Rite Aid Corporation (NYSE: RAD) was founded by Alex Grass in 1962 in Scranton, Pennsylvania as a health and beauty store, originally called Thrift D Discount Center. The company changed its name to Rite Aid Corporation in 1968 ahead of its initial public offering (IPO) on the American Stock Exchange; the company moved to the New York Stock Exchange (NYSE) in 1970. Today, Rite Aid ranks among the top 10 drugstore chains with drugstore chain sales of $26,000 million as of 2016, compared to Walmart in the number one spot with $307,800 million in sales. The company has historically had a large presence is in New York, followed by California and Pennsylvania. As of October 2018, Rite Aid is involved in a deal to transition over 1,000 of its stores to Walgreens.

Acquisitions Fueled Growth

Within 10 years of opening its first store, Rite Aid grew to 267 locations in 10 states. The company first achieved $1 billion in sales in 1983. In 1987, with the acquisition of Gray Drug (420 stores in 11 states), Rite Aid became the largest drugstore chain in the U.S., with over 2,000 stores. By 1996, Rite Aid doubled in size to 4,000 stores after several acquisitions including Read’s Drug Store, Lane Drug, Hook's Drug, Harco, K&B, Perry Drug Stores (224 stores), and Thrifty PayLess (1,000 stores). The Thrifty PayLess acquisition included the Bi-Mart membership discount store chain, which Rite Aid sold in 1998.

In 1999, Rite Aid formed a partnership with General Nutrition Companies that allowed GNC to open mini-stores within Rite Aid locations. In addition, Rite Aid partnered with Drugstore.com and offered Rite Aid customers the ability to place prescription orders online and get same day in-store pickup. Also in 1999, Rite Aid acquired pharmacy benefits manager PCS Health Systems. In 2007, Rite Aid added over 1,500 stores with its acquisition of Brooks Eckerd Pharmacy, and in 2015, it acquired pharmacy benefits manager Envision Pharmaceutical Services for $2 billion.

Accounting Scandal

In 1999, Rite Aid began restating earnings from prior years due to accounting irregularities. In 2003, six former Rite Aid senior executives were convicted of conspiracy regarding a wide-range of accounting fraud and false filings with the U.S. Securities and Exchange Commission (SEC). These executives included former chief executive officer (CEO) Martin Grass, who was the son of company founder Alex Grass. The former executives admitted to drastically overstating net income from 1997 to 2000 through multiple schemes. Alex Grass was sentenced to eight years in prison, which at the time was one of the harshest punishments ever given in connection to an accounting-related crime. Rite Aid was forced to restate its earnings by $1.6 billion, which at the time was one of the largest restatements in U.S. history.

Potential Merger

Drug price inflation continues to hurt drugstore profitability, and the Affordable Care Act (ACA) and subsequent health care reform has incentivized hospitals, health insurers and drugstores to cut costs. A popular way of doing this is reducing overhead through mergers and acquisitions (M&As). This has brought about the recent deal between Rite Aid and Walgreens. In October 2015 Rite Aid and Walgreens announced a merger with Walgreens as the acquirer. Walgreens initially offered a $9 share price for a total value of $17.2 billion. Rite Aid’s shareholders approved the deal a few months later in February 2016. However, the deal got hung up on regulatory approval complications from Walgreen’s side. Several scenarios were introduced including the involvement of Kroger to take on some divested assets for increased chances of regulatory compliance. The two companies extended talks into 2017 until the merger deal was vacated and a deal to transfer Rite Aid stores to Walgreens was developed. Instead of the merger, Walgreens and Rite Aid agreed to a $4.3 billion deal that would include 1,932 Rite Aid stores to be purchased by Walgreens.

Shortly after the deal was agreed on Albertsons and Rite Aid began separate talks for a merger. In August 2018 the talks dissolved and the potential merger discussions were terminated leaving Rite Aid to focus on its transition of 1,932 stores to Walgreens. The $4.3 billion in the Rite Aid – Walgreens deal is a help to Rite Aid which will use the proceeds to improve its financial condition and renew its corporate strategy.

Financial Performance

On September 27, 2018, Rite Aid reported second quarter 2019 financial results. Non-GAAP EPS was -$0.01 in-line with expectations and GAAP EPS was -$0.33. Revenue was $5.42 billion beating expectations by $60 million and increasing 1.3% year over year.

For the trailing twelve months through October 2018, Rite aid has revenue of $21.557 billion. Three-year annualized revenue growth for the company is -6.72%. The company reports net income of $215.4 million for the trailing twelve months. Net income growth annualized over the past three years has also been negative at -23.52%.

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.