Rite Aid (NYSE: RAD) is the third-largest drugstore chain in the United States, with over 4,800 stores in 31 states. The company makes most of its money from the sale of prescription drugs, but it also sells non-medical items such as cosmetics and greeting cards. The company should benefit from the tailwind of an aging U.S. population; people over 54 use drugs at much higher rates than their younger counterparts. Rite Aid, however, faces increasing competition from non-traditional drug retailers. Most notable among these is Wal-Mart, which recently began selling over 360 generic drugs for only $4 per subscription. This is significantly less than RAD's prices and may put pressure on the company's drug margins. It also has implications for the company's higher margin front-store (beauty products, snacks, etc.) sales, which are heavily dependent on RAD's ability to cross-sell customers who come in for prescriptions.
As of February 2010, Rite Aid operated 4,901 stores in 31 states and DC. As a drugstore retailer, the majority of Rite Aid’s business is in prescription drugs, with the remaining coming from front-end products. In fiscal 2009, Rite Aid filled approximately 300 million prescriptions and served an average of 2.3 million customers per day. 
Prescription drugs: RAD is the third largest U.S. chain drugstore, and the company depends on its retail pharmacies to bring in a large percentage of its revenue. Approximately 43% of its stores also had a drive-thru pharmacy. In fiscal 2009, prescription drugs represented 67.2% of revenue (up from 63.7% in 2007). Generics represented 30% of drugs dispensed. 
Front end products: include over-the-counter medications, cosmetics, greeting cards, photo processing, and other products. RAD tries to differentiate its front end products by offering private brands and through their strategic alliance with GNC, which makes vitamin and mineral supplements; Rite Aid has opened 1,726 GNC ‘‘stores-within- Rite Aid-stores’’ as of February 28, 2009 and has a contractual commitment to open an additional 626 stores by December 2014.. In fiscal 2009, front-end products represented 32.8% of the company's revenue. 13.5% of front end sales in fiscal 2009 came from Rite Aid’s 3,300 private label products. 
In fiscal 2009 (ended February 28, 2010), Rite Aid earned $26.2 billion in revenues, up 7.8% over fiscal 2008. However, its net loss grew from $1.1 billion in fiscal 2008 to $2.9 billion in fiscal 2009. Management blamed “one of the toughest economic environments in memory” and slow sales growth. Between August 2009 and February 2010, as part of cost-cutting measures, Rite Aid laid off 6,500 employees, or 6% of its workforce. 
In 2008, revenue grew 8.1% to $26.3 billion, with a 2.2% increase in pharmacy sales and 0.1% increase in front-end sales. However, Rite Aid’s net loss increased even further from $1.1 billion to $2.9 billion. A major contributor to this loss was a $1.8 billion write-off of goodwill required because the market value of RAD stock rose above the carrying value of the company’s net assets.
Rite Aid also incurred store closing charges of $293.7 million, an increase of 240% over the prior year, due to a higher rate of store closings and impairments relative to previous years. Many of these closures were a result of eliminating stores that Rite Aid deemed to be overlapping with stores acquired in Rite-Aid's $2.3 billion acquisition of Brooks Eckerd in 2007. While Rite Aid ended Q4 of fiscal 2009 with 4,901 stores, by Q4 of fiscal 2009 it had already closed a net of 100 stores.
Rite Aid reported a decline in revenue of 26% for the fiscal year (ending February 28th, 2009), with revenues falling from $9 billion to $6.7 billion. Q4 of fiscal 2009 also saw a decrease in revenue from $6.8 billion in Q3 to $6.7. Losses were driven mainly by non-cash charges. Despite these losses, Rite Aid's same-store sales (excluding the acquired Brooks Eckerd stores) increased by 0.8% through the fourth quarter and the fiscal year, and the company generated $324.8 million in positive cash flow from operations in Q4. By the end of this quarter, Rite Aid opened 6 stores, relocated 10 stores, and closed 19 stores, arriving at a total of 4,901 stores by the end of the fourth quarter.
With over $6B in debt, Rite Aid is on precarious ground. The company is vulnerable to increases in interest rates, as a portion of its debt is priced at adjustable rates. Higher interest rates can also make it more expensive to refinance existing debt. Rite Aid's current ratio of assets to liabilities, which represents its state of liquidity, is less than one (0.87), a low number relative to its competitors.
Concerns over Rite Aid’s debt and its ability to refinance in a tight credit market contributed to rockier stock performance in 2009. 
In Q3 of fiscal 2010 (ended November 28, 2009), Rite Aid reported revenues of $6.4 billion, a decline of 1.8% over the previous year’s Q3, and a net loss of $83.9 million, an improvement over the previous year’s Q3 net loss of $243.1 million. The decline in revenues was attributed to store closings and a decline in front-end same store sales. In the third quarter, the company opened 3 stores but closed another 14. Stores in operation at the end of the third quarter totaled 4,801.  Rite Aid forecast declining front end sales for the remainder of fiscal 2010 due reduced consumer spending on non-essential items and more aggressive bargain shopping. At the same time, Rite Aid predicted lower pharmacy margins due to reimbursement rate pressures, fewer new generics, and the impact of a recently implemented AWP cost adjustment in its Medicaid business. 
