Rite Aid RAD

 Works like a June bug in July.

Your local Rite Aid RAD -16.81%decrease; red down pointing triangle drugstore could soon disappear, a casualty of years of losses and failed mergers. In the end, Rite Aid was too small and too poor to pay the costs of lawsuits related to the opioid epidemic.

Rite Aid filed for bankruptcy on Sunday in New Jersey, unable to find the money to settle hundreds of federal, state and private lawsuits alleging it oversupplied prescription painkillers. The filing puts all those suits on hold.

As part of the restructuring, the company will close more of its 2,100 stores and name a new chief executive. Its collapse imperils some of the roughly 47,000 jobs at the company, which just celebrated its 61st anniversary. 

Lenders will provide the company with about $200 million in new financing as part of a plan to restructure more than $3 billion of existing debt in chapter 11.

MedImpact, a pharmacy benefit management firm, has offered to buy Rite Aid’s Elixir segment for $575 million, though an auction will be held to see if Rite Aid can find a higher bid, according to a person familiar with the matter.

Jeffrey Stein, head of a financial advisory firm, will take over as Rite Aid’s chief executive. The drugstore chain’s current interim CEO Elizabeth Burr will remain on the board. 

The company faces a Justice Department complaint that Rite Aid pharmacists filled opioid prescriptions despite clear “red flags.” The DOJ alleged that Rite Aid ignored evidence that its stores were dispensing unlawful prescriptions, deleted internal notes about suspicious prescriptions and directed managers to tell pharmacists “to be mindful of everything that is put in writing.” Rite Aid has denied the allegations. 

Filing for bankruptcy stays all pending litigation against the company. “We expect to negotiate a resolution of the opioid-related lawsuits with the various parties involved,” a Rite Aid spokeswoman said. “We also intend to resolve our legacy contract disputes, government investigations and securities matters.”

Opioid-related litigation is only one of Rite Aid’s problems. The company has struggled being a distant third behind Walgreens and CVS, and its financial troubles date back decades. Rite Aid has racked up more than $2 billion in net losses over the last five years. It operates about half as many stores as it did a decade ago after two mergers aimed at reinvigorating the chain fell apart. 

The Philadelphia-based chain joins a long list of once-familiar retailers that have filed for bankruptcy protection in recent years. Some, such as JCPenney, continue to operate hundreds of stores. Others, such as Toys ‘R’ Us, have disappeared from America’s streets. Rite Aid’s main drugstore rivals have been closing hundreds of locations as they too struggle with staffing and slimmer retail profits, and refocus on medical services.

Rite Aid has closed more than 200 stores over the past two years. In connection with the bankruptcy filing it rejected 168 leases. The company hasn’t determined how many more stores will be closed, the spokeswoman said.

Founding family

The retailer was started by Alex Grass with a single store in Scranton, Pa., in 1962. The founder ran the company for three decades and built it into a regional chain with hundreds of locations through acquisitions of smaller chains. He handed the CEO role in 1995 to his eldest son, Martin Grass.

Martin Grass quickly set out to enlarge Rite Aid, buying three drugstore chains that added West Coast locations and roughly doubled the size of the company. In 1998, he led the purchase of a pharmacy-benefits manager, an entity that controls prescription reimbursements for people with health insurance. At the time CVS and Walgreens were also buying chains in a consolidating industry. 

Rite Aid started as a single store in 1962 before acquiring smaller chains and expanding into hundreds of locations. PHOTO: GENE J. PUSKAR/ASSOCIATED PRESS

The decisions proved messy and costly. In the wake of the acquisitions, operational mistakes flourished, and debt rose as sales and profits fell. Grass family executives participated in real estate and merchandise agreements that benefited insiders and had to restate financial disclosures. The stock tumbled amid a cash crunch. Martin Grass was pushed out as CEO in October 1999 by creditors. 

In 2000, Rite Aid restated its earnings downward by $1.6 billion, which at the time was the largest such revision in U.S. financial history. In 2004, Martin Grass was sentenced to eight years in federal prison for accounting fraud.

“I tried to do too much too fast,” Martin Grass said in court before his sentencing. “In early 1999, when things started to go wrong financially, I did some things to try to hide that fact. Those things were wrong.” 

Busted deals

While Rite Aid floundered, CVS and Walgreens were buying up other competitors, accelerating store openings in its territories, expanding beyond pharmacy counters and selling snacks and greeting cards. CVS scooped up drug benefit manager Caremark, and later health insurer Aetna. Walgreens combined with Boots Alliance, a European pharmacy chain and drug distributor.

Under a new chief executive, Rite Aid in 2006 struck another massive acquisition, this time of Eckerd and Brooks drugstore chains for about $3.4 billion in cash and stock. The deal added about 1,800 stores to Rite Aid’s existing 3,300 locations.

The deal drained the company’s finances and consumer spending fell rapidly soon after, amid the 2008 recession. The new stores proved difficult to integrate and their performance dragged on the company. 

By 2010, Rite Aid shares were trading in penny stock territory as cost cutting failed to offset weak sales and profits at Eckerd and Brooks. In 1999, Rite Aid’s shares had traded above $50 apiece. 

The Covid-19 pandemic gave Rite-Aid a temporary boost, but the company remained unprofitable. P

John Standley, a longtime executive, became CEO in 2010. The company refinanced debt and cut more costs. In December 2012, it posted its first quarterly profit in years. But competition from larger chains, including CVS and Walgreens, still loomed as did a hefty debt load. 

In 2015, Standley found a new solution to the chain’s struggles. He signed a deal to sell the company to Walgreens for $9.4 billion. The deal, combining two of the three biggest U.S. drugstore chains, would draw antitrust scrutiny. 

“There are so many players in the market that I don’t believe the change between Walgreens and Walgreens plus Rite Aid could be big enough to change the rules of the game,” Walgreens CEO Stefano Pessina told the Journal at the time.

The Federal Trade Commission, however, had concerns. After years of negotiations, the deal fell apart. Instead Walgreens paid $5.18 billion for about 2,200 Rite Aid stores. During the uncertainty, Rite Aid’s business suffered and the company lacked money to refurbish its stores.

Soon after, Standley struck a new deal to sell the rest of the company to struggling grocer Albertsons. That idea also fell apart under investor backlash. Standley left the company in 2019.

Opioid suits

The Covid-19 pandemic gave the company’s business a temporary boost as Rite Aid became a key player in the rollout of vaccines and healthcare services. Sales improved but it remained unprofitable. In the fiscal year ending March 2023, the company had a net loss of $750 million on revenue of $24 billion. 

The Justice Department sued Rite Aid in March for allegedly violating the federal False Claims Act and Controlled Substances Act related to the dispensing of controlled substances. The company has denied wrongdoing. 

A massive acquisition in 2006 of Eckerd and Brooks drugstore chains drained Rite Aid’s finances. 

States, cities and other governments have sued Rite Aid and other major pharmacy operators, alleging they play a role in the opioid crisis by overprescribing pain medicines. Walgreens, Walmart and CVS have already agreed to pay more than $13 billion over several years to settle the suits.

Rite Aid, which had about $140 million of cash as of June, had warned investors that its cash flow might be insufficient to pay its debt obligations. It was in discussions with the opioid plaintiffs in the months leading up to its bankruptcy filing.