What’s left for Rite Aid?

Things already hadn’t been looking good for Rite Aid lately and the company’s filing for Chapter 11 bankruptcy protection on Monday—following recent speculation—doesn’t change the picture.

The drug chain and health care services company is awash in debt (approximately $4 billion plus interest) and faces more than 1,600 opioid-related lawsuits.

What’s more, Rite Aid’s financial performance has been further impacted by record inflation; elevated labor costs to retain in-demand pharmacist and corporate talent; declining reimbursement rates from third-party payors; reduced demand for front-end merchandise and COVID vaccines; increased shrink costs that are also impacting the rest of the industry; and the loss of key accounts at PBM Elixir. These headwinds have increased operating costs and decreased revenues.

In addition, Rite Aid’s portfolio is burdened by unprofitable stores that it cannot effectively exit (outside of Chapter 11), and those stores challenge the company’s earnings profile, turnaround initiatives and free cash flow.

And looking at the retail drug store arena, Rite Aid operates in a highly competitive pharma-retail space. Traditional competitors include other—and much bigger—retail drug store chains, like CVS and Walgreens; independent drug stores; supermarkets like Kroger; and mass merchandisers like Walmart and Target. Further, online retailers like Amazon and online pharmacies like Capsule, which have different cost structures, have increased competition.

Related:Rite Aid declares bankruptcy

All of that doesn’t sound good, does it? And those aren’t my words; the previous three paragraphs are all from Rite Aid’s disclosure statement for its Chapter 11 reorganization plan, filed on Monday.

Where does new CEO take Rite Aid from here?

Rite Aid has brought in a new CEO, Jeffrey Stein, who will also serve on its board and as “chief restructuring officer” (aka “turnaround specialist”). That’s all well and good, as the company certainly needs someone to firm up its financial footing. But it troubles me that Rite Aid isn’t being led by someone from with a retail, pharmacy and/or health care background. Maybe someone like that will come later, when and if the company’s finances are shored up.

For the moment, however, it appears Rite Aid is set to become even smaller.

The drug chain now has just over 2,100 stores in 17 states and noted that a big drag on its finances is a “sub-optimal retail footprint,” including unprofitable stores and an inability to get out of poor leases even when stores are closed. In late September, the Wall Street Journal had reported that Rite Aid may close 400 to 500 locations under Chapter 11 as well as divest or shut an uncertain number of stores. How does this help Rite Aid in the longer term? Wasn’t a core problem for Rite Aid that it lacked scale and wasn’t big enough to compete with CVS and Walgreens, with which it was once part of the “big three” U.S. drug chains (with some 4,600 stores)?

Related:Is there a prescription for the big-three drug chains?

The bankruptcy filing and upcoming store rationalization, unsurprisingly, raised a red flag with United Food and Commercial Workers. “As the union that represents more than 10,000 essential Rite Aid workers across the country, the UFCW’s highest priority will always be to defend and protect our hard-working union members," UFCW International President Marc Perrone said in a statement on Rite Aid's Chapter 11 filing. "We will vigorously protect all collective bargaining agreements to remain in place and through the bankruptcy process, where we also will petition the court to have a seat at the table when it comes to protecting our members wages and benefits."

Sale of PBM would be key loss; shares to be delisted

Rite Aid also said Monday that it has entered into an agreement to sell its Elixir pharmacy benefit management unit (specifically the Elixir Solutions business) to PBM MedImpact Healthcare Systems, reportedly at a floor price of $575 million. Plans call for MedImpact to serve as a “stalking horse bidder” in a court-supervised sale process, and higher offers may emerge.

Related:Rite Aid gets delisting warning from NYSE

Elixir has been considered an expansion springboard for Rite Aid as retail drug chains morph into broader health care service companies. So how does selling that business brighten the picture for Rite Aid? What growth vehicle can the company hang its hat on?

Well, Rite Aid won’t be hanging its hat in the New York Stock Exchange. After the market close on Monday, NYSE announced that it plans to begin proceedings to delist the company’s common stock, whose trading is now suspended on the exchange. NYSE had warned Rite Aid about a potential delisting in late September due to noncompliance with minimum share price and and market capitalization requirements.

“Rite Aid is unlikely to emerge from the Chapter 11 process as a more meaningful pharmacy competitor,” Jonathan Palmer, senior health care industry analyst at Bloomberg Intelligence, wrote in a research note on Monday. “The decision to file for bankruptcy was inevitable, given its opioid burden is far from settled, along with the structural challenges that have plagued it for years. The proposed sale of most of Elixir, while needed to provide capital, leaves an enterprise with even fewer growth opportunities.”

In fiscal 2023, Rite Aid totaled more than $24 billion in revenue, and the company fills roughly 200 million prescriptions annually and employs over 45,000 people. Stein noted Rite Aid’s legacy of community pharmacy and health care in his declaration of support filing for the company’s Chapter 11 plan.

“The RSA [restructuring support agreement], together with the DIP [debtor-in-possession financing], presents the best option for Rite Aid to continue serving communities for the years to come,” Stein affirmed in the declaration document. “Rite Aid seeks to emerge from Chapter 11 stronger than ever, with a leaner balance sheet, a rationalized store footprint and a more competitive business. And, most importantly, this Chapter 11 process will allow Rite Aid and its employees to continue their decades-long commitment to—and proud heritage of—meeting the health care needs of the communities they serve.”

*Editor's Note: Article updated with comment from UFCW.