Rite Aid – Game on for an Opportunistic Real Estate Strategy
Rite Aid (RAD) turned in its 18th consecutive month of same store sales declines. The struggling drug store chain reported revenues for the latest quarter of $ 6.2 billion (compared with $ 6.352 billion for the same quarter last year). In addition, net loss for the most recent quarter was $ 79.1 million. Also, the company stated in its most recent earnings call that the company is paying approximately $ 100 million a year in dark store rent. It appears that the company’s 10,092,337 square feet of excess space will take several years to burn off (approximately 4,832,854 sf is sub-leased).
As I started peeling back the most recent F3Q11, it became clear to me that Rite Aid should consider deploying some opportunistic real estate strategies:
Save-A-Lot – Rite Aid recently announced that is licensing ten (10) South Carolina stores to include full service grocery products within the upper retail sales space. These grocery products include meat, produce and dairy products. According to Rite Aid’s recent earnings call, the grocery products will be 40% cheaper than traditional supermarket products. It appears that the company’s “early results” are promising and that Rite Aid may begin a nationwide rollout of the Save-A-Lot merchandise.
I applaud management’s new sales initiatives and this complimentary co-branding strategy that will compete with other discount grocery retailers like Aldi, Food Lion (Delhaize), and the national dollar store chains (not to mention Wal-Mart’s new “small mart” facilities). The combined grocery-drug store strategy is evolving, and I am certain that Walgreen’s (WAG) and CVS are considering similar strategies to increase sales and remain competitive. What I like about Rite Aid’s new Save-A-Lot strategy is that it works well within its current real estate footprint. The cost to retrofit a new Save-A-Lot interior is significantly less than relocating a new facility; hence the ROIC (Return on Invested Capital) should boost sales and profitability quickly and efficiently.
Store Locations – Currently Rite Aid operates 4,780 stores in 31 States. The majority of the stores are located in the northeast and the southeast with a fractional (853/4780) 17.8% located in six (6) western States (CA, CO, NV, OR, UT and WA). Given Rite Aid’s massive leverage ($6.4 billion), it appears that the company could provide some valuable de-leveraging by selling off approximately 853 of its west coast stores. In addition, Rite Aid owns eleven (11) distribution centers totaling approximately 5.5 million square feet. Since the company is paying its creditors around 8% in interest, it appears that a significant amount off long term debt could be further reduced by selling the assets and leasing them back to third party sponsors (i.e. sale leaseback facility). Both above mentioned strategies could provide Rite Aid with a significant reduction in its burdensome $ 6.2 billion in debt.
The New Rite Aid – With a smaller store count (proposed as less than 4,000 stores in 25 States), the “less leveraged” model could begin to compete with its peers while continuing to increase customer count and brand awareness. Currently Rite Aid management claims to have ample liquidity; however, my take is that the company is “borrowing from Peter to pay Paul” while convincing its bankers to float notes at sub-prime interest rates. The obvious above-mentioned real estate strategy allows Rite Aid to trade the west coast assets consisting of Boardwalk (WA with 139 stores), Park Place (CA with 600 stores), and Pennsylvania Avenue (OR with 71 stores) in return for beefing up on the core assets like Vermont Avenue (northeast US) and St. James Place (southeast US) – all on the east coast. In addition, the company could (and should) continue to expand its product mix to include the Save-A-Lot merchandise that is more aligned with the customer demographics in the core eastern markets.
I have found that to win Monopoly you must be patient and efficient (lean and mean). With 2011 upon us, the new Rite Aid should embark on strategy so that the #3 drug store retailer can remain competitive. Let’s not forget the lessons learned from other highly leveraged retailers like Circuit City, Linens n’ Things, Blockbuster, and Hollywood Video (to name a few). Game on Rite Aid …..
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.