Rite Aid's Bold Strategy Amidst Financial Restructuring

Rite Aid sought Chapter 11 bankruptcy protection on Sunday due to the challenging conditions faced by drug stores. This was further compounded by its position as a runner-up to larger chains and costly legal disputes over allegations of filling illegal opioid prescriptions.

The bankruptcy filing was not unexpected, as CVS and Walgreens, its larger competitors, are also grappling with similar issues. These companies are also closing stores as customers increasingly turn to more customer-friendly options such as Amazon, Walmart, Target, and Costco, which offer nationwide pharmacy services.

However, Rite Aid is in a much worse financial situation compared to its competitors and is unable to withstand the challenges currently plaguing the industry. Recently, the company submitted a notice to the US Securities and Exchange Commission indicating its inability to provide its latest quarterly financial report due to its exploration of "strategic alternatives," which essentially translates to considering bankruptcy in the language of Wall Street.

According to the filing, the company anticipates a significant increase in losses for the previous quarter. This is quite alarming considering Rite Aid has already suffered a loss of around three-quarters of a billion dollars from March 2022 to March 2023, as well as an additional $307 billion between March and May of this year. Over the course of the past six years, Rite Aid has accumulated nearly $3 billion in losses.

Rite Aid, in its most recent financial report filed in early June, had a meager $135.5 million in cash reserves while carrying a burdensome $3.3 billion of long-term debt. This debt surpassed the value of the company's assets by almost $1 billion and was further compounded by increasing interest rates. Neil Saunders, the managing director of GlobalData, noted that Rite Aid's continuous financial losses throughout the past six years made it inevitable for the company to file for bankruptcy.

A plan to stay afloat

The company said in a statement it had secured $3.5 billion in financing and debt reduction agreements from lenders to keep the company afloat through its bankruptcy.

The company announced its intention to expedite store closures, divest certain businesses such as prescription benefit provider Elixir Solutions, and potentially resolve legal disputes at a significantly lower expense through bankruptcy. Rite Aid has appointed Jeff Stein as the new CEO, who will also oversee the restructuring process and join the board. Stein emphasized the company's commitment to continue operating.

Rite Aid has been led by an interim CEO since January 2023.

Fighting opioid lawsuits

Rite Aids losing battle against mounting debt was exacerbated by its legal troubles stemming from accusations of filing unlawful opioid prescriptions for customers.

The company was sued by the Department of Justice in March for allegedly processing "unlawful prescriptions for controlled substances" with the knowledge of wrongdoing. This action is deemed a violation of the False Claims Act and Controlled Substances Act. The government has accused Rite Aid of disregarding clear warning signs while fulfilling prescriptions for highly addictive pain relievers.

On September 26, 2019, in San Rafael, California, the Rite Aid logo is prominently showcased on the outside of a Rite Aid pharmacy. Rite Aid stock experienced a significant surge following the company's report of second-quarter earnings that surpassed expectations, even though revenues fell below projections. Earnings per share for Rite Aid increased by 12 cents, surpassing analysts' predictions of 7 cents per share.

Rite Aid's stock is encountering significant volatility due to the following reasons:

Upon filing its lawsuit, the US Justice Department stated its intention to utilize all available resources in order to hold Rite Aid responsible for its contribution to the opioid epidemic.

Walgreens, CVS, and other companies have resolved comparable legal cases in recent years, yet they have managed to maintain their financial stability and withstand the substantial financial obligations resulting from settlements with various government agencies. The US Centers for Disease Control and Prevention reports that over half a million individuals have lost their lives to drug overdoses in the United States from 1999 to 2020.

Rite Aid, the seventh largest pharmacy in the United States, is the third-largest standalone pharmacy chain nationwide. With over 2,200 stores across 17 states, it received a $17 billion lifeline in 2015 when Walgreens sought to acquire the chain. However, the deal faced intense scrutiny from US regulators due to concerns about potential violations of federal antitrust laws and decreased competition in the drug store market.

In the end, the companies reached an agreement in 2017 for a reduced deal worth $4.4 billion. Under this agreement, Walgreens purchased nearly 2,000 Rite Aid locations, resulting in Rite Aid losing its prominence and being unable to compete on the same level as its larger competitors. Contribution to this report was made by CNN's Nathaniel Meyersohn and Juliana Liu.