Rite Aid Corporation
Address:
30 Hunter Lane
Camp Hill, Pennsylvania 17011-2400
U.S.A.
Telephone: (717) 761-2633
Toll Free: 800-748-3243
Fax: (717) 975-5871
http://www.riteaid.com
Statistics:
Public Company
Incorporated: 1958 as Rack Rite Distributors, Inc.
Employees: 72,000
Sales: $16.54 billion (2004)
Stock Exchanges: New York Pacific
Ticker Symbol: RAD
NAIC: 446110 Pharmacies and Drug Stores
Company Perspectives:
Our Mission: To be a successful chain of friendly, neighborhood drugstores. Our knowledgeable, caring associates work together to provide a superior pharmacy experience, and offer everyday products and services that help our valued customers lead healthier, happier lives.
Key Dates:
1958: Alex Grass incorporates Rack Rite Distributors, Inc.
1962: Through Rack Rite, Grass opens his first discount drugstore in Scranton, Pennsylvania, calling it Thrif D Discount Center.
1963: Creation of a drugstore chain begins with the opening of five more stores.
1966: The first Rite Aid pharmacy opens in one of the firm's drugstores in New Rochelle, New York.
1967: Seventy Rite Aid private-label products are introduced.
1968: The firm makes its first public offering of stock and changes its name to Rite Aid Corporation.
1969: The firm's first major acquisition is the 47-store Daw Drug Co. of Rochester, New York.
1982: Rite Aid opens its 1,000th store.
1983: Revenues surpass $1 billion.
1995: Perry Drug Stores Inc. is acquired; Martin Grass succeeds his father, Alex Grass, as Rite Aid's chairman and CEO.
1996: Rite Aid expands to the West Coast through a $2.3 billion deal for Thrifty PayLess Holdings, Inc.
1997: The acquisitions of K&B, Incorporated and Harco, Inc. add more than 300 stores located in the South.
1999: Pharmacy benefits manager PCS Health Systems, Inc. is acquired for $1.5 billion; Rite Aid enters into partnerships with General Nutrition Companies, Inc. and drugstore.com; the company begins restating earnings from previous years because of accounting irregularities; this, coupled with financial difficulties brought on by a huge $6.7 billion debt load, leads to the ouster of Chairman and CEO Martin Grass; Robert G. Miller is brought in from the outside as his successor.
2000: Rite Aid further restates its earnings for 1998 and 1999, revealing an additional $1.06 billion in losses; PCS Health Systems is sold off.
2002: Martin Grass and three other former Rite Aid executives are indicted on federal criminal charges stemming from the accounting scandal.
2003: Mary F. Sammons is named president and CEO; Grass pleads guilty to two criminal counts.
Company History:
Rite Aid Corporation, which ranks as the third largest retail drugstore chain in the United States, operates about 3,380 drugstores in 28 states across the nation and in the District of Columbia. Rite Aid's stores average 12,750 square feet and offer a professional pharmacy service, a full selection of health and personal care products, an assortment of general merchandise, and more than 1,900 Rite Aid brand products. Through an alliance with General Nutrition Companies, Inc. (GNC), a leading retailer of specialty vitamins and supplements, more than a quarter of Rite Aid outlets include a GNC "store-within-the-store." Prescription drug revenue accounts for about 63 percent of total sales. Over-the-counter medications and personal care products generate 10 percent; health and beauty aids, 5 percent; and general merchandise, 22 percent. More than half of the company's stores are freestanding outlets, nearly 40 percent have a drive-through pharmacy, and close to 70 percent include a one-hour photofinishing department. To keep its stores supplied, Rite Aid maintains 12 distribution centers and overflow storage facilities.
Company Origins
Although Rite Aid Corporation was not formally incorporated until 1968, it got its start a few years earlier through Rack Rite Distributors, Inc., developed by Alex Grass, Rite Aid's founder and later chairman and chief executive officer. Grass had founded Rack Rite in 1958 to provide grocery stores with health and beauty aids, as well as other nonfood products. In 1962 U.S. federal legislation repealed the fair trade laws that fixed minimum retail prices on most products, opening up the door to discount stores, price wars, and vigorous competition. Quick to take advantage of the situation, Rite Aid opened its first discount drugstore in 1962 in Scranton, Pennsylvania. Called the Thrif D Discount Center, this was the forerunner of the modern Rite Aid drugstores.
By Christmas 1962 Thrif D was taking in $25,000 each week. It tripled its first-year projected sales of $250,000, pulling in $750,000. While the company continued to develop Rack Rite distributors, Thrif D's sales results proved that discount drugstores were truly profitable. In 1963 Rite Aid opened five more drugstores, extending its market area to New York.
