Can Rite Aid’s C-Suite Shake-Up Be Good News?

10/2/17

By Todd Campbell, MotleyFool

Only months after Rite Aid's (NYSE:RAD) planned merger with Walgreens Boots Alliance(NASDAQ:WBA) disintegrated, Rite Aid's CEO Ken Martindale left the company to become the CEO of GNC Holdings, Inc. earlier this month. Following the departure, Rite Aid Chairman Joseph Standley took over full control of the CEO role and on Thursday, he announced he's hired Kermit Crawford to serve as Rite Aid's new president and chief operating officer.

Rite Aid's C-suite shuffle creates a bit of uncertainty, but it may not be bad news for the embattled retail-pharmacy chain. Ultimately, Martindale was responsible for failing to get Rite Aid's merger with Walgreens across the regulatory finish line; perhaps a shake-up at the top is exactly what's necessary to breathe fresh life into this struggling chain.

A person hands a prescription to a pharmacist.

IMAGE SOURCE: GETTY IMAGES.

What's the story?

Walgreens may no longer be acquiring Rite Aid lock, stock, and barrel, but it has agreed to acquire about 2,000 Rite Aid stores in an all-cash deal valued at roughly $4.4 billion. The deal has gotten an OK from regulators, and stores will begin being transferred to Walgreens soon.

The companies expect all of Rite Aid's stores will be in Walgreens' hands by early next year. At that point, Rite Aid's C-suite will finally be able to stop focusing on mergers and acquisitions (M&A) and start focusing again on winning back customers. Fortunately, management will have more financial flexibility to do that once this deal is done.

The company plans to use its cash windfall from Walgreens to solidify its balance sheet by paying down a good portion of its debt. A history of acquisitions has left Rite Aid owing more than $7 billion to its creditors, and despite past debt restructurings, the company's still spending over $100 million per quarter in interest.

Paying down Rite-Aid's debt should boost margin, and that should allow management to increase investments that can get it back on track to deliver long-term growth. It will still own more than 2,500 stores following its deal with Walgreens, and many of its remaining stores will need a cosmetic refresh. In the past, remodeled stores have performed better than other stores, so I expect the pace of remodeling will pick up next year.

Rite Aid should also be in a better position to support growth at its pharmacy-benefit management business, Envision Rx. Pharmacy-benefit managers negotiate lower drug costs for insurers and other healthcare payers and they manage prescription-drug adherence programs and mail-order prescription fulfillment. It's a good business to be in, but competing for business can be costly, and Rite Aid's financials have hindered it -- until now.

Rite Aid might also be able to use its newfound wealth to more aggressively pursue an in-store healthcare-clinic strategy. Its competitors have opened thousands of in-store clinics, and those clinics are diversifying revenue and solidifying prescription unit volume. So far, Rite Aid's only dipped its toes in the marketplace, so there's a lot of catching up to do.

Work to be done

Joseph Standley has been shepherding Rite Aid along in various leadership roles since 2008, so he's uniquely qualified to know where Rite Aid's pain points are. Kermit Crawford's got plenty of been-there-done-that experience, too. He began his retail career as a Walgreens' pharmacy intern more than 30 years ago, and between 2004 and 2014, he held various top leadership jobs at Walgreens. Those roles range from store manager to managing its pharmacy-benefit manager business to serving as president of pharmacy, health, and wellness until his retirement in 2014.

It's anyone's guess if Standley and Crawford can overcome the obstacles weighing down Rite Aid's performance. They'll need to figure out how to offset revenue that's under pressure from generic drug launches and payer pushback, and boost foot traffic to drive front-end sales.

Although the challenges are big, the company's improving income statement can give management the tools it needs to turn the company around. Only time will tell if I'm right.

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