Drugstore chain is ready to grow after 5-year slide

The chain faces tough competition from its fast-growing competitors.
CAMP HILL, Pa. (AP) -- After nearly five years of closing unprofitable stores and trying to recover from an accounting scandal that sent its stock plummeting and put some former executives behind bars, Rite Aid Corp. says it is once again ready to expand.
"We believe now that we have passed the mark of being stable and we don't worry about the survival issue anymore," Rite Aid's chief executive and president, Mary Sammons, said in a recent interview. "If we're going to have a future and the kind of future that we should have, we need to begin to grow again."
The nation's third-largest drugstore chain faces stiff competition from its larger competitors. Walgreen Co. is building new stores at a rate of more than one a day in a campaign to have 7,000 stores in operation by 2010, and CVS Corp. has agreed to purchase 1,260 Eckerd stores to add to its nearly 4,200 existing outlets.
Rite Aid's growth will be modest by comparison. It plans to open as many as 145 new and relocated stores across the country by March 2006. Currently, it operates about 3,380 stores, more than 600 fewer than it had 1999.
All told, the three chains control almost a quarter of the nation's 55,000 pharmacies. The rest are independently owned or run by smaller chains, mass merchants like Wal-Mart or supermarkets.
History
Rite Aid's reemergence is what one Wall Street analyst called a "minor miracle" after the company's rapid expansion in the late 1990s went seriously awry.
Under that management team, which was led by Martin Grass, the son of Rite Aid's founder, the company spent billions to expand by about 1,500 stores over five years and purchase PCS Health Systems, a pharmacy-benefits management company.
The spree left the company $6 billion in debt, the seriousness of which was hidden for at least two years because Grass and others falsified Rite Aid's balance sheets to make the company look more profitable than it was. As a result of a federal investigation, Grass and three other former executives are behind bars after pleading guilty to conspiracy. A fifth awaits sentencing on 10 criminal counts after being convicted by a jury.
When Sammons and others took over in December 1999, they discovered a disorganized chain that had overstated its revenues by at least $1.6 billion and was steadily losing customers.
In March, the company completed its first profitable year since 1997.
Looking ahead
Now, Rite Aid, the least profitable of the three largest chains, hopes to maximize profits by building on entrenched distribution, advertising and supervisory operations in its strongest markets, such as Baltimore, Philadelphia and southern California.
Fueling its competitors' expansion are steady increases in prescription-drug use and the cost of the average prescription.
With health-conscious baby boomers aging into the retirement years and what Sammons described as a bevy of new disease-prevention drugs expected in the next few years, there should be plenty of opportunity for the drugstore chains, analysts said.
"There's an awful lot of volume to be had," said Neil Stern, a drugstore analyst for the Chicago retail consulting firm of McMillan Doolittle LLP. "Stores are simply keeping up with demand, instead of overbuilding."
Rite Aid's challenges may be more complicated: Its stores, on average, produce fewer sales and fill fewer prescriptions than CVS' or Walgreen's, and the company's debt is much higher, analysts say.
"There's much less margin of error for Rite Aid because of that balance sheet," said Tom Goetzinger, an analyst at the Chicago-based Morningstar Inc.
But even though Rite Aid is carrying a relatively large $3.7 billion in long-term debt -- CVS' debt totals about $750 million while Walgreen has practically none -- Sammons insists it can afford to expand.
"I think if you look at how we finished off this last quarter, and the amount of cash on our balance sheet, our relationship with banks, I'd say we're on really solid financial footing," she said.
"The timing is right for us."