By 1964 Rite Aid's market territory included New Jersey and Virginia. Its store count doubled, bringing the total to 12. The number of employees had grown to 200. Expansion did not stop there; in 1965 Rite Aid penetrated Connecticut, and its store count rose to 25.
In 1966 Rite Aid continued to expand. Its number of stores reached 36. The growth of both the retail chain and the "rack-jobbing" portion of the business, Rack Rite Distributors, generated the need for more space, so Rite Aid began to construct a new corporate headquarters and distribution center. It also opened the first Rite Aid pharmacy in one of its drugstores in New Rochelle, New York. The following year Rite Aid introduced 70 of its own private-label products. The results of the Rite Aid pharmacy's first year were so positive that the company planned to continue installing pharmacies throughout its drugstore chain.
Acquisitions and Change in the Late 1960s and 1970s
The following years brought many changes and firsts for the company. Rite Aid made its first acquisition when it bought the Philadelphia-centered 11-store Martin's chain. Its store count rose to 60, and its market share began to grow in Baltimore, Maryland; Newark, New Jersey; and Rochester and Buffalo, New York. In 1968 Rite Aid made its first public stock offering, issuing 350,000 shares at $25 per share on the American Stock Exchange, as well as formally changing its name to Rite Aid Corporation.
In 1969 Rite Aid acquired the 47-store Daw Drug Co. of Rochester, New York, bringing Rite Aid's store count to 117. The company also acquired Blue Ridge Nursing Homes along with Immuno Serums, Inc., and Sero-Genics, Inc., incorporating them into the company's medical services division. Offering more than 260 of its own private label products also contributed to Rite Aid's growth. The company increased its mechanical efficiency, installing material-handling equipment, such as conveyers, in its drug warehouse. It hooked up a telephone-order transmission system between the warehouse and drugstores to move orders swiftly. In addition, Rite Aid installed electronic data-processing equipment to produce price tags. That year expansion was so visible that Rite Aid declared a two-for-one stock split.
On January 20, 1970, Rite Aid was admitted to the New York Stock Exchange and began trading on the big board at $25 per share with 2.8 million shares outstanding. Although the U.S. economy moved into a recession, Rite Aid was among the discount stores that flourished. Also in 1970 Rite Aid acquired the 16-store Fountain Chain in Clarksburg, Virginia. By that time the company offered more than 300 of its own products bearing the Rite Aid logo, prompting the addition of 100,000 square feet to its main distribution center in Shiremanstown, Pennsylvania. In November 1971 Rite Aid sold 250,000 new shares of common stock to the public.
In 1971 the company acquired Sera-Tec Biologicals, Inc., of New Jersey, which was combined with the company's prior acquisitions of Immuno Serums and Sero-Genics to comprise the company's medical services division. Rite Aid also purchased a 50 percent equity in Superdrug Stores, Ltd., of the United Kingdom. During this period of rapid growth, Rite Aid pharmacies were filling more than five million prescriptions a year. To consolidate management and increase efficiency of the rapidly growing number of stores, Rite Aid separated its market area into five divisions and 20 supervisory districts.
In 1972 Rite Aid focused on internal efficiency in preparation for additional expansion. Also in 1972, Sera-Tec Biologicals, Biogenics, Inc., and Immuno Blood Services, Inc., were merged to form what would become known in the early 1990s as Sera-Tec. When 1972's Hurricane Agnes wrought severe damage on the company's stores in Wilkes-Barre, Pennsylvania, and Elmira, New York, it also damaged the phone and water service at corporate headquarters. Teams worked around the clock to make the necessary repairs, and stores were reopened fairly rapidly. In fact, Rite Aid handled the disaster so impressively that it still was able to report filling more than 6.25 million prescriptions that year.
In 1973, despite the Middle East oil embargo and ensuing recession, Rite Aid again began making acquisitions. It acquired the 49-store Thomas Holmes Corp. chain and the 50-store Warner chain, both in greater Philadelphia. The company also set about creating distribution centers that could handle the rapidly multiplying number of Rite Aid stores. It expanded its Shiremanstown distribution center by 71,000 square feet, enabling the facility to supply up to 500 stores. The company also built an automated distribution center in Rome, New York, to handle the growing northeastern market. Rite Aid's accounting and data processing departments moved to a separate building in Shiremanstown, which became the hub of the Rite Aid complex.
Further activity during this time included reducing its holdings in Superdrug PLC, the successor to Superdrug Stores, Ltd., to 42.5 percent, selling a 7.5 percent interest. The number of private-label products that appeared bearing the Rite Aid logo climbed to 700. In addition, Rite Aid became one of the first drugstore chains in the United States to implement a senior citizen discount cardholder program.
