January 8, 2008
Rite Aid Cashes In Its Chips in Vegas
When Rite Aid acquired nearly 1,900 Brooks and Eckerd drugstores last June, it became the largest chain on the East Coast. At the time of the acquisition, the company made clear that its newly obtained size would put it in a better position to compete with the likes of Walgreens and CVS on the national drugstore stage.
Since then, however, Rite Aid has struggled. The chain reported a 0.5 percent decrease in same-store sales during December with flat pharmacy numbers (blamed on an increase in sales of lower-priced generics) and lower front-end revenues (-1.2 percent).
The day following the release of its December financials, Rite Aid announced it was closing its 28 stores in the Las Vegas market and selling patient prescription files for 27 stores to Walgreens. While Walgreens is purchasing the patient records, it is not clear what will happen to the actual stores. Rite Aid said it was “working with interested parties on selling or assigning the leases on the 28 buildings.”
Rite Aid said the sale was made because Las Vegas was not a core market for the company. According to a company press release, Rite Aid last opened a new store in Las Vegas in 1999.
The erstwhile competitors said they would work together to assure consumers would not be inconvenienced.
“Walgreens pharmacy staffs are ready to make the transition as seamless as possible for Rite Aid patients,” said Dave Gloudemans, Walgreens vice president of store operations for Nevada, in a press release. “With 53 Las Vegas stores opened since we entered the market in 1996, patients will find our pharmacies convenient to use. We’re excited to bring more patients our unique combination of pharmacy services that includes 24-hour pharmacies at 20 locations in the state, drive-thru pharmacies and prescription labels available in 14 different languages.”
Discussion Question: What does this deal mean for Rite Aid and Walgreens? Does the closing of its stores in Las Vegas, for example, suggest that Rite Aid is going into retrenchment mode?
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Rite Aid is around $2.11 today. It was around $5.75 a year ago. The company told investors that it would lose money for a while before the acquisitions’ integrations are complete. Rite Aid made a giant risky bet: that quick growth through acquisition would pay off in the long run. Unfortunately, implementation issues can torpedo a terrific strategy. Getting out of a money-losing market isn’t a bad idea, especially if the assets can be sold at a good price.
With more retailers focusing on the drug business and more insurance companies focusing on cutting costs for prescriptions, Rite Aid should reevaluate its strategy. The stores are not laid out for an easy convenience stop and the convenience selection is poor at best. I would continue to liquidate the underperforming stores and focus on markets where it is strong. The focus should be on the local community and building relationships with its neighborhoods; partnering with schools and community events and let its customer base know they make house calls.
It is important to note that this is only 27 stores in a specific market. However, patient prescriptions are the lifeblood of this industry. We cannot forget the impact that the $4 generic prescription being offered by Target and Wal-Mart is having on the industry and what this means for the rest of the competitors in this category. Acquisitions are difficult pills to swallow. 2008 will be the forecaster of the success or failure of this effort.
I don’t doubt Rite Aid can get through the integration of Eckerd. I do doubt that they will be able to improve sales, profits, cash flow and make any sizable cuts in its huge debt load. To do that, they need to make significant store level investments throughout their legacy and acquired operations…but that’s at least another year away (allowing time for the integration).
Assuming sales continue to underperform, cash flow will be too big of an issue in another year’s time, which will then result in cuts in capex (they’ve already scaled back expansion), keeping them from making those required store investments.
What’s kept them afloat over the past ten years has been the strong industry fundamentals. However, in the last few months we’ve seen increasing evidence of slowing sales throughout the industry, including some disappointing numbers by both Walgreens and CVS during December.
I expect further retrenchment is likely…although it may need to be even more aggressive and exit larger, even profitable, West Coast markets to generate some cash flow to keep its East Coast ops afloat.
Rite Aid investors may want to sell at $2.11 and get out while they can.
While Walgreens and CVS are upgrading their store size, convenience and product selection, Rite Aid expansion was mainly the acquisition of smaller stores with minimal changes for the consumers. They really have no competitive advantage. And in order to upgrade they will need cash flow which they don’t have. They may want to sell more stores than just those in Vegas and use that capital to revamp their current stores to stay competitive in the markets where they exist.
As far as Walgreens’ and CVS’ numbers being disappointing in Q4 of 2007, that’s probably not much different than same store sales last Holiday Season. There is an inherent drop in Drug during that period, especially with the increase of online sales for cards, wrapping paper, etc.
