the past year, as the company’s stock price fell below $1 and forced the company to seek shareholder approval for a reverse stock split to stay listed on the NYSE.
Historically, reverse stock splits carry a certain stigma, but Rite Aid very well may be the exception. For starters, many of the analysts following Rite Aid consider the reverse stock split a non-issue relative to the chain’s projected performance. Rite Aid needs to stay listed on the NYSE in order to honor at least one of its debt covenants.
The chain is expected to execute the reverse split in the next month, driving share prices from the low of 34 cents per share at the beginning of the new year, to a little more than $5 per share.