Rite Aid making right moves, now it must deliver...

Outlook

April 16, 2000|By Amanda J. Crawford

Rite Aid making right moves, now it must deliver

Troubled chain has name, know-how and $640 million

Last week, Rite Aid Corp. announced that it received a $1 billion credit line from lenders, staving off bankruptcy and giving the troubled Camp Hill, Pa., drugstore chain two years to restore its financial health.

After using $360 million for refinancing expenses and to repay other debt, the company has $640 million to support its turnaround plan.

Last year, Rite Aid was forced to restate three years of earnings downward by $500 million after the Securities and Exchange Commission began investigating the company's accounting practices. Its chairman was forced to resign; its auditor quit; and its stock price plunged. Its recent inability to sell its PCS Health System subsidiary left Rite Aid with few options as it faced $1.6 billion in debt coming due in November.

Though the refinancing came at the cost of higher interest rates on some of its borrowing and substantial dilution for its stockholders, the credit line has been seen by some as a vote of confidence in the company's new management team, led by former grocery chain executive Bob Miller.

What does Rite Aid have to do to recover? What are its prospects?

Glenn S. Curtis

Equity analyst, InsiderTrader.com, New York

From the perspective of investors, I think Rite Aid will have to prove that it can turn in consistent same-store sales growth and improve its efforts at the store level, particularly with front-end sales. Rite Aid is a great company with a solid history and a good name. But, on the other hand, it has also had to deal with problems on the investor relations front as well as the ability to deal with the growing competition.

The banks are at this point making a big bet that Rite Aid will be able to turn things around. We think that the financing that the company has arranged should certainly allow management time to get things back on track, but they will have to deliver on the earnings front.

Brian L. Eisenbarth

Portfolio manager, Collins & Co. LLC, Larkspur, Calif.

The first thing they have to do is get their books cleaned up, which I think they are well on the way of doing. There has been a lot of psychological damage to investors. Accounting restatements are one of the hardest things to come back from since it destroys credibility on Wall Street.

The first step is to replace the people that put the company in that situation, and they've done that. They're pretty good managers and they understand the industry very well.

I think the prospects are good. They've reformatted a lot of stores. But the way they've done it, there are aisles going in strange angles and it's kind of hard to find things. I haven't received a lot of positive feedback from people I've talked to about the new stores. The new people will be addressing this. They do have good locations and a pretty solid store base, so the infrastructure is there. It is just a matter of changing things around to be more shopper-friendly.

They are now addressing their financial situation.

The company got itself into a tough financial situation with their debt and the acquisitions they made. The debt was becoming a big burden for them. The interest they were paying on their debt was cutting into their financial flexibility. They didn't have a lot of room there because the cash the company is generating is being completely consumed by interest charges. What's left over is what they have to plow back into the company and fix up their stores and make investments into their store base. They needed some wiggle room, which is why they got the line of credit.

I think that it is not going to be an overnight success, but I think the new management team understands what's ahead of them and they are making the right moves.

Philip J. Muldoon

Analyst, McDonald Investments Inc., Cleveland

The building blocks for Rite Aid to recover are there. The business it is in is good. They have major presence in the aggregate and also in regional markets. They have a lot of new stores that should be able to be utilized to take advantage of what is going on in the aggregate.

The question is, how big is the hole dug by the former management of this company? If it's too deep, even if these guys are good managers, it might be too much for them to recover from.

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