Rite Aid is clinging to its position as a distant third (behind Walgreen and CVS) in the US retail drugstore business. The struggling company runs nearly 4,600 drugstores in some 30 states and the District of Columbia. Rite Aid stores fill prescriptions (about two-thirds of sales) and sell health and beauty aids, convenience foods, greeting cards, and more, including some 3,000 Rite Aid brand private-label products. About 60% of all Rite Aid stores are freestanding and more than half have drive-through pharmacies. Rite Aid acquired more than 1,850 Brooks and Eckerd drugstores from Canada's Jean Coutu Group for about $4 billion, which saddled the company with plenty of debt and some redundant stores.
Rite Aid operates stores in 31 states and the District of Columbia. Its largest markets are New York, California, and Pennsylvania, home to more than a third of its drugstores.
In addition to its retail pharmacy chain, Rite Aid operates more than 2,200 GNC stores-within-Rite Aid-stores that sell vitamins and mineral supplements through a partnership with General Nutrition Companies, Inc. Rite Aid, which considers the in-store GNC departments to be a differentiator between it and its larger rivals, is contractually obligated to open at least 300 more GNC LiveWell stores-within-stores by the end of 2019. The chain also offers health care services, including flu shots, other immunizations, and diabetes management consultants, at its drugstores.
Rite Aid's sales grew by less than 1% in fiscal 2014 (ended February) versus the prior year, to $25.5 billion on an increase in pharmacy sales, partially offset by a decrease in sales of front-end merchandise. The rise in pharmacy sales was driven primarily by brand drug price inflation, partially offset by decrease in same-store prescription count, negative impact from generic introductions, and continued reimbursement rate pressures.
Despite the relatively flat sales, net income more than doubled to $249 million on decreasing expenses, including lease termination and impairment charges. Notably, fiscal 2014 marked the second consecutive year of profitability for the chain after years in the red after acquiring the Brooks and Eckerd stores back in 2007. The return to profitability came after years of closing redundant and underperforming stores and layoffs. The years of sustained losses left Rite Aid short on cash to make improvements to stores or to move them to better locations. Now that the company has returned to profitability, it's in a better position to compete with rivals Walgreen and CVS after falling far behind them. Net cash from operating activities declined to about $702 million in 2014 from $820 million the prior year.
Rite Aid's strategy for fiscal 2015 (ends February) is to accelerate its transformation into a neighborhood destination for health and wellness. (Rivals Walgreen and CVS are following the same path.) In fiscal 2014 the chain converted more than 400 stores to its Wellness format, which brought the total number of Wellness stores to 1,215 by the end of the year. Going forward, another 450 Wellness remodels are slated for fiscal 2015. Indeed, Rite Aid is remodeling hundreds of stores and stepping up marketing efforts to lure shoppers with its Wellness loyalty card and pushing flu shots during the second half of the year. The loyalty card program (launched in 2010) is the first national marketing campaign that Rite Aid has undertaken in some 10 years.
Also in fiscal 2014, Rite Aid expanded its agreement with drug distributor McKesson for pharmaceutical purchasing and distribution. As part of a new five-year agreement, McKesson assumed responsibility for purchasing all brand and generic medications dispensed in Rite Aid stores, as well as delivering them to the chain's 4,600 locations. Rite Aid expects to realize greater purchasing and distribution efficiencies and to generate additional cash flow from the agreement to fuel its long-term growth plans.
Mergers and Acquisitions
In April 2014, Rite Aid acquired Boston-based Health Dialog, a provider of health coaching, shared decision making tools and health care analytics, from Bupa, a London based international health care services group. Health Dialog will operate as a 100% owned subsidiary of Rite Aid. The purchase furthered Rite Aid's goal of advancing its Health Alliance program. Also in April, the company bought Houston-based RediClinic, an operator of 30 retail clinics in the greater Houston, Austin, and San Antonio areas, to further its health and wellness strategy. Rite Aid paid a combined $86 million and assumed debt of $2.5 million related to the two purchases.