Having tracked Rite Aid “deals” for several years, over the past year, as a consumer, there hasn’t been much to draw me there. Walgreens has done a better job by far of having attractive stores, deals, rebates, etc (no CVS in my area).
Unless you’re paying cash for the prescription or you really love your pharmacist, when stores like CVS offer things like Extra Care Bucks and other promotions, it makes it easy to skip Rite Aid. The prices are higher, and some of the stores are really run down.
CVS/Walgreens on the other hand has done a good job of offering clean stores and no hassle deals. I have a newsletter with 4000 people subscribed, dedicated to what’s on sale at CVS…I’ve never even had a request from a single person for a similar offering for Rite Aid.
Personally as a shopper, I find Rite Aid promotions and ads not worth the time. If they left my market, I wouldn’t miss them much. It comes as no surprise to me that they are getting beat up on by competitors.
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Rite Aid is around $2.11 today. It was around $5.75 a year ago. The company told investors that it would lose money for a while before the acquisitions’ integrations are complete. Rite Aid made a giant risky bet: that quick growth through acquisition would pay off in the long run. Unfortunately, implementation issues can torpedo a terrific strategy. Getting out of a money-losing market isn’t a bad idea, especially if the assets can be sold at a good price.
With more retailers focusing on the drug business and more insurance companies focusing on cutting costs for prescriptions, Rite Aid should reevaluate its strategy. The stores are not laid out for an easy convenience stop and the convenience selection is poor at best. I would continue to liquidate the underperforming stores and focus on markets where it is strong. The focus should be on the local community and building relationships with its neighborhoods; partnering with schools and community events and let its customer base know they make house calls.
It is important to note that this is only 27 stores in a specific market. However, patient prescriptions are the lifeblood of this industry. We cannot forget the impact that the $4 generic prescription being offered by Target and Wal-Mart is having on the industry and what this means for the rest of the competitors in this category. Acquisitions are difficult pills to swallow. 2008 will be the forecaster of the success or failure of this effort.
I don’t doubt Rite Aid can get through the integration of Eckerd. I do doubt that they will be able to improve sales, profits, cash flow and make any sizable cuts in its huge debt load. To do that, they need to make significant store level investments throughout their legacy and acquired operations…but that’s at least another year away (allowing time for the integration).
Assuming sales continue to underperform, cash flow will be too big of an issue in another year’s time, which will then result in cuts in capex (they’ve already scaled back expansion), keeping them from making those required store investments.
What’s kept them afloat over the past ten years has been the strong industry fundamentals. However, in the last few months we’ve seen increasing evidence of slowing sales throughout the industry, including some disappointing numbers by both Walgreens and CVS during December.
I expect further retrenchment is likely…although it may need to be even more aggressive and exit larger, even profitable, West Coast markets to generate some cash flow to keep its East Coast ops afloat.
Rite Aid investors may want to sell at $2.11 and get out while they can.
While Walgreens and CVS are upgrading their store size, convenience and product selection, Rite Aid expansion was mainly the acquisition of smaller stores with minimal changes for the consumers. They really have no competitive advantage. And in order to upgrade they will need cash flow which they don’t have. They may want to sell more stores than just those in Vegas and use that capital to revamp their current stores to stay competitive in the markets where they exist.
As far as Walgreens’ and CVS’ numbers being disappointing in Q4 of 2007, that’s probably not much different than same store sales last Holiday Season. There is an inherent drop in Drug during that period, especially with the increase of online sales for cards, wrapping paper, etc.
Having tracked Rite Aid “deals” for several years, over the past year, as a consumer, there hasn’t been much to draw me there. Walgreens has done a better job by far of having attractive stores, deals, rebates, etc (no CVS in my area).
Unless you’re paying cash for the prescription or you really love your pharmacist, when stores like CVS offer things like Extra Care Bucks and other promotions, it makes it easy to skip Rite Aid. The prices are higher, and some of the stores are really run down.
CVS/Walgreens on the other hand has done a good job of offering clean stores and no hassle deals. I have a newsletter with 4000 people subscribed, dedicated to what’s on sale at CVS…I’ve never even had a request from a single person for a similar offering for Rite Aid.
Personally as a shopper, I find Rite Aid promotions and ads not worth the time. If they left my market, I wouldn’t miss them much. It comes as no surprise to me that they are getting beat up on by competitors.