By 1974 the Rome distribution center was supplying 131 Rite Aid stores. Rite Aid also created a fifth Sera-Tec center in Pittsburgh, just as the Dow Jones Industrial Average was falling to 663--the lowest since 1970--and worldwide inflation set in. Over the next year Rite Aid focused on internal organization and increased its security department in an effort to reduce shoplifting.
By 1976 Rite Aid resumed acquisitions, purchasing the 52-store Keystone Centers, Inc. of Pennsylvania and New Jersey. The following year, it acquired 99 more stores by buying the Read's, Inc. drug chain in Baltimore. This $18 million purchase led to Rite Aid's garnering the largest market share in Baltimore. In 1977 Rite Aid's private-label products, with almost 900 different items, accounted for 9 percent of its retail sales.
Although the value of the dollar plunged in 1978, Rite Aid's momentum did not. Rite Aid acquired 11 stores from Red Shield in Pittsburgh and the four-store Quality Drugs chain of greater Philadelphia. By focusing on providing value in the most efficient manner possible, Rite Aid gained substantial market share in the major metropolitan markets of Buffalo, Rochester, and Syracuse, New York; Charleston, South Carolina; Baltimore; and Philadelphia. The company also added 11,500 square feet to its executive space in Shiremanstown, where it bought a 79,000-square-foot building to house the growing finance, advertising, store engineering, and construction departments. Then, focusing on its central businesses, Rite Aid sold the Blue Ridge Nursing Homes in Camp Hill and in Harrisburg, Pennsylvania, for an after-tax profit of $1.8 million.
In 1979 Rite Aid acquired six U-Save stores in North Carolina and eastern Tennessee, as well as nine Shop Rite stores in the Hudson Valley. It redesigned its company logo and updated its store interiors, using mirrored canopies and bright colors throughout, while streamlining checkout counters in the process. In order to save time and money on West Virginia store openings and transportation costs among 140 of its existing stores, Rite Aid started up a 210,000-square-foot distribution center in Nitro, West Virginia. Moreover, the company set ambitious goals, such as increasing store count by 10 percent every year and continuing to open higher-margin pharmacies throughout its drugstore chain.
New Strategies, Including Diversification, in the 1980s
In 1980 Rite Aid adopted some new tactics in its growth plan. Its board of directors agreed tentatively to buy back as many as one million shares of Rite Aid common stock. These shares would be retained as treasury shares to provide liquid assets that could be quickly translated into cash for acquisitions, funds for the employees' stock option plan, or any other corporate purposes. That year Rite Aid acquired the six-store Schuman Drug of Lansdale, Pennsylvania, and the four-store Lane drugstores in Youngstown, Ohio, establishing a new prescription division for Ohio and western Pennsylvania. To expedite the processing of third-party claims, Rite Aid installed a scanning system in its data processing department. The company opened a 43,000-square-foot addition to its finance and accounting building. Also in 1980 Rite Aid became one of the nation's largest suppliers of plasma with the opening of its ninth plasmapheresis center.
By 1981 Rite Aid had become the third largest retail drug chain. It acquired the 31-store South Carolina division of Fays Drug and made its third stock split since its initial public offering in 1968, issuing additional common stock contingent on the four-for-three stock split. The company also formed a new division to handle its business in West Virginia and western Pennsylvania.
In 1982 Rite Aid became the largest U.S. drug chain as measured by the number of stores and market share in New York, Pennsylvania, New Jersey, Maryland, and West Virginia. Rite Aid continued to expand its market area westward, acquiring the four-store Cochran Drugs in Columbus, Ohio; the 16-store Lomark Discount Drug Stores Inc., in Cincinnati, Ohio; and the 26-store Mann Drugs of High Point, North Carolina. In addition to these drugstores, Rite Aid acquired the fifth largest toy store in the nation, the 128-store Circus World Toy Stores, Inc., for $11.1 million. Rite Aid also expanded its Nitro, West Virginia, distribution center. The company now had total distribution capacity for 1,200 stores, which was essential and timely; Rite Aid opened its 1,000th store in Durham, North Carolina.
