CAMP HILL, Pa. (AP) – The turnaround team that assumed the leadership of Rite Aid Corp. cruised into town on a jet in December 1999 with little understanding of the depth of the company’s troubles.
The quartet of executives, freshly signed on from an Oregon-based grocery and general merchandise chain, did not know they would have to restate the company’s revenues by $1.6 billion – at the time, the largest such revision in American history – and plead with Wall Street for more time and money to revive the company’s sales and pay down its debt.
Three years later, Rite Aid is showing a small quarterly profit, Wall Street analysts are giving it good reviews, and senior executives are declaring Rite Aid a turned-around company.
“It’s been an amazing journey,” said Bob Miller, Rite Aid’s chairman and chief executive officer. “If you asked 10 knowledgeable people when we got here if Rite Aid would survive, nine of them would have said ‘no.”‘
When Miller’s team arrived, it found a pharmacy chain of about 3,900 poorly merchandised and stocked stores staffed by a demoralized work force of nearly 90,000. The central Pennsylvania-based company had few sales or marketing mechanisms to reverse declining customer counts and, despite steady pharmaceutical sales, it had heavy debt left over from a purchasing spree by the prior management.
“I spent time looking at our stores and really doing some research myself,” said Mary Sammons, the chief operating officer who is set to succeed Miller as CEO in June, “and to me there wasn’t a good reason why the company couldn’t be successful.”
For six months, accountants combed the books to straighten out two years of allegedly falsified entries that deflated expenses and inflated revenues. The $1.6 billion restatement in July 2000 was higher than anyone had imagined, although it has since been surpassed by the $9 billion accounting fraud Worldcom Inc. has admitted.
“I would say it was absolutely a huge scandal,” said Ed Ketz, an accounting professor at Penn State University’s Smeal College of Business Administration who has a forthcoming book on accounting fraud. “It still ranks in the top 10.”
Rite Aid’s previous chairman and chief executive, Martin L. Grass, is under federal indictment on federal fraud and conspiracy charges, and is scheduled to go to trial in June with two of his top executives. All three have pleaded innocent.
Miller and his team have since settled a number of lawsuits stemming from the conduct of Grass, the son of Rite Aid’s founder, and his executive team, which was forced out in October 1999.
Regardless of the damage done by accounting scandals, businesses with good foundations like Rite Aid – the 40-year-old drugstore chain has stores from California to New York – can be turned around with the right moves, Ketz and others say.
“There’s too much value to destroy in a liquidation,” said Peter Knutson, a professor emeritus of accounting from the Wharton School at the University of Pennsylvania. “It has a name, it has a franchise, stores all over under that name. … Rite Aid’s real problem was that it wasn’t doing well economically and they had had a series of (expensive) acquisitions.”
In three years, Miller, Sammons and the other two turnaround-team members – since-resigned David Jessick and chief administrative officer John Standley – have brought the company back, closing 500 underperforming stores and remerchandising, remodeling, and vigorously marketing many of the stores they kept.
They sold some assets and doubled the company’s shares of common stock to help pay down debt.
The result is a 3,400-store chain that has decreased its debt from $6.6 billion to about $3.9 billion and cut net losses from $1.6 billion in fiscal 2001 to $112.1 million in recently ended fiscal 2003 – which included a $7 million fourth-quarter profit. Its cash flow from operations has increased to 3.9 percent of revenue for fiscal 2003, three times what it was in 2000.
Even as it closed stores, management has seen revenue rise from $13.3 billion in fiscal 2000 to $15.8 billion in fiscal 2003. Rite Aid now employs about 75,000 people.
In the past few weeks, the company has earned a round of rating upgrades from analysts at firms including Merrill Lynch, Moody’s, and Standard & Poor’s.
And the future appears bright: As more pharmaceuticals hit the market – including generics, which bring a higher profit margin – and an aging population increasingly takes pills for preventive or curative purposes, sales promise to be strong, Sammons said.
Still, Rite Aid has a heavy debt load to resolve, and lags the top retail pharmacy chain, Walgreen, which posted $28.7 billion in revenue last year and has ambitious plans to expand upon its 3,880 store base.
Rite Aid’s bread-and-butter pharmacy sales, like those throughout the industry, have a paper-thin profit margin of 2 percent or less. And Rite Aid’s stock price remains at about $3, a shadow of its high of $50.94 in early 1999 before the company plummeted into scandal.
Troubles began when Martin Grass took over in 1995.
Expensive purchases – like the $2.3 billion acquisition of Thrifty PayLess stores in 1996 – piled debt onto the chain built by Alex Grass from the first store he opened in Scranton, Pa., in 1962, to provide health and beauty products.
As earnings sagged and debt mounted, the stock price plummeted in 1999 and Martin Grass began to explore selling Rite Aid or some of its assets. With Rite Aid defaulting on loans, Grass allegedly pledged stock from a subsidiary for a new $1.3 billion line of credit without the knowledge of the board of directors.
The board forced him out in October 1999 and announced plans to restate revenues.
Venture capitalist Leonard Green, then a Rite Aid director, helped arrange new short-term financing and the turnaround team. A job that at first appeared simply to be about winning back customers, treating employees and vendors right, and restocking and remerchandising stores, soon became much larger.
The company’s financial position now is as good as could have been expected two years ago, Miller said.
“Rite Aid is certainly going to survive and prosper,” Miller said, “and I’m certain of that.”
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On the Net:
Rite Aid: www.riteaid.com
AP-ES-04-22-03 1434EDT
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