Jim,
I had a long respond earlier this morning but the SI was down for a while and it got lost.
Recollection of earlier post: I said that I'm not ready to invest, as I want to visit stores and see if anything had changed. I wanted to see more employees, foot traffic, and judge people's moral.
I just came back from my ~1hr visit to three stores. The first one messy, as a shipment just arrived --the truck was actually still in the parking lot. The second had some empty front-shelves, with some that had open boxes next to them (re-shelving?). The third one had no problem. In all cases I felt there was enough employees, unlike last time where there were very few.
The time in Los Angeles was from 12:30-1:30PM, ~75°F weather.
I talked to one employee (for over 10 minutes), who had been working for RAD for 13 years. He said he believes in the company, and although some are not all happy about their jobs, many of them will stay working for a long time, as it isn't that much different at other places.
He said top execs are going from store to store, but it hadn't changed from previous times. He said pharmacy sales are not strictly affected by increase in prices (something I used to believe, with the increase going to manufacturers rather than RAD), but because of the cold season and new drugs.
The only negative I had to say was that X-mas items occupied a few long shelves, but then I realized that the holiday just passed, and the 50%-off items are needed to remain for a while to clear the inventory.
Also, the parking lot was about half full. This can be for two possible reasons: 1) The time of Day, and 2) More employees/more productive, which will move customers faster, with fewer cars in the lot.
One important thing I was told is that there's barely any overtime, when before they had many. So expect employment cost to go down. Since overtime was 1.5 of pay, this should make for a strong reduction in payroll.
Overall, the stores are doing just as before, only the debt level is a concern. And debt level is less of a concern because: 1) RAD will not suffer (at least not as others) in an economic slow down, so even if the credit market is tightening, I believe it's in general and not for companies such as RAD, and; 2) I think Leonard Green will not disappoint.
Conclusion: I believe RAD will find it easier to refinance/roll-over their debt, and has a small chance of BK thanks to the 1) strong mangement that was put in place, 2) a healthy employee moral, 3) clever reduction in cost, and a 4) slow economy. What they need is time, and I believe that in their last filing (proxy), they said many of the debt is 2002. I think it's enough, but I have to read more. As to the price already going up, it still OK, if you belive in their long term prospects.
This is a 2-3 year play. I'll have to visit the stores at other hours of the day, but I believe my conclusion will not deviate much. Rite Aid closed at 2.625, up 0.25.
Good day,
Marty
PS
You pointed out the large short interest on the stock, but I believe much of it is to hedge against convertible (and other) debt positions. I may be wrong, as always. |
