Rite Aid's Sad Saga Continues (News) November 10, 1999

Rite Aid's Sad Saga Continues

By Dave Marino-Nachison (TMF Braden)
November 10, 1999

"It's like a nightmare, isn't it?" Tom Cruises's Vincent Lauria asked Grady Seasons in the closing frames of the 1986 billiard hall classic The Color of Money.

Stockholders of embattled drugstore chain Rite Aid (NYSE: RAD) must feel themselves a bit behind the 9-ball, their shares the worst-performing on the Standard & Poor's 500 Index so far this year and their company issuing an ever-unraveling mess of bad news.

Today, the company's stock dropped another 25% of its market value after it told investors "not to rely on forward-looking profitability and cash flow information" disseminated at an Oct. 11 analyst and investor meeting. In a conference call last month, former Chairman and CEO Martin Grass forecast earnings before interest, taxes, and amortization of $1.01 billion this year and cash flow of $1.27 billion and $1.46 billion over the next two years.

Rite Aid also canceled a conference call for this evening during which it was to discuss the news, reported in today's edition of The Wall Street Journal, that the SEC's enforcement division might be taking a look at the company's plans to restate earnings for the last three fiscal years downward by about $500 million.

"It just keeps getting worse and worse," Lauria asked Seasons rhetorically, "doesn't it?"

It does in Rite Aid's case: Today's news appears to have undone any guarded optimism that might have accompanied the late-September revelation that the company had handled its liquidity crisis. (Click here for the Foolish take on that news and a quick recap of the year's events.)

This raises an issue that frequently perturbs investors, particularly those who follow retail chains closely. When the stock of a large company with a strong national brand and a far-reaching store base swoons, it often means opportunity for those who believe the investment is just out of favor or suffering from short-term missteps.

But in many cases, investors are instead stuck with "supertanker investments," which take miles to slow down and even more to turn around. When all a company has left is its brand, is any price a reasonable one? Those who've watched Sears (NYSE: S) struggle, or tracked the difficulties of Woolworth before it attempted a rebirth as Venator Group (NYSE: Z) know the trying moments this kind of investing can bring.

In Rite Aid's case, instead of rays of hope, the company seems to be gathering cloud after cloud.

Among the things investors should look for when waiting for companies to right their ships are momentum and a strong balance sheet, and Rite Aid doesn't appear to have either. Losses were heavy in Q2 (although same-store sales weren't bad), and today's news only adds uncertainly to the near-term picture; as of the end of the quarter Rite Aid was looking at a balance sheet laden with debt and a cash flow situation that makes the rats' departure from Hamelin look leisurely by comparison.

To make matters worse, the company revealed earlier this month that it paid lenders fees amounting to $43 million to renegotiate loans and extend a big-dollar debt repayment period, also cutting capital spending plans for next fiscal year. Much of Rite Aid's trouble has been caused by overly aggressive expansion financed in large part by debt, and the company has been working of late to pare many of the assets it bought not long before.

Add this to the fact that Grass quit not long after making the previously mentioned pronouncements about profits and cash -- a search is ongoing -- and the picture doesn't look particularly appealing.

"I didn't deserve that," Paul Newman's Eddie Felson told a disconsolate Dale -- played by legendary stickman Steve "The Miz" Mizerak -- after a first-round whuppin' in the same tournament as mentioned above.

But for the Rite Aid executives -- who have apparently lost investor confidence almost completely thanks to some bad decisions, poor information management and messy accounting -- Felson's retort might be more appropriate: "Yes," he said. "Yes, you did."

Related Links:
Rite Aid Web Page
Rite Aid Message Board
Fool Plate Special, 9/30/99: Is First Aid Nearby For Rite Aid?
Fool News, 8/26/99: Rite Aid Talking Transaction

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