Rite Aid's sales exceeded $1 billion in 1983. It was listed among Forbes magazine's top 500 companies in both sales volume and number of employees. It issued a three-for-two stock split, its fourth stock split since it became listed and its second in two years. The value of Rite Aid's holdings in Superdrug PLC increased when that company went public and began trading its shares on the London Stock Exchange--at which point Rite Aid sold one-third of its interest in Superdrug, bringing its holdings down to 28.2 percent of the company's outstanding shares. Partially because of this, Rite Aid was able to offer a new employee stock purchase plan; to acquire the four-store Beagle chain in West Virginia and Ohio; to open its first Heaven novelty shop; and to integrate a point-of-purchase and pharmacy computer system. All of this helped to establish Rite Aid as the largest drugstore chain in the Northeast.
By 1984 Rite Aid started expanding beyond its core business. It bought American Discount Auto Parts (ADAP), a 32-store chain based in Avon, Massachusetts. It also purchased Encore Books, Inc., a 19-store deep-discount bookstore chain in Philadelphia. In addition to these departures from the company's core business, Rite Aid acquired the three-store Nifty Norm's, Inc. of Philadelphia, the six-store Herrlich Drugstores, the five-store Remes Drug Stores, the 13-store Lippert Pharmacies, three State Vitamin stores of Michigan, the three-store Jay's Drugstores in western New York, and the 24-unit Muir Drug Store chain based in Grand Rapids, Michigan. In 1984 Rite Aid also spun off its subsidiary wholesale and grocery division, Super Rite, as an autonomous public company, selling a partial interest in its holdings for $22 million.
In 1985 Rite Aid focused less on acquisitions than on internally generated growth. While Rite Aid that year acquired four Midland Valley Drug stores in Midland, Michigan, and eight State Vitamin discount stores in Lansing, Michigan, it opened five stores of its own, moving into the deep-discount drug market with the company's Drug Palace. Rite Aid further penetrated new markets by opening video rental departments in more than 160 of its drugstores. It also installed point-of-purchase scanning registers and more computerized pharmacy equipment. The newly spun-off Super Rite took its first step into retail grocery with its purchase of the 47-store Food-A-Rama supermarket chain in Baltimore and Washington, D.C. Rite Aid's subsidiary, Sera-Tec, opened two new plasma centers, bringing the count to 11. That year, Rite Aid sold Circus World Toy Stores for $28.8 million cash and 185,000 common shares. In addition, Rite Aid bought 1.1 million shares of its own common stock at $19 per share.
Rite Aid did not experience major expansion in 1986. It acquired only two Revco stores in Buffalo and opened six more Drug Palaces, bringing its deep-discount drugstore total to 11. The year was nevertheless notable in that two of Rite Aid's corporate officers received prestigious positions. Preston Robert Tisch of Rite Aid's board of directors was appointed Postmaster General of the United States, and company President Alex Grass was named chairman of the board and president of the National Association of Chain Drug Stores.
Adding More Than 1,000 Stores: 1987-91
In 1987 Rite Aid acquired the nine-store Harris Drug in Charleston, South Carolina; 113 SupeRx stores in Florida, Georgia, and Alabama, and a 200,000-square-foot distribution center in Florida from the Kroger Co. (in a $57 million deal); and 94 Gray Drug Fair, Inc. stores in Florida and Maryland, from the Sherwin-Williams Company. These acquisitions substantially expanded Rite Aid's southern market area. Because of the success of its pilot video departments in 1986, Rite Aid added 429 more video departments to its drugstores in 1987, bringing the total to 971. Rite Aid also continued to install pharmacy and point-of-purchase automated systems throughout the chain. That year Dun's Business Month ranked Rite Aid 25th among all publicly traded companies for consistent dividend advances. In 1987 Rite Aid was the largest employer in the retail drug industry.
The following year Rite Aid purchased from Sherwin-Williams the balance of Gray Drug Fair, consisting of 356 stores in Delaware, the District of Columbia, Indiana, Maryland, New York, Ohio, Virginia, West Virginia, North Carolina, and Pennsylvania. This purchase brought Rite Aid's store count to more than 2,100 and greatly expanded the company's market penetration in these states. That year, in Winnsboro, South Carolina, Rite Aid opened its fifth distribution center. This 265,000-square-foot distribution center enabled Rite Aid to supply up to 450 more stores in the Southeast. In April 1988 Rite Aid acquired the Begley Company, consisting of 39 drugstores in Kentucky and 140 dry cleaners in ten states, for about $20 million.
In 1989 the company continued to expand and enhance the technology available to its stores. Moreover, Rite Aid finalized a deal with Super Rite Foods Holding Corporation in March 1989 to sell its 46 percent interest in Super Rite Foods, Inc. Rite Aid also acquired 99 People's Drug Stores and 18 Lane Drug units. In September of that year, it disposed of its 46.8 percent equity in Super Rite Foods for $18.37 million, with a positive cash flow in excess of $40 million. That same year showed record sales for Rite Aid; its revenues of $2.87 billion for this 53-week fiscal year represented a 15.4 percent increase from the previous 52-week fiscal year. Company earnings, however, continued to absorb the cost of the enormous acquisitions the company made in 1987.
