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Rite Aid: Four goals for 2009

BY Michael Johnsen

CAMP HILL, Pa. —It’s a new year for Rite Aid, and with that comes the opportunity to shift the general perception of the company back toward reality—from a debt-riddled, underperforming pharmacy operator to a viable competitor with plenty of upside.

But if Rite Aid wants to show analysts and vendors what it’s all about, there are four key areas it needs to improve in 2009: continue improving on its Brooks/ Eckerd store base; continue to improve store results through effective marketing and merchandising; continue to control costs, i.e., inventory levels and capital expenditures; and continue to effectively manage its debt load.

Improve Brooks/Eckerd

Performance across the Brooks/Eckerd store base was moving in the right direction before the economy slowed things down for most retailers. Front-end same-store sales shifted positive at the close of the company’s third quarter ended Nov. 29, 2008. “Comps at the acquired stores were showing solid progress between June (minus 6.2%) and October (plus 0.4%) before turning negative again in November…and December,” said analyst Bill Dreher, Jr., of Deutsche Bank.

The economic slowdown “appears to be offsetting the benefits of the grand reopenings and from cycling last year’s remodeling-related disruption,” he said. For the third quarter, same-store sales at the former Brooks/ Eckerd operations fell 1% over the period (up 3.7% in front-end and down 2.6% in pharmacy).

And Rite Aid’s pharmacy business has a lot of room to grow. Meredith Adler, research analyst for Barclay Capital, told Drug Store News, “There is a lot of operating leverage [within Rite Aid]. If you add 200 prescriptions per week, you’re going to see a big improvement in profitabilitcy because they don’t have to add any more pharmacists,” she said.

That’s not necessarily the case for Rite Aid’s competition, which means Rite Aid is in a position to generate a lot of EBITDA momentum. “If Eckerd Rx comps turn positive, EBITDA would benefit disproportionately,” noted Goldman Sachs’ John Heinbockel.

Improve merchandising and marketing

“The key to unlocking store productivity in our front-end business is to improve our merchandising and marketing processes,” John Standley, president and COO, told analysts last month. Former Pathmark vet Ken Martindale, brought in last month as senior EVP merchandising, marketing and logistics, is tasked with tailoring Rite Aid’s mix market by market.

“We [have] 4,900 stores that are all a little different for some reason or another. Figuring out which reasons are important and grouping customers and stores with common attributes … will allow us to focus our investment in labor, inventory, advertising, promotional markdowns and distribution costs in the stores that will provide the highest returns,” Standley said.

Rite Aid will target cost reductions through such areas as inventory reduction and SKU rationalization, labor management and the delivery of goods to the store.

Improve cost controls

These types of cost-cutting activities already have helped Rite Aid drive strong EBITDA performance during the third quarter ended Nov. 29.

“In these unprecedented times, it’s important to focus on what we can control, and our team did an excellent job of doing just that,” said chairman and CEO Mary Sammons, “improving operating efficiency throughout our company, in the stores, distribution centers and corporate office.

“We significantly reduced working capital and responsibly pared CapEx,” Sammons said. “We did a better job of managing labor to sales, while at the same time continued to improve our customer satisfaction scores year-over-year and quarter-over-quarter,” she added, suggesting that improving cost controls, a definite priority, will not necessarily undercut customer service and customer retention.

Improve debt load

The soonest any significant amount of Rite Aid’s debt comes due is September 2010, when it’s senior secured credit facility of $1 billion matures. However, the consensus among analysts is that it will be effectively renegotiated sometime in the coming year. “We’re committed here to getting some debt reduction and generating some free cash flow next year,” Standley said.

In the meantime, the company is not necessarily capital challenged. “They have a bank facility that had plenty of available [funds] at the end of the third quarter…during their peak inventory period,” Adler said. “So they had plenty of liquidity before the Christmas holidays,” she said, and any demand on available cash flow will not be as high again until Christmas 2009. At the close of the third quarter, Rite Aid carried $149 million in cash and had an additional availability of $495 million under its revolver.

It’s certainly been tough going for Rite Aid in the past year, as the company’s stock price fell below $1 and forced the company to seek shareholder approval for a reverse stock split to stay listed on the NYSE.

Historically, reverse stock splits carry a certain stigma, but Rite Aid very well may be the exception. For starters, many of the analysts following Rite Aid consider the reverse stock split a non-issue relative to the chain’s projected performance. Rite Aid needs to stay listed on the NYSE in order to honor at least one of its debt covenants.

The chain is expected to execute the reverse split in the next month, driving share prices from the low of 34 cents per share at the beginning of the new year, to a little more than $5 per share.

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Americans choosing homeopathy for cough/cold

BY Michael Johnsen

NEW YORK Homeopathy doesn’t sell well at mass retail, when it’s homeopathy you’re trying to sell. That’s because homeopathy doesn’t rank very high in the mass consumer’s decision matrix, according to several suppliers of homeopathy medicines. What does rank high on that decision matrix is safety and efficacy. Mass consumers want to know that the medicine they’re taking does what it says it’s going to do, and when used as directed, that the medicine is going to make them feel better overall by not exchanging one set of symptoms for another set.

“In all the research we’ve done with consumers, the two main [factors] that they look for are ‘safe’ and ‘effective,’” Dale Nepsa, president of Hyland’s, told Drug Store News. “Homeopathy [as a concept] is way down the list after that,” Nepsa added.

