Rite Aid ends year on right path, but still playing catch-up in pharmacy

Drug Store News, April 11, 2005 by Michael Johnsen

NEW YORK -- As Rite Aid executives prepared for its year-end earnings call with securities analysts April 7, the company was expected to finish its second consecutive year in the black, with earnings coming in at the low end of its projections of 3 cents per share. The news reinforces the message to Wall Street that last year's performance was no anomaly for the nation's third-largest drug retailer and that Rite Aid's current management team has the chain moving down the right path.

But for all the time and toil the chain has invested down the road to renewed profitability, in a sense the road has brought Rite Aid to the base of a mountain. You need to find Everest before you can reach the summit. In other words, Rite Aid's work isn't done yet.

To be sure, Rite Aid has come quite a ways from its days when many analysts had the company on bankruptcy watch. In that time, Rite Aid:

* successfully managed its debt to more agreeable terms.

* reinvigorated its workforce.

* cemented relationships with key vendor partners.

* streamlined store operations.

But for all of this, the chain still significantly lags behind both Walgreens and CVS in pharmacy comp numbers.

Rite Aid clocked a 1.6 percent increase in pharmacy same-store sales for the year, compared with 12.5 percent for Walgreens and 5.9 percent for CVS. And while that's not entirely an apples-to-apples comparison--Rite Aids fiscal year ended Feb. 26, compared with Aug. 31, for Walgreens and Jan. 1 for CVS--it's still representative of how far Rite Aid needs to go before it closes the gap, which remains the company's most significant challenge. And getting there is not going to be easy.

For starters, its not as if its competitors are content to rest on their laurels. Actually, the competition has intensified in many of Rite Aid's core markets, as both CVS and Brooks work to reinvigorate sales and long-term growth in the Eckerd stores each chain acquired last year.

And both CVS and Walgreens continue to pursue significant new-store opening programs. Walgreens in November entered Pittsburgh, a market it has marked for major expansion, and recently announced that it would look this year to open its first stores in Albany, N.Y., as well as in Montana and West Virginia. In all, Walgreens plans to add 450 stores in 2005. CVS, which re-entered Southern California and opened its first stores in Minneapolis last year, will continue to focus on its new markets, which also include Chicago, Las Vegas, Arizona, Florida and Texas, and plans to add about 250 new stores, including roughly 100 net new stores.

Meanwhile, Rite Aid's strategy has been to shore up its core markets--principally Southern California and the Eastern Seaboard from Washington to New York--with new-store growth and targeted merchandising/marketing programs. With a CapEx number coming in around $300 million, Rite Aid's plan was only to add about 40 new stores last year, with plans to ramp up to as many as 200 new stores over the next couple of years.

The chain's Customer World prototype that debuted in December in Sellersburg, Ind., represents much of the latest thinking in drug store design, with clear sight lines to the pharmacy counter, beauty positioned prominently--in this case, in the center of the store--and easily accessible convenience food items. And that ought to help it capture some return visits, especially once those stores start opening on a larger scale.

Rite Aid's Living More senior loyalty card program, ought to resonate well with one of chain drug's core shoppers. And a test market of Hispanic merchandising in Philadelphia and Southern California, which has been going well, according to Rite Aid, will help the chain reach another highly sought after demographic (for more details, see "Rite Aid tests Hispanic store concept" in the March 7 issue of Drug Store News).

While initiatives such as these may help to fend off competition in Rite Aid's core markets, the chain's mail order flank remains exposed. Last year's announcement by the United Auto Workers Union to move toward mandatory mail significantly curtailed Rite Aid's performance in central America, enough so that the chain was compelled to restate some of its earnings guidance for fiscal 2005.

For this reason, Rite Aid has entertained moving back into the PBM business, similar to what Walgreens and CVS have done. The strategy doesn't solve the mandatory mail order problem, but it does mitigate the problem: The chain can offer the savings on chronic medicines through the mail, but still capture that consumer, hopefully, for acute medicines in-store. "Even though we would not have the critical mass of lives that a large PBM would have, if we target our efforts really toward markets that are strategically important for us, there are a lot of opportunities," Mary Sammons, Rite Aid president and chief executive officer, has noted.