The company in 1990 continued to focus on the integration of both its past and present acquisitions. Rite Aid added 1,754 store computer systems, and it enhanced 2,279 pharmacy terminals. The pharmacy terminals enabled drug interaction analysis and cumulative tax information, all of which resulted in speedier prescription service. Prescription sales for 1990 advanced 17.8 percent from the previous year, and then represented a full 43 percent of store revenues. Rite Aid's computerization also propelled the company toward greater efficiency, enabling it to cut back on unnecessary corporate staffing in spite of the fact that the company's store count had continued to grow.
From 1987 to 1991, Rite Aid acquired more than 800 drugstores and opened 276 new stores, closing only 103 units. Within this period, Rite Aid's store count grew by nearly 60 percent. In 1991 Rite Aid added 68 stores and bought prescription records from 65 drugstores in Washington, D.C.
A Growing Appetite for Acquisitions in the 1990s
While some organizations viewed the recession of the early 1990s as a bleak period, Alex and Martin Grass, the father-and-son team then running Rite Aid, said it was a good time to buy, according to a January 13, 1992, Business Week article. The recession brought opportunities to acquire vulnerable companies, and Rite Aid bid for the bankrupt Revco D.S., Inc. chain in early 1992. Although the deal later fell through, Rite Aid had demonstrated its ability to move decisively and quickly. Significant acquisitions included 34 Whelby Super Drug Stores in Maine and New Hampshire in 1993, and 72 La Verdiere Enterprises, Inc. drugstores and 16 Revco drugstores, both in 1994. Rite Aid completed its largest acquisition yet in March 1995, spending $132 million for the 224-unit Perry Drug Stores, Inc., the largest drugstore chain in Michigan, with annual revenues of $735 million. This deal pushed Rite Aid's store count near the 3,000 mark.
Beginning in 1994 Rite Aid opened 50 state-of-the-art drugstores in New York City, boosting the total to 67 within the city. Rite Aid planned to bring more stores into all of New York's boroughs later in the decade. In fiscal 1994 Rite Aid acquired Pharmacy Car, Inc. and Intell Rx Inc., a drug review company with proprietary software that reviewed physicians' prescription patterns. From these two purchases emerged the subsidiary Eagle Managed Care Corp.
Martin Grass succeeded his father, Alex Grass, as Rite Aid's chairman and CEO in March 1995. In July of that year, Rite Aid bolstered its presence in the New York metropolitan region by purchasing the 30-store Pathmark Stores, Inc. chain. In October, 20 stores in Maine were bought from Brooks Pharmacy. Also that year, the company shed four unrelated businesses in order to focus on its pharmaceutical operations: Encore Books, Concord Custom Cleaners, Sera-Tech Biologicals, and ADAP, the auto parts dealer. Proceeds from these divestments totaled about $142 million. By midyear Rite Aid appeared well positioned. Market value, once $1.3 billion in 1993, reached about $2.5 billion. Rite Aid set out to open, renovate, or expand 1,000 more stores over a three-year period.
In 1996 Rite Aid continued to restructure its business to operate larger, higher-volume, and more profitable drugstores. In June the company purchased Taylor Drugs, a chain of 34 stores operating in Louisville, Kentucky. Rite Aid, already the largest drugstore operator in the state, entered Louisville with a major share of the market. At the same time, the company divested operations in certain areas where its market share was weak. During 1996 Rite Aid sold 37 drugstores and the assets of 72 more stores in Florida, as well as 33 drugstores and the assets of 21 others located in Massachusetts and Rhode Island. In October 1996 the company reached an agreement to sell 190 stores in North and South Carolina to J.C. Penney Company, Inc.'s Thrift Drug chain, which would soon merge with and into Eckerd Corporation.
In November 1996 the company entered into a joint venture to provide mail-order pharmacy services with Smith Kline Beecham's Diversified Pharmaceutical Services, a leading pharmacy benefit manager. This move was seen as another channel of distribution to offer prescriptions to select managed care customers.
Another attempt was made by the company in 1996 to buy its rival, Revco, but when the Federal Trade Commission rejected the $1.8 billion deal, Rite Aid moved on to other prospects. (Revco was subsequently acquired by CVS Corporation in 1997.) December 1996 marked the largest acquisition in Rite Aid history--a merger with Thrifty PayLess Holdings, Inc., which had sales of $4.4 billion in 1,007 stores in the western United States. The price tag was $1.4 billion in stock and the assumption of almost $900 million in debt. Thrifty was the largest chain drugstore operator in California, Oregon, Washington, and Idaho.