That helps explain why homeopathy products more and more are finding a profitable space on the mass retailer shelf. The medicines are marketed more for what they are — safe and effective remedies that help relieve many of the same symptoms addressed by allopathic medicines — than for how they work.

However, the concept driving homeopathy also is gaining greater share — and not just because homeopathic remedies marketed against pediatric cough/cold is helping to fill the void vacated by allopathic remedies, around which concerns over safety and efficacy are circling. According to the Association of American Medical Colleges, more than 95 of the nation’s 125 medical schools now require some kind of complementary and alternative medicine coursework, which includes homeopathy and, accordingly, brings homeopathy more into the fold of conventional medicine. “What pharmacists and other healthcare professionals are looking for is a product that has clinical efficacy,” commented Bob Silverstein, senior sales and marketing director with Origin Biomed. “Any reticence toward homeopathy that traditional pharmacists might have, we’ve been able to overcome just with the performance of the product itself.” Origin Biomed markets Neuragen PN, a relatively new product for nerve pain.

Homeopathy, as a concept, also is gaining traction with consumers. “They’re starting to know the word; they’re starting to understand it; they’re starting to have more faith in it,” Nepsa said.

But the controversy around allopathic cough/cold remedies for children certainly is driving interest in “alternative” remedies like homeopathic products — though consumers are more likely developing an affinity for relative brands than the concept of homeopathy. “Boiron has always depended very heavily on word-of-mouth,” noted Alissa Gould, public relations manager at Boiron. “And moms talk,” she said, making the situation surrounding kids’ cough/cold today a significant opportunity for homeopathic manufacturers. According to Mintel/Nutrition Business Journal projections, overall sales of homeopathic are expected to reach $1.1 billion by 2012, up from an estimated $831 million sales base in 2008.

The focus on marketing and merchandising homeopathy, much like their allopathic remedy cousins, also helps explain why some of the homeopathy suppliers today are seeking to generate some momentum around their brands in much the same way that allopathic companies do — similar to how McNeil Consumer’s brand Tylenol extends beyond analgesics into cough/cold, for example. Companies like Hyland’s, Boiron and Similasan are attempting to generate some brand equity around their corporate brands. Hyland’s has established itself in baby care with its teething and colic remedies, as well as within the kids’ cough/cold set with its Curious George-licensed cough/cold products, and is making headway with adult-oriented products like Restful Legs for restless legs. Boiron is beginning to expand its “hard-to-pronounce” flu remedy Oscillococcinum brand with new Oscillo offerings, and is extending its brand name across the aisle into analgesics with Arnicare. Similarly, Similasan with its long heritiage in ear care and eye care products, is attempting to extend its Similasan brand identity into insomnia and anxiety/stress relief.

“The opportunity [for homeopathy at mass] is first to identify those health conditions that can be effectively treated by homeopathy,” noted Curt Behrens, president of P2B, a sales and marketing company that represents Similasan. And more importantly for mass outlets, the opportunity is to identify those homeopathic treatments that can deliver more immediate relief, because that’s what consumers want. “The regimen has to match to consumer expectations,” said Behrens. “From a merchandising perspective, it’s important that homeopathic products are not segregated from traditional OTC treatments … because the consumer shops by condition and disease states, [but] they also shop adjacencies.”

To segregate homeopathy at mass retail would only serve that consumer looking for homeopathic treatments first. And that consumer doesn’t shop often enough in mass outlets to support a homeopathy destination center. “Even in health food, that homeopathic-driven consumer is only a small fraction [of that channel’s] total consumer base,” Behrens said.

Homeopathy as a destination center within mass retail has been tried, actually, and has failed miserably, a few suppliers noted, asking that the specific retailers who tried the concept not be called out. Homeopathy traditionally sells very well in specialty retail, where it is, in fact, sold more as a lifestyle for consumers in search of more natural alternatives in all aspects of their lives. That helps explain why homeopathy thrives as a destination center in those channels. It goes back to that decision matrix — specialty channel consumers have already familiarized themselves with and embraced the concept behind how homeopathy works, and consequently have placed homeopathy higher up on their decision matrix.

Another driver of homeopathy unique to specialty is the informed and educated customer service rep combing the aisles. For mass retail, that represents a significant investment in training and labor — an expense that grows proportional to the store base — that delivers only questionable returns.

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B&L names Valenti president, North America

BY Michael Johnsen

ROCHESTER, N.Y. Bausch & Lomb on Friday named Peter Valenti president, North America, Vision Care, effective later this month.

“[Valenti] possesses deep leadership experience, as well as considerable eye health and general healthcare expertise,” stated Stuart Heap, corporate VP and global president, Vision Care, Bausch & Lomb. “His appointment further strengthens our existing team, which is focused on delivering innovation in the contact lens, lens care and vision accessories segments of the industry.”

Valenti was most recently VP and general manager, Surgical Devices (U.S.), for Covidien, where he led sales and marketing strategy for its $1 billion product portfolio. Prior, he spent 12 years with Johnson & Johnson, serving in a variety of U.S. and international roles across consumer, pharmaceutical and device businesses. Before his career with Johnson & Johnson, he held several brand management roles with Procter & Gamble.

He earned an MBA from the Johnson School of Management at Cornell University, and a Bachelor’s degree from the University of Connecticut. Valenti  will be based in Rochester, N.Y.

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