Rite Aid reported revenues of $6.5 billion and a net loss of $208.4 million for the fourth reporting quarter of FY2010 ended February 27, 2010. Overall, fourth quarter financials were negatively impacted by lower sales particularly in pharmacy margins which resulted to less profit on new generics. The improvement in front end margin and decrease in SG&A was not strong enough to offset the decline in pharmacy margins, which declined 202 basis points.
Continuing store closings and decline in same store sales (2.4% decrease) led another quarter of declining sales (3.6% decrease). Note, however, that the net loss of $208.4 million is adjusted to $116.9 million should significant non-cash charges such as goodwill impairment, store impairment and additional tax valuation allowance is omitted.
For the 52 weeks fiscal year ending February 27, 2010, Rite Aid reported revenues of $25.7 billion compared revenues of $26.3 billion in FY2009. The 2.4% decline in revenues were driven by 121 net few stores as Rite Aid continued to shut down stores around the country. Besides store closing, same-store sales also decreased 0.9% over the fiscal year compared to FY2009. The decrease of 2.9% from front-end and 0.1% increase in pharmacy sales resulted in the net decrease. Prescription sales continued to account a large portion of total revenue (67.9%) and represents 96.2% of pharmacy sales.
Without regard to non-cash charges such as goodwill impairment, store impairment, and tax valuation allowance against deferred tax assets, FY2010 net loss of $640 million compared to the reported net loss of $506.7 million. The decrease in SG&A expense was not enough to offset the impact of a weak economy on lower pharmacy margin. Rite Aid managed to open 17 new stores, relocate 41 stores, remodel 8, and closed 138 stores. Total stores standing as of end of FY2010 totaled 4,780.
Rite Aid reported revenues of $6.4 billion and a net loss of $73.7 million for the first quarter of FY2011 ended May 29, 2010. The better than expected results were benefited from a decrease in Selling, General & Administrative Expenses (SG&A) expenses, which were then partially offset by a decline in sales and gross margin. The decrease in overall sales ($6.4 billion compared to $6.5 billion in Q1 FY2010) was a result of store closings and a decline in same-store sales of 1.0% which was led by a 138 bp negative impact from new generic introduction in pharmacy sales. Further, number of prescriptions filled in same stores decreased by 1.7% over prior year period.
On average, analysts had forecast a loss of 13 cents per share for the company's fiscal 2010 first quarter, according to Thomson Financial. The actual net loss reported of 9 cents per share was therefore attributed to a decrease in SG&A expense and lower charges related to store closings. While the company closed 15 stores in the first quarter FY2011, it opened 2 new stores and relocated 8 others. Total stores in operation as of the end of first quarter FY2011 stands at 4,767.
Rite Aid posted a net loss of $197.0 million ($0.23 loss per diluted share) for the second quarter of FY2010. Revenues were $6.2 billion, a 2.5% decrease as a result of store closings and declining same store sales. Same store sales were 1.5% lower than prior year 13 week period, which consisted of a 0.9% decrease in front-end and 1.8% decrease in the pharmacy sales. These pharmacy sales included a 195 bp negative impact from new generic introductions.
Rite Aid continues to face amounting debt worries. Contributing to the net loss of $197.0 million was a $44.0 million debt modification expense related to the retirement of Rite Aid's $648.0 million Tranche 4 term loan due 2015 under its senior secured credit facility.
Rite Aid posted a loss of $81.5 million or -$0.09 EPS after paying preferred dividends for the third reporting quarter ended November 27, 2010. This loss compares to a steeper loss of $86.1 million, or -$0.10 EPS same quarter last year. While Rite Aid's bottom line improved, Rite Aid's top line fell 2% to $6.2 billion as RAD's revenues from stores open at least one year was and will continue to be projected as softer than expected. Also affecting the top line during the quarter was a slow cold and flu season.
As a result, RAD projects a net loss of between $525 million and $655 million for the entire fiscal year. In response to continued losses, RAD signed a partnership with Supervalu Inc. to add grocery sections to 10 stores. Sales from stores for front-end products have doubled on average, though margins have shrunk due to more perishable items. RAD hopes that this new model could turn around the company after a string of net losses.
An aging baby boomer segment, estimated at 76 million people, continues to fuel an increase in demand for prescription drug sales. The American Association of Retired Persons (AARP), reports that while people in the 25-54 age group fill between 5 and 12 prescriptions each year, people over the age of 55 fill between 19 and 24 prescriptions. As this generation of boomers gets older, RAD's prescription drug sales could increase.
