Drug chain turns the corner and market takes note RITE AID'S RIGHT STUFF

November 17, 1994|By Jay Hancock | Jay Hancock,Sun Staff Writer

A year matters. As 1993 ended, Wall Street saw Rite Aid Corp. as a dowdy drug chain, battered by health care cost-cutters on one side and such mega-discounters as Wal-Mart and Drug Emporium on the other.

Since then, Rite Aid has closed bad stores, repurchased stock, redesigned its selling floor, sold nondrug businesses, improved inventory computers and set up a division that helps insurers manage drug costs.

The book on Rite Aid now: a progressive beneficiary of health care change with top sales technology and great real estate.

"We're very positive" on the company, said Richard N. Nelson, who follows Rite Aid for Chicago-based Duff & Phelps Investment Research.

So are other investors. Eleven months ago Rite Aid stock fetched $15.25 a share. Yesterday it closed at $23.50.

So is Rite Aid's management. "We have probably never been more upbeat in the company at any time in the last five years," company President Martin L. Grass said yesterday. He spoke at a lunch sponsored by the Baltimore Security Analysts Society.

Lately, Rite Aid has posted its best store-for-store sales results in years. Revenue in stores open for at least a year rose by 8.4 percent in September and 8 percent in October -- at a time when prices have barely budged.

Pharmacy contracts with health maintenance organizations have helped to pull more people into Rite Aid stores, Mr. Grass said. And improved merchandise display and selection are spurring customers to spend more on nonpharmacy goods, he added.

Rite Aid, based in Camp Hill, Pa., has cleared its aisles of cluttering racks, is offering one-hour photo finishing and stocking more diagnostic tests, food and drink and designer cosmetics. Within three years it hopes to convert 900 of its 2,500 stores to a bigger, 9,600-square-foot model with wider corridors and a separate waiting area for pharmacy customers.

And by next summer, most stores should have computerized reordering systems that keep hot merchandise on the shelves.

"We think we have all the technology in place to become the most efficient company in terms of SG&A [operating costs] . . . but more importantly, in terms of sales," Mr. Grass said.

Rite Aid recently sold its Sera-Tec biologicals subsidiary and hopes to sell its ADAP auto parts chain, its Encore book chain and Concord Custom Cleaners by the end of the year, Mr. Grass said, deriving more than $125 million.

"We've now got the business focused entirely on the drug store business, which is what we do best," he said.

Although health insurers and employers are pushing down profit margins on prescription drugs, Rite Aid's broad store network should continue to help it land "managed care" pharmacy contracts, he said. That's an advantage that such competitors as Wal-Mart and supermarkets, with stores spread more thinly, don't have, said Mr. Nelson.

Rite Aid's most promising area for added profits in the next few years is its Eagle Managed Care unit, which is intended to help HMOs track and control drug spending, Mr. Grass said.

In the future, he said, "I don't think you can exist just sitting there pouring pills into bottles, filling prescriptions for people."

In its most recent quarter, Rite Aid earned 32 cents a share, up from 25 cents last year. Analysts' projections of $1.65 in per-share earnings for this year are on-target, Mr. Grass said.

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