Healthier Rite Aid is boost for industry

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It’s time for people in the chain drug industry to take another look at Rite Aid, whose long, painful turnaround has started to gain traction in recent months.

For more than a decade the company has been widely viewed as something of an invalid, a status that resulted from self-inflicted wounds. Financial irregularities in the late 1990s pushed Rite Aid to the bring of bankruptcy, and for a time there were questions as to whether the drug chain would survive intact.

Bob Miller and Mary Sammons, two former Fred Meyer executives, were brought in to cope with the crisis. The duo did a remarkable job saving the patient, upgrading its condition from critical to stable, and ensuring that it remained a significant factor in the marketplace.

The wrongdoing of previous management saddled Rite Aid with a huge debt load that made it difficult for the company to keep pace with Walgreens and CVS/pharmacy, which during the first decade of the new century moved into a class by themselves among the nation’s drug store operators and into the upper echelon of retailers of any kind. For Rite Aid, sales and market share gains were extremely difficult to come by, while the bottom line consisted mostly of a string of huge losses.

Now the situation shows some signs of improvement. Under the direction of John Standley, who succeeded Sammons as president and chief executive officer in September 2008, and chief operating officer Ken Martindale, the company is exhibiting surprising strength as measured by some important retail metrics, including comparable-store sales.
For the four weeks ended October 22 Rite Aid posted a 2.9% sales increase over the prior-year period, building on three consecutive quarters where that number rose.

“We are pleased with the continued improvement in our top-line results,” Standley said after the recent release of Rite Aid’s financial results for the second quarter. “Customers are responding positively to our sales initiatives, including our highly popular and fast-growing wellness+ loyalty program.”

Thus far some 44 million consumers have signed up for the plan, which places a strong emphasis on health and wellness and is designed to bring value and convenience to members. By contrast, CVS/pharmacy’s industry-leading loyalty program includes about 69 million members; Walgreens has yet to introduce its plan.

During the second quarter wellness+ members accounted for 69% of Rite Aid’s front-end sales and 66% of its pharmacy business, according to Standley.

Another area where the drug chain is demonstrating a newfound assertiveness is store design. With the “wellness” prototype that it unveiled earlier this year, the company seeks to increase customer engagement through a high level of personalized service and interactive technology. Among the offerings available to consumers at the outlets are medication therapy management consultations, prescription reminder and refill services, immunizations, product selection support for vitamins and over-the-counter pharmaceuticals, and specially trained pharmacists for diabetes care.

Such initiatives have enabled Rite Aid to put together three consecutive quarters of growth in earnings before interest, taxes, depreciation, amortization and special charges. EBITDA rose 1.7% to $184.3 million during the most recent period.

Executives are keenly aware that, despite all the progress, there’s still a lot more work to do. In a recent presentation at the Imperial Capital Opportunities Conference, Standley and his colleagues singled out several areas for improvement, including bolstering the performance of lower-volume stores, finding greater efficiencies, enchaining private label offerings and providing a better customer experience. And then there’s the debt, which still stands at more than $6 billion.

The challenges are formidable, but at this point Rite Aid appears to be headed in the right direction. Anyone who thinks the chain drug business is well served by healthy competition should be pleased with that development.


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