In 1997 Rite Aid integrated this West Coast operation into the chain, installing new computer hardware in all Thrifty PayLess stores. Then, having just abandoned most of the South, Rite Aid reentered the region in August 1997 when it spent about $340 million for two privately held companies, New Orleans-based K&B, Incorporated and Tuscaloosa, Alabama-based Harco, Inc. K&B operated 186 stores in Louisiana, Texas, and four other southern states and had 1996 sales of $580 million. Harco ran 146 stores in Alabama, Mississippi, and Florida and had $258 million in revenues in 1996. In addition, in 1997 Rite Aid opened 369 new, 10,500-square-foot prototype stores, which seemed to pay off. These new stores generated more than $3 million compared with the $2 million average of older, smaller stores, thanks to added space and innovative design. The new format placed a greater emphasis on so-called front-end merchandise (i.e., nonprescription items), particularly health and beauty care items and cosmetics. The siting of the new stores reflected an evolving emphasis on freestanding outlets over those located within strip shopping centers. Rite Aid now operated more than 3,600 stores, and revenues for 1998 reached $11.38 billion.
During 1997 and 1998 the more than 1,300 Thrifty, PayLess, K&B, and Harco stores were converted to the Rite Aid banner. Many of the acquired stores were older, outdated stores, sorely in need of a remodeling. The company began a multiyear process of converting the units to the Rite Aid format. Some were expanded, while others were relocated--often shifting from a strip mall to a freestanding locale. In addition, Rite Aid opened a number of its new prototype stores; the chain wished to continue growing, but there were few opportunities left for large acquisitions. The corporation also bolstered its advertising in 1998, spending $200 million that year, a 35 percent increase over the ad spending from a few years earlier.
A Host of Troubles and the Beginnings of a Turnaround: 1999 and Beyond
Continuing its acquisitions spree, Rite Aid in November 1998 reached an agreement to acquire PCS Health Systems, Inc. from Eli Lilly and Company. The $1.5 billion deal, financed through short-term borrowing, was completed in January 1999. PCS was a leading pharmacy benefits manager, or PBM, involved in handling the administrative, paperwork side of prescription-drug services for health maintenance organizations (HMOs) and large employers and attempting to secure lower overall drug costs for them. Rite Aid's existing PBM, Eagle Managed Care, was subsequently melded into PCS. Also in January 1999 Rite Aid entered into an alliance with General Nutrition Companies, Inc. (GNC), a leading retailer of specialty vitamins and supplements. The firms agreed to place 1,500 GNC outlets within Rite Aid stores over the next three years. In February, Rite Aid spent about $25 million to purchase Edgehill Drugs, Inc., a 25-store chain operating in Maryland and Delaware. In July, the company allied with drugstore.com, acquiring a 25 percent stake in the online pharmacy; through this partnership, customers were soon able to order prescriptions online through drugstore.com and then pick them up later that same day at a Rite Aid outlet.
During these same months of 1999, however, Rite Aid was simultaneously in the process of going seriously off-track. Investigations conducted by Business Week magazine and the Wall Street Journal began delving into allegations of dealings between Rite Aid and companies whose owners included members of the Grass family--dealings that the company had not disclosed. The company soon launched an internal investigation, which indeed uncovered undisclosed holdings in Rite Aid suppliers by Grass family members. At the same time, Rite Aid began running into serious financial problems, in part because of difficulties integrating the recent acquisitions, particularly that of Thrifty PayLess, but also because of the heavy debt it had accrued to fund the growth spurt; the total debt load reached as high as $6.7 billion. In March, Rite Aid announced that its fiscal 1999 fourth quarter earnings would fall far short of expectations, sending its stock plunging 39 percent. Shareholder lawsuits were soon filed. In June, after uncovering accounting irregularities, the company made its first downward adjustment in its earnings for the previous three fiscal years; in October it went further, adjusting earnings for these years down by $500 million. Late that month, Rite Aid faced a huge debt payment that it was not going to be able to make. The company's bankers agreed to a one-year extension of the credit, but not before forcing the ouster of Martin Green. After a short period of interim leadership, Robert G. Miller was named chairman and CEO of Rite Aid in December 1999. Miller had been CEO of Fred Meyer, Inc. from 1991 until the acquisition of the Portland, Oregon-based grocery retailer by the Kroger Co. in May 1999. Miller brought with him three other former Fred Meyer executives, including Mary F. Sammons, who was named president and chief operating officer. By the time the new executive team was in place, Rite Aid's stock was trading well under $10 per share, down from the 52-week high of $51.13 in January 1999.