The retail drugstore industry will benefit from accelerated generic prescription drug sales, as over $80 billion in branded drugs are set to lose patent protection between 2010 and 2015.  The gross profit from a generic drug prescription is greater than the gross profit from a brand drug prescription because of lower wholesale prices. However, while RAD's margins may increase, revenue growth may be slower because generic drugs sell for a lower price.
In 2008, IMS Health reported a 1.3% decline in national drug sales. This decline is attributed in part to higher generic dispensing rates, a slowdown in the introduction of branded drugs, and the decline of blockbuster drugs. 
The retail drugstore industry relies significantly on third party payors such as Medicare and Medicaid, which cover over 80 million Americans. In fiscal 2009, 15.7% of total RAD sales were to customers covered by Medicare Part D and 6.6% were to customers covered by Medicaid, a total of 24.3%.  These organizations periodically change the beneficiary eligibility requirements and drug reimbursement rates. When third-party payors reduce the number of participants or reduce their reimbursement rates, RAD's sales and margins could be reduced.
Recently, many competitors outside of the traditional drugstore retailers have made aggressive moves into the prescription drug market. Most notable is Wal-Mart, which recently began selling over 360 generic drugs for only $4, significantly less than RAD's prices. Since then, Wal-Mart has expanded its $4 generic drug distribution to 16 states and nearly 360 drugs.  Given that Wal-Mart has over 4,000 stores in the US and a presence in nearly every major metropolitan market, it could have a major impact on the pricing and margins of generic drugs. This may ignite a price war and put compounded pressure on the RAD's drug margins and lower its profits.
Major drug manufacturers carrying common household OTC medications such as Tylenol, Advil, and Motrin are six times more likely to be purchased by consumers than its same function generics. The main idea behind this thinking, even though most often than not the drug facts are the same, is consumers grew up with these brands and perceive them as safer or more effective than inferior goods.
However, when in the rare case that these trusted household brands are recalled, consumers are often thrown into confusion and will make the switch over to retail pharmacy generics, sometimes permanently. This presents a very valuable opportunity for retail pharmacies. For example, when JOHNSON & JOHNSON (JNJ)'s drugmaking unit McNeil recalled millions of children's and adult versions of those drugs over the past 10 months since late 2009, many consumers have been fraught with confusion as retail pharmacies have been stuck with inadequate supply.
As a result, all major pharmacies such as CVS, Walgreens and Wal-Mart have revamped private label drug manufacturing by five times capacity versus 2009. As traditional JNJ loyalist consumers are forced to use generics, they may realize that they are just as effective as Tylenol and JNJ, except cheaper. As such, these loyal consumers may choose to permanently change over, which presents an extremely lucrative opportunity for retail pharmacies.
As RAD's major competitors such as CVS and WAG continue to hack away at its market share, RAD has began to focus on inventory and store management, even at the cost of top-line growth. For example, RAD announced in 2009 that it would terminate operations of 12 Rite Aid stores in California and Eastern Idaho areas to Walgreens. By lowering store count, RAD has begun to scale back and look at the bottom-line.
In January 2011, RAD entered an agreement with Agilence, a point-of-sale video auditing solutions leader to provide auditing software to nearly 600 RAD stores. By being able to efficiently identify losses that occur at point-of-sale, RAD will be able to quickly minimize point-of-sale losses while streamlining promotion execution.
Walgreen Company (WAG) is industry's strongest company across the country, with the top spot in 44 of the 100 largest drug store markets, including the No. 1 share in 5 of the 10 largest areas and No. 2 share in another 23 and No. 3 in
CVS (CVS) is either first or second in every one of the top 10 markets and No. 1 in the two largest drug store markets --the New York and Los Angeles metropolitan areas. Overall, it has the No. 1 share in 30 markets and No. 2 share in 27 and No. 3 in 8.
Rite Aid (RAD) is the No. 1 chain in 16 markets, with one ranking in the Top 10, via the acquisition of Eckerd stores in Philadelphia.
In addition to other drugstore retailers, Rite Aid also competes with supermarkets and convenience stores that fill prescriptions, as well as internet-based drug vendors.
|Retail Pharmacy Industry — Competitive Operating Metrics (2009)||Walgreen Company (WAG)||Rite Aid (RAD)||CVS Caremark Corporation (CVS)||Wal-Mart (WMT)||MedcoHealth Solutions (MHS)|
|Revenue (billions of USD)|
|Revenue Growth from 2008||7.29%||-3.00%||12.87%||0.95%||16.67%|
|Net Profit Margin||3.17%||-1.97%||3.76%||3.66%||2.14%|
|Income Growth from 2008||-7.00%||N/A||15.01%||8.75%||16.08%|
|Earnings per Share||2.16||-0.43||2.56||3.76||2.61|