A bankruptcy prescription for Rite Aid

What happened?

US drugstore and pharmacy chain, Rite Aid has filed for bankruptcy. The company stated to investors that it may not be able to keep its business running.

It has lost more than $1 billion in the months before its bankruptcy filing. They have been unable to file its latest quarterly financial report as a result of this.

The revelations come amid a tough time for the company, facing such as competition and a wide host of litigation suits in relation to the opioid epidemic in the US.

Rite Aid: A quick glance

What? A US drugstore company

Industry: Drugstore /Pharmaceutical industry

Founded: 1962 in Scranton, US

Founder: Alex Grass

Current CEO: Jeffrey Stein

Number of stores: 2,100 stores in 17 states

Number of employees: 45,000+

Image courtesy of RLI

What is causing the turbulence?

The US drugstore and Pharmacy chain industry has been going through a rough patch in recent months. Some reasons for Rite Aid’s potential bankruptcy include:

· They’re in billions of debt. Insurer Humana Health and pharmaceutical company, McKesson Corporation are Rite Aid’s largest creditors. At the beginning of June 2023, which is the last time the company filed a financial report, they had just $135.5 million of cash on hand and $3.3 billion in long-term debt. Since 2017, Rite Aid has nearly $3 billion in losses.

· They’re facing thousands of lawsuits. They’re currently being faced with over a thousand local, state and federal lawsuits, all claiming that it filled thousands illegal prescriptions for painkillers and thus, fuelling the Opioid crisis. For example, the Department of Justice filed a lawsuit against the company in March 2023, claiming that they violated the False Claims Act and Controlled Substances Act. With that being said, Rite Aid isn’t the only company to come under such legal fire. CVS, Walgreens and other firms have settled similar lawsuits over recent years.

· Less demand. The Covid-19 pandemic meant people came to its stores for their covid-19 jabs. If it were me, I’m sure I’d have bought something I needed from the store too. More sales often means more profit. Lockdowns have ended and the number of Covid-19 cases has dramatically declined, leading to reduced footfall and less sales. Deteriorating sales has left the company with a reduced amount of money to invest in its businesses and has led to an increased difficulty in paying back its debt.

· Shoppers are being drawn to competitors. Major competitors such as Amazon and Walmart have been luring shoppers to their stores, due to their more affordable products. Independent drug store and pharmacy outlets tend to price their products slightly higher than bigger counterparts, with having less stores being one reason for this. The aim is to draw shoppers to you and not away. Given the tough economic climate countries such as the US are in, it’s safe to say that many more people will be drawn to products that are cheaper in price.

How has Rite Aid been responding to the turbulence?

They’ve managed to secure $3.45 billion in funding and debt reduction agreements from lenders. It’ll keep the company afloat for now. But a question arises – for how long will the financing sustain them?

· They have been closing stores. So far, they have closed 154 stores across the US. This is in an effort to free up some cash and reduce the pay off some of the debt they owe to creditors. Store closures have been a regular occurrence for more than a year in Philadelphia, according to the United Food and Commercial Workers Local 1776 (they represent Rite Aid employees in the Philadelphia area).

· They have sold some of its businesses. This is due to a slump in sales, which inevitably affects the amount of capital they can invest into these businesses. Selling some of them keeps more money in the company and helps to pay off some of their debt.

· They appointed a new CEO. Jeff Stein has come in and will help to guide the company’s restructuring process. He stated, “With the support of our lenders, we look forward to strengthening our financial foundation, advancing our transformation initiatives and accelerating the execution of our turnaround strategy.” Mr Stein is the founder of Stein Advisors, a financial advisory firm that focuses on fixing struggling companies.

· Operations are continuing. The company stated that it will, “make every effort” to make sure that customers know whether their store is closing ahead of time. Customers will get their prescriptions filed at another Rite Aid branch or from other nearby pharmacies.

The bankruptcy means that they expect heavy losses from the previous quarter. Shares of the company on the New York Stock Exchange are about 65 cents, down from $4.20 just a year ago.

What happens during a restructuring?

For Lawyers on the debt or creditor side – Insolvency lawyers are usually involved in all stages of the insolvency process. They can undertake various tasks, such as negotiating company voluntary agreements, filing through the company’s assets to see whether any outstanding debt can be paid off with them and conducting a detailed assessment of the corporate and capital structure of the company.

Financial advisors - They conduct a broad range of tasks, such as the renegotiation of lower interest payments, filing through the company’s tax, conducting audits, looking at the company’s balance sheet and more.

A change in the organisational structure, the closing of underperforming locations and/or departments, reallocating resources to different parts of the business and much more are also done as part of the restructuring process.

This story highlights a growing trend…

Rite Aid is apart of a growing number of companies filing for bankruptcy.

Companies are filing for bankruptcy at their fastest rate since 2020. From Vice Media, to Instant Pot, to Bed, Bath and Beyond, all of these companies have filed for Chapter 11 this year. Debt defaults like this usually come in cycles. Remember the financial crisis of 2008?