Miller and company quickly brought Rite Aid's store expansion program to a halt and launched a rigorous review of the existing store portfolio, targeting underperforming units for closure. In 2001 alone, 144 stores were shuttered. Sammons also slashed prices on Rite Aid's 1,500 top-selling products by 20 percent to get customers back into the stores and worked with vendors to repair supply-chain problems. In June 2000 the new management team completed a $1 billion refinancing plan, providing some breathing room for a company on the verge of a bankruptcy filing. Then in July, after months of poring over the books for the previous three-plus years, Rite Aid revealed even larger losses: an additional $1.06 billion in losses for 1998 and 1999, turning what had been $450 million in profits for those years into losses of $600 million. The $1.6 billion restated earnings total amounted to the largest accounting restatement in U.S. history--a dubious distinction that soon would be erased by the wave of accounting scandals that shook the country in 2000. In addition, the company reported a $1.14 billion loss for 2000. In a move to further reduce debt, Rite Aid also unveiled the sale of PCS Health Systems to Advance Paradigm, Inc. for about $910 million plus equity securities in the resulting firm, AdvancePCS, Inc. The deal closed in October 2000. The following March, Rite Aid sold its stake in AdvancePCS for $284.2 million.
Meanwhile, litigation connected to the accounting scandal and the former managers of Rite Aid proliferated. In November 2000 the company agreed to pay at least $200 million to settle the class-action suits brought by shareholders contending that the firm's stock had been inflated by falsified bookkeeping. While Miller said, "This is a major step in putting the past behind us," several former top Rite Aid officials still had to contend with the legal consequences of their past actions, as formal investigations had been launched by the Securities and Exchange Commission (SEC) and federal prosecutors. In June 2002 a federal grand jury in Pennsylvania issued a 37-count indictment, charging Martin Grass and three other former Rite Aid executives with masterminding an illegal accounting scheme. One year later, on the eve of his trial, Grass pleaded guilty to conspiracy to defraud and conspiracy to obstruct justice. He faced as many as eight years in prison. In all, six former Rite Aid executives either pled guilty to or were convicted of criminal conduct in connection with the accounting fraud. They included the top four administrators at the firm during the late 1990s. The SEC also launched a suit seeking civil penalties against the former executives that potentially could amount to millions of dollars.
Outside the courtroom, Rite Aid continued its turnaround efforts. A $3.2 billion loan refinancing completed in June 2001 further strengthened the firm's financial footing, helping reduce total debt to about $3.7 billion and easing it back from the brink of bankruptcy. Additional funds were raised through the sale of the firm's stake in drugstore.com between January and May 2002. Drugstore.com continued to function as Rite Aid's exclusive online pharmacy. During 2002 and 2003 an additional 156 underperforming stores were closed, further reducing the store count to about 3,400. For the year ending on March 1, 2003, Rite Aid trimmed its net loss to $112.1 million, compared with the $827.7 million loss of the preceding year. Perhaps most impressively, Sammons's efforts at turning around the performance at the stores were clearly beginning to pay off: Same-store sales (sales at stores open more than one year) were up 6.7 percent for the year. Sammons was rewarded by being promoted to president and CEO in June 2003, with Miller remaining chairman.
By the third quarter of 2004, Rite Aid was on the verge of a return to steady profitability. Net income of $22.5 million that quarter reduced the net loss for the first nine months of the year to $26.9 million. Another signal of the firm's recovery came in February 2004 when it was reported that Rite Aid had entered the bidding for the Eckerd chain, which J.C. Penney was attempting to sell. Rite Aid reportedly offered as much as $4 billion for the chain, which operated almost 2,800 stores, mostly in the East and South. Given the nascent nature of Rite Aid's recovery, analysts were doubtful that the firm's bid would prevail against competing offers from arch-rival CVS and the Jean Coutu Group Inc., a Canadian firm that owned the Brooks Pharmacy chain in the Northeast. It was nevertheless certain that Rite Aid had entered a new growth phase: In June 2003 the company announced plans to build 175 new stores in its strongest markets over the next two fiscal years. With a keen eye on controlling costs and keeping its books clean, Rite Aid was poised for a full recovery from its black days in the late 1990s.
Principal Competitors: Walgreen Co.; CVS Corporation; Wal-Mart Stores, Inc.; Eckerd Corporation.
Further Reading:
- "Bar Codes and RFDC Fill the Information Gap at Rite Aid," Modern Materials Handling, October 1993.
