Rite Aid turns profit corner, targets store growth

Drug Store News, July 19, 2004 by Michael Johnsen

LOS ANGELES -- It was almost fitting that the clouds parted on the day of Rite Aid's annual meeting, held here for the first time, making for a sunny day after a week-long spell of California-style June gloom.

The chain seems firmly back in the profit saddle this year, following through on its first profitable year in the past five years with a profit-bearing first quarter of fiscal 2005, which started in March.

"It was a great year for us in fiscal 2004 because we returned to profitability," Mary Sammons, Rite Aid's president and chief executive officer, told shareholders last month. "We really have turned our business around, and now we can focus on our future and what we can do to really grow our company."

Indeed, in fiscal 2005, Rite Aid embarks on two long-dormant initiatives: a new-store development program and a national advertising campaign that will go a long way toward branding Rite Aid as a go-to pharmacy in its core markets.

And though that new-store development program will concentrate only on Rite Aid's core markets and represents far less of a capital commitment than either Walgreens or CVS has made, it still reflects a giant leap forward for the chain, compared with five years ago.

"We're ready to focus our attention on growth again [with] new-store development, Sammons said. "We haven't done a lot of that over the past four and a half years."

As a matter of fact, Rite Aid has opened a total of 98 new stores in the past five years, and 77 of those new-store openings took place in fiscal 2000 when the current management team was first taking hold of the company's reins. Conversely, Rite Aid plans to open more than 240 new stores in the next three years.

The fact that the chain has had no significant new-store growth--net store totals have declined steadily since fiscal 2000 as the chain has closed underperforming locations--speaks even greater volumes to Rite Aid's ability to hold its own in competing on the front end. "When we look at our comp sales, it's a real testimony to our strategies because we did not have a lot of new stores," Sammons acknowledged. "Now, being able to open new stores again is further motivation to our team, as well as a signal to everybody that we're here for the future."

However, Rite Aid remains highly leveraged despite a refinancing deal last year that pushed most of the chain's debt obligations beyond 2008, and that begs the question: Do you funnel proceeds back into the business or pay down the debt load?

"We are all the time [looking to] balance this issue of paying down debt and investing back into the company," Sammons said, responding to a shareholder's question.

"The leverage issue is certainly a substantial one for us," added John Standley, who wears three hats at Rite Aid: senior executive vice president, chief administrative officer and chief financial officer. "Continued deleveraging of the company is important to us because of real estate issues and other financing issues." Standley made the point that the company cannot engage in a more aggressive new-store program without making a more substantial commitment to real estate deals--deals that tie up capital long before a new store actually breaks ground. However, managing that debt load has to be balanced against the need to maintain a fresh store base and "our need to continue the renovation program, to remodel stores [in order] to grow the top line and to grow the number of stores in our critical markets," Standley concluded.

For fiscal 2005, Rite Aid adjusted its capital expenditure projection to a range falling between $275 million and $325 million, representing as many as 40 new stores this year and 175 remodels. "We're focusing our dollars on store growth and store improvement ... but we're also making financial commitments to prescription file buys [and pharmacy technology]," Sammons said.

Coupled with a rejuvenated new-store pipeline, Rite Aid also is reintroducing its "With us it's personal" slogan to the television airwaves in a significant fashion--reaching 33 Rite Aid markets this fall. (See the related story on page 56.)

"The marketing campaign is going to include a combination of outdoor, circular ads, point-of-sale [signage] in store, health brochures and TV," Sammons noted. "It's fully integrated, and it's all going to be saying the same thing. This campaign is really geared at looking at [the drug store shopping experience] from the customer's point of view and saying [Rite Aid] is here to help."

Front-store business is Rite Aid's strength

According to Rite Aid market data from ACNielsen, the No. 3 drug store chain increased market share in all major segments of its front-end business, including beauty, health, general merchandise, seasonal and consumables. "Our front-end sales, which are a little under 40 percent of our total revenues, [are] right up there with the industry leaders," Sammons said. "[That's a really] significant accomplishment for our company, as we have got more and more customers into the front end of our stores, increasing customer counts, as well as transactions."