Image courtesy of Bloomberg Originals

What is driving these filings? Let’s look at some factors:

· A slash in interest rates. At the start of the 2020 pandemic, the Federal Reserve slashed interest rates, so struggling companies could stay afloat. It meant that it was cheaper to borrow money from lenders. The access to debt brought companies more time to continue to operate, however, it meant more and more debt was being taken on…

· Enter higher interest rates. This is where the main culprit of the higher Chapter 11 filings we’re seeing. With a number of companies taking more and more debt, it meant it would be harder to pay back creditors when interest rates increased. This is what is happening now. The Federal Reserve wants to slow down the high inflation and so rates are being kept higher for longer. With interest rates currently at 3.7% , I won’t be surprised if more companies file for bankruptcy.

Distressed Debt

The higher interest rate environment has created a mountain of distressed debt. Taken from the Corporate Finance Institute, Distressed Debt, “refers to the securities of a government or company that has either defaulted, is under bankruptcy protection, or is in financial distress.” In other words, it is the debt from “entities that are going through bankruptcy, or are in the brink of going through it.” Examples include common and preferred shares and bonds.

Image courtesy of Bloomberg Originals

There is more than $200 billion of distressed debt in the US, and this is larger than the GDP of some European countries. Since 2021, this sort of debt, owned by risker and less creditworthy businesses has jumped around 400%, according to Bloomberg.

Note: Most businesses go bankrupt not because they lose money. They go bankrupt because they borrow money from lenders and when times get tough and it goes to refinance the loan, the bank says you’re not as a good a credit as you used to be, or we don’t have as much money to lend as we used to, or their standards have gotten higher.

What is clear is that Rite Aid will not be the last company, more will follow and lawyers specialising in Insolvency and Restructuring will continue to get work. As long as interest rates remain high, we can continue to expect bankruptcies to be ‘the norm’.

Another note: Was the filing inevitable?

“It was always a matter of when, not if, Rite Aid would file bankruptcy”…

“The company has been deep in the red for the past six years.”

These statements come from Neil Saunders, managing director of GlobalData.

These comments prompted me to ponder on why he would say this. As I have previously stated, over the past six years, Rite Aid has nearly $3 billion in losses. They’re losing to their bigger and arguably slightly better rivals, such as Walgreens and Amazon among a number of reasons.

Potential scenarios with Rite Aid…

For me, there are two solutions, two of which are similar:

1. A competitor can purchase the company. Walgreens is one option. In 2015, Walgreens offered to buy the chain for $17 billion. However, the dela was met with scrutiny from US regulators. In the end, Walgreens bought just under 2,000 Rite Aid locations for a smaller $4.4 billion deal. However, the deal left Rite Aid with less locations and as a less powerful rival to other chains within the industry. I say this deal watered the flower of the increased likelihood of bankruptcy for Rite Aid as they grew the influence of Walgreens and reduced theirs. With this being said, Rite Aid is still a valuable company. Instead of just letting Rite Aid become no more, a competitor, such as Walmart can either decide to purchase everything that comes with Rite Aid, or decide to buy some, such as their IP or their most profitable store locations. Or Walgreens can decide to buy the rest pf the remaining locations. In my opinion, this is possible, however, such stores are going through similar problems Rite Aid is going through, so there is a genuine question about whether now is the best time to make an acquisition.

*Image courtesy of* *HealthCare Finance News*

2. The last option, is that no one wants to buy the company and they go bankrupt. Given that it is buried under billions of debt and rising interest rates making repayment much more unlikely, this option doesn’t seem too farfetched. If so, it would be a great shame, since they’re one of the chains that has been operating for a good few decades.

My final thoughts:

If Rite Aid does go bankrupt, then it there is one less competitor within the industry. However, it does leave a worrying sign. Is Rite Aid the first of many to go bankrupt within the industry? Will struggling companies merge to strengthen their position? Will giants such as Walmart and Amazon continue to dominate and snap up demand, or will the antitrust police show up at their door and crush their plans?

These are some of the questions that come to mind when I think about the company’s future. But to sum up my view as of now – I think Rite Aid still has a chance, and for me the most likely outcome is that a competitor will either buy all or some of Rite Aid.

That’s it for this week! What are your thoughts on the story? Will they go bankrupt? Will they manage to stay afloat?

Comment below your thoughts. Or you can message me on any of my social media platforms or send me an email: hello@parahinsights.com

Until next, time, stay curious!

DISCLAIMER:

This blog is for informational purposes only. Parah Insights is not associated with the news sources in this blog, and sharing does not equal endorsement. Parah Insights does not provide financial, tax, legal or accounting advice – always consult your financial and legal advisors to determine what’s right for you and your business.

Further resources:

‘Why So Many US Companies Are Going Bankrupt’ - YouTube video by Bloomberg Originals

‘Rite Aid files for Chapter 11 bankruptcy, names new CEO’ – YouTube video by KTLA 5

‘Rite Aid files for bankruptcy’ - Article by CNN