Rite Aid might sell stores in West

Analysts don't expect wider sell-off by troubled chain

August 27, 1999|By Lorraine Mirabella | Lorraine Mirabella,SUN STAFF

Rite Aid Corp., beset by rising costs and falling stock prices, will likely try to sell some or all of its West Coast drugstores but is not expected to attempt to shed the entire chain, analysts said yesterday.

Speculation about a possible sale of all or a portion of the Camp Hill, Pa.-based retailer continued yesterday, a day after the company said it was in discussions about "possible corporate transactions."

"If consummated, [the transactions] would be material," the statement said. "There can be no assurance as to the outcome of these discussions."

A Rite Aid spokeswoman said she could not comment beyond the statement, which the company gave as the reason for postponing a Sept. 2 analyst meeting until Sept. 22. Shares of Rite Aid fell $1.50 yesterday, to $21.38, after gaining $3.4375 Wednesday in the wake of the company's statement.

Retail experts said yesterday that the third-largest U.S. drugstore chain, whose shares have lost half of their value in the past six months, is considering selling some or all of the approximately 1,000 drugstores it acquired from Thrifty Payless in December 1996.

Rite Aid had folded the stores in California, Nevada, Washington and Oregon into its empire as a way to move into new markets and continue its strategy of growing through acquisitions.

Many of those stores, all of which have been converted to the Rite Aid name, have not performed well as the retailer failed to retain the former chain's customers or attract new ones, analysts said.

The current talks probably center on those stores, not on a wider sale of the chain, said Mark Millman, president of Lutherville-based Millman Search Group, a national retail consulting firm.

"It's still a very profitable business," Millman said. "They've grown too fast, but I don't think management is ready to throw in the towel. They have a good niche in the East Coast market.

"They took on more than they can handle and are willing to unload stores in the West where they don't have a strong identity and face fierce competition. The best thing for them to do is to unload stores in the markets where they're weakest."

Potential buyers could include any of Rite Aid's main drug rivals, CVS Pharmacy, Walgreen Co. and Eckerd drugstores.

"It would be a good way for other drugstore companies to get bigger," especially those whose name recognition and distribution and marketing systems are well established in the West, Millman said.

Rather than selling all 1,000 of the former Payless stores, Rite Aid is more likely to sell about 250 of the largest stores -- those as large as 40,000 square feet -- that have not performed well, said Eric Bosshard, an analyst with Cleveland-based Midwest Research who follows the company. Those stores are at least twice as large as most of the stores Rite Aid acquired from Thrifty Payless, he said.

"Since they've bought them, they've never figured out how to make the big stores work," Bosshard said. "Those of the more traditional size have put out pretty decent numbers. We're less concerned with that."

Bosshard said a supermarket chain such as Safeway Inc. or Albertson's Inc. is a more likely buyer than any of the big drugstore chains. If that happened, the drugstores would be converted to supermarkets, he said.

A spokeswoman for Safeway said yesterday that she could not comment.

Rite Aid has not always succeeded when it converted other drugstore chains to the Rite Aid name, said Burt Flickinger III, managing director of Reach Marketing, a Westport, Conn.-based retailing consulting firm. For instance, some consumers began shopping at competitors' stores after Rite Aid acquired Katz and Bestoff in the South and changed the name and format of the formerly family-owned drugstore chain.

"Beyond Walgreen, it's hard for anyone to compete effectively as a national drug chain," Flickinger said. "They can get higher financial returns as a multiregional operator as opposed to" a national chain.

Rite Aid, with annual sales of nearly $13 billion and about 3,800 stores in 30 states, has had mostly disappointing financial results this year. In March, the company announced that fiscal fourth-quarter earnings would fall far short of expectations because of higher-than-expected costs of expansion, including greater-than-expected expenses from opening and closing stores and delays in moving from an old distribution center in Pennsylvania to a new one in Perryman, in Harford County.

The company has also blamed disappointing results on costs of acquiring PCS Health Systems Inc., a provider of pharmacy benefit management programs, and other drugstore chains.

Stronger prescription drug sales helped the company post a slightly higher profit -- an increase of about 3 percent -- during its fiscal first quarter, but earnings fell a penny short of Wall Street's expectations.

In June, the company restated earnings for fiscal 1999 and two prior years after federal regulators reviewed its accounting practices related to a spate of acquisitions. Fiscal 1999 earnings were lowered by 9 percent, 1998 earnings were cut by 3.3 percent, and 1997 earnings were raised slightly.

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