- Barrett, Amy, and Karen Stevens, "Rite Aid Tells All--After the Storm Breaks," Business Week, February 22, 1999, pp. 36, 38.
- Berner, Robert, and Mark Maremont, "Lost Heir: As Rite Aid Grew, CEO Seemed Unable to Manage His Empire," Wall Street Journal, October 20, 1999, pp. A1+.
- Brookman, Faye, "Grass Leaves a Mixed Legacy at Rite Aid," Women's Wear Daily, October 22, 1999, p. 9.
- Campanella, Frank W., "Recovery Room: Rite Aid Finds It in Its High-Margin Pharmacy Operation," Barron's, January 19, 1987, pp. 35+.
- Coleman, Calmetta Y., "Rite Aid's Rapid Expansion Poses Problem for Chain," Wall Street Journal, September 3, 1998, p. B4.
- Condon, Bernard, "Like Father, Like Son. Sort Of," Forbes, June 1, 1998, pp. 90, 92.
- Dochat, Tom, "Rite Aid Keeps Its Focus on Building 'on Good Results,'" Harrisburg (Pa.) Patriot-News, June 22, 2003, p. A1.
- ------, "Stockholders to Settle Rite Aid Lawsuit," Harrisburg (Pa.) Patriot-News, October 16, 2002, p. D6.
- ------, "Under New Team, Rite Aid Changes Its Ways," Harrisburg (Pa.) Patriot-News, June 22, 2002, p. A5.
- "Eagle Managed Care: A Wrong Way and a Rite Way," Drug Topics, September 5, 1994.
- Fried, Lisa I., "Rite Aid Keeps Getting Bigger and Bigger," Drug Store News, April 27, 1998, pp. 133+.
- Gerber, Cheryl, "High Tech Pain Killer," Forbes ASAP, December 4, 1995, pp. 108-10.
- "Groomed for Success," Chain Store Age Executive, April 1995, pp. 25-28.
- Hannon, Kerry, "The Doctor Is In," Forbes, July 13, 1987, p. 426.
- Harris, Gardiner, "Rite Aid to Sell Its PCS Unit for $800 Million," Wall Street Journal, July 12, 2000, p. B2.
- Hussey, Allan F., "Prescription at Rite Aid Calls for Profits Rebound," Barron's, November 17, 1975, p. 63.
- Johnsen, Michael, "On Steadier Ground, Rite Aid Sets New Goals," Drug Store News, July 21, 2003, pp. 51, 61.
- Kilman, Scott, "Rite Aid Ex-Officials Charged in Accounting-Fraud Probe," Wall Street Journal, June 24, 2002, p. A2.
- Lipin, Steven, "Rite Aid to Pay $1.4 Billion for Thrifty," Wall Street Journal, October 14, 1996, p. A3.
- Lipin, Steven, and Robert Berner, "Rite Aid to Buy Lilly Business for $1.5 Billion," Wall Street Journal, November 17, 1998, p. A3.
- Longo, Don, "The Maestro of Rite Aid's Recovery," Retail Merchandiser, February 2004, pp. 19+.
- "Lost in Space," Financial World, November 21, 1995, pp. 46-47.
- Maremont, Mark, "Call to Account: Rite Aid Case Gives First View of Fraud on Trial," Wall Street Journal, June 10, 2003, pp. A1+.
- Maremont, Mark, and Robert Berner, "Family Affairs: Rite Aid Does Business with Firms Linked to CEO Martin Grass," Wall Street Journal, January 29, 1999, pp. A1+.
- Murray, Matt, and Bryan Gruley, "Rite Aid Corp. Abandons Revco Deal, Blaming FTC for Aggressive Opposition," Wall Street Journal, April 25, 1996, p. A3.
- Nelson, Brett, "Looking Up--Maybe," Forbes, March 4, 2002, pp. 64-66.
- "Rite Aid Sees a Future in Capitated Managed Care," Drug Topics, November 1993, p. 52.
- "Rite Aid's Softer Side," Chain Store Age Executive, April 1995, p. 28.
- Sherrid, Pamela, "Rite Place, Rite Price," Forbes, November 23, 1981, pp. 87+.
- Spurgeon, Devon, and Mark Maremont, "Rite Aid Posts $1.14 Billion Loss for Year," Wall Street Journal, July 12, 2000, p. A3.
- Tosh, Mark, "Pushing Recovery's Boundaries," Drug Store News, April 29, 2002, pp. 74, 127.
- Weber, Joseph, et al., "Seizing the Dark Day," Business Week, January 13, 1992, pp. 26-28.
Source: International Directory of Company Histories, Vol.63. St. James Press, 2004.
