Driving profitable sales on road back to black

Perhaps the greatest challenge facing Rite Aid is the recession as the company focuses on growing profitable sales at both the front-end and pharmacy.

Rite Aid’s road back to black still is long and pocked with challenges, but it’s by no means tenuous or uncertain. That’s because Rite Aid, under the tutelage of chairman Mary Sammons, president and CEO John Standley, and the team behind them, continues to align its initiatives against a future, singular objective.

And right now that singular objective is to grow profitable sales.

Perhaps the greatest challenge facing Rite Aid today is the economic recession. “While we believe that the company should be successful in driving a turnaround over the longer term—possibly with the aid of some store divestitures to free up capital to invest in the store base—we believe the near term could be bumpy due to the impact of the economy and the considerable amount of work to be done on executing the strategic plan,” noted J.P. Morgan analyst Lisa Gill in a June 24 note. Even as front-end sales begin to show improvement, Gill noted, pharmacy sales will be facing tough comparisons in the year ahead, as last year’s H1N1 scare cycles through and with an increase in 90-day prescriptions, which now make up 7% of Rite Aid’s prescription base, Gill noted.

“It hasn’t been easy,” Sammons wrote in an open letter to shareholders in May. “[In fiscal 2010] we filled more prescriptions in comparable stores, but declining pharmacy margins hampered our results. Our nonprescription sales softened as customers continued to cut back on spending in a weak economy with high unemployment.”

Rite Aid reported a net loss of 59 cents per diluted share for fiscal 2010, and projected a net loss per diluted share of between 41 cents and 65 cents at the end of fiscal 2011 on sales of between $25.2 billion and $25.6 billion, with same-store sales ranging between a decrease of 1% to an increase of 1%, as compared with fiscal 2010.

But going forward, there are several initiatives Rite Aid has put into play this calendar year to help the chain stay the course toward profitable sales, starting with the chainwide implementation of the company’s differentiated customer loyalty program, wellness+, a program that ought to appeal to value-conscious consumers (see story) ;Rite Aid’s foray into click-and-counsel pharmacy services (see story); and the company’s focus on immunization services, fielding 7,000 immunizing pharmacists across 3,000 of its more than 4,000 stores (see story) .

Another focus for Rite Aid has been its segmentation initiative, which involves grouping stores with similar characteristics and creating a unique business plan for each group, and represents pretty significant sales growth opportunities. In the past quarter, Rite Aid expanded its test-market merchandising plan for low-volume stores across 34 locations, and that test marketing will be enhanced by the implementation of wellness+, which can tease out the number of Rite Aid customers who either shop the front-end but not the pharmacy or vice versa, and then successfully reach those consumers with attractive cross promotions.

“That’s where we think wellness+ as it matures [over the] next year really will give us the opportunity to get at some of the customers who are maybe front-end customer[s] that don’t use our pharmacy,” Standley told analysts in June. “We’ve also been working on some merchandising ideas for some more health-and-wellness-focused stores, and we will talk about that more as it gets a little more wind underneath its sails.”

BY THE NUMBERSRite Aid*For fiscal year 2010 ended Feb. 27Source: Company reports
2009 sales*$25.7 billion
No. of stores4,780
%of sales from Rx67.9%

An additional initiative designed to help deliver value to today’s more value-conscious consumer is Rite Aid’s revamping of its private-label offerings. Rite Aid began implementing its new private-brand architecture in the past quarter. The new store-brand offering includes the following brands—Rite Aid Pharmacy for health products, Renewal for beauty, Pantry for food and certain consumables, Home for household goods, Tuga-boos for baby and Simplify as the chain’s new price-fighter brand. “All of our existing private-brand products, with a few exceptions, will be migrated over time to these new brands with new, more contemporary packaging,” Standley said. “This brand architecture, combined with strong promotional support, good price positioning and continued development of new items, will help us grow private-brand sales and meet the needs of today’s consumer.”

Rite Aid converted 60 items in the past quarter and plans to have some 1,000 items converted by the end of fiscal 2011, representing almost one-third of its private-label SKUs. During fiscal first quarter 2011, private-brand penetration for the company increased to 15.4% from 14.9% in the comparable period last year.

And Rite Aid continues to manage the costs of doing business effectively. For example, at the close of the company’s fiscal first quarter on June 23, distribution costs as a percentage of sales dropped to 1.44%, the lowest level over the past two years. By comparison, at the end of first quarter 2009 (June 2008), distribution costs as a percentage of sales totaled 1.79%. Rite Aid also continues to manage its looming debt load successfully. The chain refinanced $2.5 billion in debt that had been scheduled to become due in September 2010, pushing any significant debt maturities into calendar 2012. And more recently, Rite Aid completed another round of refinancing, taking an as-yet-untapped revolving credit facility of $1.2 billion due in 2012, and parlaying that into a $1.2 billion credit facility that matures on April 18, 2014, on more favorable terms.

Rite Aid’s liquidity totaled $945 million at the end of fiscal 2010, however, and the company generated free cash flow of $230 million that subsequently was placed toward debt reduction. That marked the first time Rite Aid generated positive cash flow since its acquisition of Brooks/Eckerd. Rite Aid also has continued to add to that positive cash flow in first quarter 2011. “Our liquidity is the strongest it has been in several years, with more than $1.2 billion at quarter end,” Sammons told analysts in June. “This enables us to continue to withstand an economy that doesn’t appear to be headed for a solid recovery any time soon. At the same time, the strong liquidity position allows us to continue to invest in initiatives designed to grow our business.”

And while Rite Aid has been the recipient of its second warning letter from the New York Stock Exchange for trading at less than $1 over a 30-day period, Rite Aid last year successfully regained NYSE compliance without having to resort to a reverse stock split, and has until the end of January to regain NYSE listing compliance by trading at above $1 for 30 consecutive days. Rite Aid’s board already has approved a reverse stock split, pending shareholder approval, should that become necessary to maintain listing compliance.

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