NEW YORK Divesting itself of its West Coast store base certainly would place Rite Aid in a much more favorable position with regard to its debt load, merchandising and marketing synergies and supply chain efficiencies. So why not divest?
The question really is, can Rite Aid walk away from a baby-boomer-rich market in which it has not only invested heavily in the past few years but also represents 18% of its overall store base and 28.6% of its overall square-footage. And that answer may very well swing “no” unless there are an awful lot of zeros within any offer.
Historically, Rite Aid has suggested that the price has got to be so good that they can’t responsibly walk away. And that’s because Rite Aid is, in poker parlance, pot-committed to its West Coast stake. The chain has invested enough into its Pacific-Coast stores that the valuation would have to be sweet enough that the offer becomes their return on that investment.
Further, the deal would likewise have to more than make up for the smaller buying heft a post-divestiture Rite Aid would wield.
“The West Coast is a very strong contributor to our overall results,” commented Mary Sammons, chairman, then-president and CEO, during a conference call with analysts held around the time the CVS/Longs deal had been announced. “[The West Coast] is also a strong contributor to … scale, our ability to really have greater capacity to buy better and do what we do and leverage expenses,” she said. “We have strong market shares out there. We've invested a lot of dollars out there … frankly.”
CVS may be eliminated as a potential suitor given its acquisitions along the West Coast, namely Longs Drug, but Walgreens, Walmart and Tesco have all been identified by analysts as potential suitors — Walgreens in an effort to better combat CVS, Walmart because it’s looking to expand through smaller retail boxes in a real-estate saturated market and Tesco given its desires to expand significantly into the U.S. market.
Morgan Stanley analyst Mark Wiltamuth suggested that the West Coast operations may be a sound divestiture for Rite Aid given the fact that the stores are, in his belief “stronger profit generators” as compared to the chain’s East Coast operations in an April 2009 research note.