Rite Aid CEO: With Big Debt Woes At Bay,
Focus On Sales
By DINAH WISENBERG BRIN
Of DOW JONES NEWSWIRES
PHILADELPHIA -- Drugstore chain Rite Aid Corp. (RAD), which recently
achieved a turnaround milestone by refinancing its crippling debt, is on the
road to health, focusing now on the basics of boosting sales and cash flow, its
chairman and chief executive told Dow Jones Newswires on Tuesday.
The Camp Hill, Pa., company, the nation's third-largest pharmacy chain in
terms of revenues, also expects to settle within a year various federal
investigations of activities, occurring under previous management, with no
material affect on the business, CEO Robert G. Miller said.
"The refinancing really took the question away, 'Can Rite Aid survive?' Now
it's just really, 'How successful can we be?"' said Miller, whom Rite Aid
tapped in December 1999 after an accounting scandal and aggressive
expansion under previous management battered the stock and created $6.6
billion in debt.
With the refinancing and a new $500 million revolving-credit facility in place,
Rite Aid fixed its balance sheet and has plenty of money to run the business,
pay interest and invest in itself, according to the CEO.
"We have the flexibility to do whatever we need to run this company," he said.
In late June, Rite Aid finished refinancing $3 billion in debt, retiring most of the
debt due in 2002 and leaving it with $3.7 billion in debt. The deal gave the
company breathing room - as no major debt will mature before 2005 - and an
extra $200 million to use in its turnaround.
Rite Aid used proceeds from its $1.5 billion sale of PCS Health Systems to
help pay down its debt.
"Today we don't have to worry about whether we have enough cash or
there's a payment coming due in 2002. All those concerns are behind us,"
Miller said.
Sales Take The Spotlight
The company is now focused on "Retail 101" in hopes of boosting sales by
improving the way its stores are run, he said.
Same-store sales are up an average of 10% over the past year, pharmacy
sales have improved, and Rite Aid leads the chain-drugstore industry in
growth of front end, or non-pharmaceutical, sales. But sales per store trail
those of Rite Aid's major rivals, CVS Corp. (CVS) and Walgreen Co.
(WAG), as do earnings before interest, taxes, depreciation and amortization.
Rite Aid has started an employee-rewards program to encourage its
personnel to take good care of customers, offers pay incentives to managers
based on sales and cash flow, and recently issued stock options to managers
and pharmacists.
"It's all geared toward running better stores" and making sure associates "feel
good," Miller said.
Rite Aid was cash-flow positive last quarter and should be cash-flow positive
for its current fiscal year, ending March 2002, Miller said. The company
probably will give further financial guidance to investors in the near future, but
isn't doing so yet.
Analysts expect the company to post a loss of 14 cents a share for the second
quarter, compared with a $1.87 a share loss in the year-earlier quarter; and
they expect a loss of 39 cents a share for 2002, which compares with a loss
of $5.65 a share for fiscal 2001, or $5.15 a share from continuing operations.
Rite Aid is cooperating with three ongoing federal government investigations
related to activities that occurred under previous management, and expects all
three to be settled within a year, Miller said.
The CEO expects a "nonmaterial" cash settlement in the next few months
stemming from a U.S. Attorney's Office probe, but Miller doesn't foresee any
criminal charges against the company.
Miller also expects "nothing negative to the company" from a U.S. Securities
and Exchange Commission investigation.
The U.S. Department of Labor has been investigating Rite Aid's 401(k) plan,
which allowed employees to buy the company's common stock; purchases of
the stock were suspended in October 1999, the same month Rite Aid
announced it had identified accounting irregularities and former top
management resigned, according to an SEC filing.
Miller also expects a settlement to arise from that probe, and that insurance
will cover it.
The accounting scandal that prompted the government probes and
management turnover also forced Rite Aid to remove a combined $1 billion
from 1998 and 1999 earnings. The company has proposed a settlement for a
related class-action shareholder lawsuit.
In an SEC filing this week related to the recent refinancing, Rite Aid said its
debt obligations will continue to hurt operations and that it lacks enough cash
flow to service its debt. However, in the interview Tuesday, CEO Miller
offered assurances that the company is on solid footing.
"We feel very comfortable that we have fixed the balance sheet. We have
plenty of cash to run the business," he said, adding that banks recently agreed
to lend the company $1.9 billion. By the end of its current fiscal year, the
company expects to generate enough cash flow to cover fixed costs, interest
and capital expenditures, a spokeswoman said.
Rite Aid plans to spend $150 million on capital improvements this fiscal year,
when it expects to open six new stores, replace 25 stores, and do 75 major
remodelings and 200 minor remodeling jobs, Miller said. The company also
plans to buy $30 million in prescription files from other pharmacies.
The turnaround, which has involved closing 163 underperforming stores, is
aided by the fact that drugstores are the fastest growing segment of the retail
sector, Miller said. Pharmaceuticals represent 60% of Rite Aid's business,
and U.S. prescription drug sales are forecast to grow 75% over the next five
years since more drugs are in the Food and Drug Administration approval
pipeline than at any time in history, he said.
Rather than look for another major landmark on the road to recovery,
investors should look for quarterly progress at Rite Aid, according to Miller,
former chief operating officer at Kroger Co. (KR) and former CEO of Fred
Meyer Inc., a food and drug retailer.
"This company is now a very viable company," Miller said, "and our job is just
to continue to improve."
-By Dinah Wisenberg Brin, Dow Jones Newswires; 215-656-8285;
dinah.brin@dowjones.com |
