No cause for overreaction to Rite Aid news, analyst says

NEW YORK The waters might be choppy, but Rite Aid still stands a strong chance of successfully turning around its recently-acquired Brooks/Eckerd operations, Meredith Adler, research analyst for Lehman Brothers, expressed in a note published Friday.

The note comes one day after Rite Aid lowered its fiscal 2008 guidance for sales, net loss and adjusted EBITDA because of a soft economy and slow start to the cough/cold season according to the company. That news dropped Rite Aid’s stock by some 27 percent to less than $3 per share.

“We remain confident in the medium- and long-term outlooks for Rite Aid and the benefits of the Brooks/Eckerd merger … although we expect near term sales pressure to persist into 4Q,” Adler wrote.

“The conversion of the acquired stores’ front end to Rite Aid’s more successful approach is going smoothly from a process perspective,” she said. “It is, however, creating more pressure on earnings than expected.” Sales at the acquired stores have never been high, and the temporary distruption in stores on account of systems conversions and remodels, not mention Rite Aid’s discontinuation of certain inventory and unprofitable promotions, and sales have eroded even further, Adler said. “It is our view that Rite Aid essentially bought the Brooks/Eckerd pharmacy business with the intention—well underway now—to replace the acquired front ends with its more successful offering, merchandising plan and prototype layout. The first initiative is complete for all stores but the latter two have only just begun. … That means that the company will need to live with the sales and earnings weakness at the acquired stores for a few more quarters, though steady improvement should occur by the beginning of the new calendar year.”

Over the course of the third quarter, Rite Aid completed systems conversions at an additional 265 stores after having completed 300 by the end of its second quarter.

Rite Aid had changed all the merchandise at every store by the end of November, which includes the company’s private label offerings. And Rite Aid has completed minor remodels and remerchandised 150 stores, Adler reported, and consolidated 78 stores, transferring the prescription files of 71 acquired Brooks/Eckerd stores to nearby Rite Aid stores and transferring the prescription files of seven Rite Aid stores to nearby acquired stores.