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Rite Aid confident despite projection drop

BY Michael Johnsen

NEW YORK —Rite Aid’s brass may have lowered its earnings projections for its fiscal year 2008 last month, but management says the Brooks/Eckerd conversions are still on course, and the company is primed to realize its full future growth potential. “Remember that Rite Aid is not only a quarter-by-quarter story but a company with a long-term strategy and vision that we believe will make us very successful in the future,” Mary Sammons, Rite Aid president and chief executive officer, said during an analyst conference call last month. “While we will continue to feel the temporary impact of one of the biggest integration efforts in our industry’s history, when we’re through, we expect Rite Aid will be a formidable drug store company with tremendous capacity to create shareholder value.”

Rite Aid lowered its fiscal 2008 guidance because of a sluggish start to this year’s cough and cold season and a soft economy, Sammons said. “Our team is focused on our critical priorities of increasing both front-end and pharmacy sales, containing costs, investing in the store base through our new and relocated store program and improving customer satisfaction.”

“Sales in the stores that have undergone the full conversion to Rite Aid are moving in the right direction, even before they receive the benefit of additional planned marketing support,” noted Jim Mastrian, Rite Aid’s special advisor for corporate strategy, in a December letter to suppliers. The Brooks/Eckerd stores are improving their private-label penetration, which represented less than 9 percent before the acquisition, toward a penetration level of 13 percent.

Over the course of the third quarter, Rite Aid completed systems conversions at 265 stores after having completed 300 by the end of its second quarter. “We continue to be on track to have all of the acquired stores converted and integrated into Rite Aid by fall of next year,” Sammons reported.

Rite Aid had changed all the merchandise at every store by the end of November, which includes the company’s private-label offerings. Rite Aid’s newly acquired Brooks/ Eckerd distribution centers are stocked with 8,500 new items, the retailer reported.

The company is also continuing to invest in new and relocated stores, which adds to the drag on its bottom line. While relocated stores only take some 18 months to reach a break-even point, new stores can take as long as three years.

“We’ll actually have a larger number of stores that begin to enter our comp numbers over the next several quarters,” Sammons said. “[The new Customer World stores] are performing pretty much as we have expected, so we’re confident about that program going forward.”

Rite Aid expects sales to fall between $24.3 billion and $24.6 billion, with same-store sales improving 1 percent to 2 percent, compared with previous guidance of $24.5 billion and $25.1 billion, with same-store sales improving 1.3 percent to 3.3 percent.

Net loss for fiscal 2008, is expected to drop between $161 million and $192 million compared with previous guidance of net loss between $78 million and $161 million.

Rite Aid reported revenues of $6.5 billion for the 13 weeks ended Dec. 1, representing a 51 percent increase. The lowered guidance will not impact Rite Aid’s ability to pay down its debt load in accordance with its covenants, however. “The required maturities over the next three years are less than $175 million,” commented Kevin Twomey, Rite Aid executive vice president and chief financial officer. “The largest component of that is the $150 million note that’s due Dec. 15, 2008.… As we are going through this integration and ramping up the synergies, fiscal 2008 is going to be…a negative free-cash flow [year],” Twomey said, where the operating cash flows will be less than capital expenditures. However, that will change by fiscal 2009, he said.

In the days after Rite Aid lowered its guidance, the company’s shares dropped by some 27 percent to less than $3 per share.

But analysts were undeterred. “We remain confident in the medium- and long-term outlooks for Rite Aid and the benefits of the Brooks/Eckerd merger…although we expect near-term sales pressure to persist into 4Q,” wrote Meredith Adler, research analyst for Lehman Brothers.

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S&P revises outlook on Rite Aid

BY Michael Johnsen

NEW YORK Standard & Poor’s Ratings Services revised its outlook on chain drug retailer Rite Aid to negative from stable, the firm reported Friday. At the same time, S&P affirmed the ‘B’ corporate credit rating on Rite Aid.

“The outlook change reflects the company’s weak same-store sales and our expectation that this trend will continue over the next few quarters,” stated Standard & Poor’s credit analyst Diane Shand. Rite Aid faces a more cautious consumer, strong growth of lower-priced generics and intense competition, she said. In addition, the current environment could make it more challenging for the company to integrate its recently-acquired Brooks/Eckerd stores.

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Boston Mayor decries in-store health clinics

BY Antoinette Alexander

BOSTON On the heels of the Massachusetts Public Health Council approving regulations allowing for in-store health clinics in the state, Boston Mayor Thomas Menino is reportedly looking to ban the clinics from opening in the city.

The decision by the health council “jeopardizes patient safety,” Menino said in a written statement, according to a Boston Globe report. “Limited service medical clinics run by merchants in for-profit corporations will seriously compromise quality of care and hygiene. Allowing retailers to make money off of sick people is wrong.”

The newspaper also reported that, in a separate letter, the mayor urged members of the city’s Public Health Commission to consider banning the clinics from opening within Boston. CVS has plans to open 20 to 30 MinuteClinics in the Greater Boston area but it is unclear how many of those would be within the city’s limits.

Defending its decision to allow clinics to operate, the state Public Health Council issued a statement that read: “The members of the Public Health Council were deliberative and thoughtful in their review of the limited service clinic regulation. We believe these types of clinics, operated either as part of a retail operation or in a nonprofit setting, can provide the public access to safe, convenient, and quality care for minor health issues.”

Officials at MinuteClinic were not immediately available for comment.

On Jan. 9, the state Public Health Council approved rules for limited service medical clinics. The new regulations took effect immediately.

“This is a new model for health care delivery that can benefit many people in the Commonwealth. These regulations will improve consumer convenience and make it easier for non-profit organizations to establish satellite clinics in a variety of settings to serve vulnerable populations,” stated secretary of Health and Human Services JudyAnn Bigby in a statement issued after the approval.

Added John Auerbach, commissioner of the Department of Public Health and chair of the PHC, “Properly regulated, these types of clinics will serve an important function, making care for minor medical care more convenient. The council was mindful of not wanting to create a stand-alone system of health care, so these regulations require coordination and linkages to primary care providers.”

The approval came at the end of a long review process that included two public hearings and the submission of hundreds of pages of testimony regarding the regulations, including testimony in favor of the clinics from the Convenient Care Association.

“We appreciate the Public Health Council’s careful deliberation regarding the adopted regulations that will now guide the operation of limited services clinics in Massachusetts. These retail-based clinics are providing consumers in 35 other states with easy access to high-quality, affordable health care in the face of a nationwide primary care physician shortage. Since this growing shortage is well documented in Massachusetts, and its related health care access issues have been exacerbated by the state’s near-universal healthcare coverage, we appreciate the Council embracing limited services clinics as a partial solution to these serious problems,” said Web Golinkin, president of the CCA and chief executive officer of in-store clinic operator RediClinic, in a statement issued after the council’s decision.

Sparking the move to create specialized regulations for these clinics was CVS’ application to open a MinuteClinic in one of its stores in Weymouth. According to the council, early in the application review process it became clear that DPH regulations governing medical clinics did not address the operation of medical clinics with limited scope of services. Rather than consider applications requiring numerous waivers from full-service clinic regulations, the department decided to create a specialized set of rules.

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