Overview
We are a pharmacy retail healthcare company, providing our customers and
communities with a high level of care and service through various programs we
offer through our two reportable business segments, our Retail Pharmacy segment
and our Pharmacy Services segment. We accomplish our goal of delivering
comprehensive care to our customers through our retail drugstores, RediClinic
walk-in retail health clinics and our transparent and traditional PBMs,
EnvisionRxOptions and MedTrak. We also offer fully integrated mail-order and
specialty pharmacy services through EnvisionPharmacies. Additionally through
EIC, EnvisionRxOptions also serves one of the fastest-growing demographics in
healthcare: seniors enrolled in Medicare Part D. When combined with our retail
platform, this comprehensive suite of services allows us to provide value and
choice to customers, patients and payors and allows us to compete in today's
evolving healthcare marketplace.
Retail Pharmacy Segment
Our Retail Pharmacy segment sells brand and generic prescription drugs, as well
as an assortment of front-end products including health and beauty aids,
personal care products, seasonal merchandise, and a large private brand product
line. Our Retail Pharmacy segment generates the majority of its revenue through
the sale of prescription drugs and front-end products at our 2,464 retail
stores. We replenish our retail stores through a combination of direct store
delivery of pharmaceutical products facilitated through our pharmaceutical
Purchasing and Delivery Agreement with McKesson, and the majority of our
front-end products through our network of distribution centers. In addition, as
of November 30, 2019, the Retail Pharmacy segment includes 66 RediClinic walk-in
retail clinics, of which, 30 were located within Rite Aid retail stores in the
Philadelphia and New Jersey markets.
Pharmacy Services Segment
Our Pharmacy Services segment provides a full range of pharmacy benefit services
through EnvisionRxOptions. The Pharmacy Services segment provides both
transparent and traditional PBM options through its EnvisionRxOptions and
MedTrak PBMs. EnvisionRxOptions also offers fully integrated mail-order and
specialty pharmacy services through EnvisionPharmacies; an innovative claims
adjudication software platform in Laker Software; and a national Medicare Part D
prescription drug plan through EIC's EnvisionRx Plus product offering. The
segment's clients are primarily employers, insurance companies, unions,
government employee groups, health plans, Managed Medicaid plans, Medicare
plans, other sponsors of health benefit plans and individuals throughout the
United States.
Restructuring
In March 2019, the Board of Directors implemented a reorganization of our
executive management team to further streamline our business. In addition, we
announced a restructuring plan that resulted in a reduction of managerial layers
and consolidated roles across the organization. In addition, we have been
working on other transformation initiatives, which include building tools to
work with regional health plans to improve patient health outcomes,
rationalization of SKU's in our front-end offering to free up working capital,
an assessment of our pricing and promotional strategy, additional executive team
changes and further headcount reductions, and a continued review of our cost
structure.
As a result of the restructuring that we announced in March, we expect to
achieve annual cost savings of approximately $55.0 million, of which
approximately $42.0 million is expected to be realized during the fiscal year
ended February 29, 2020. These savings offset the reduction in TSA fees that we
experienced in Fiscal 2020. We have also incurred restructuring costs to support
our transformation initiatives, which we expect to provide future growth and
expense efficiency benefits. We anticipate our total fiscal 2020
restructuring-related costs to be approximately $100.0 million and expect to
realize the full benefit of this investment over the next two years.
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Asset Sale to WBA
On September 18, 2017, we entered into the Amended and Restated Asset Purchase
Agreement with WBA and Buyer, which amended and restated in its entirety the
previously disclosed Original Asset Purchase Agreement. Pursuant to the terms
and subject to the conditions set forth in the Amended and Restated Asset
Purchase Agreement, Buyer agreed to purchase from Rite Aid 1,932 Acquired
Stores, three distribution centers, related inventory and other specified assets
and liabilities related thereto for a purchase price of approximately
$4.375 billion, on a cash-free, debt-free basis, in the Sale.
We announced on September 19, 2017 that the waiting period under the HSR Act
expired with respect to the Sale. We completed the store transfer process in
March of 2018, which resulted in the transfer of all 1,932 stores and related
assets to WBA and received cash proceeds of $4.157 billion. On September 13,
2018, we completed the sale of one of our distribution centers and related
assets to WBA for proceeds of $61.2 million. On October 31, 2019, we completed
the inventory transfer at one of our remaining distribution centers to WBA for
proceeds of $23.5 million. The inventory transfer has been included in the
results of operations and cash flows of discontinued operations for the thirteen
week period ended November 30, 2019. On December 4, 2019, we completed the
transfer of the related distribution center and non-inventory related assets to
WBA for proceeds of $39.2 million. The impact of the sale of the related
distribution center and non-inventory assets resulted in a pre-tax gain of
approximately $19.0 million, which will be included in the results of operations
and cash flows of discontinued operations during the fourth quarter of fiscal
2020.
The transfer of the remaining distribution center and related assets remains
subject to minimal customary closing conditions applicable only to the
distribution center being transferred at such distribution center closing, as
specified in the Amended and Restated Asset Purchase Agreement. We will receive
additional proceeds of approximately $94.0 million upon completion of the sale
of the remaining distribution center and related assets.
The parties to the Amended and Restated Asset Purchase Agreement have each made
customary representations and warranties. We have agreed to various covenants
and agreements, including, among others, our agreement to conduct our business
at the distribution centers being sold to WBA in the ordinary course during the
period between the execution of the Amended and Restated Asset Purchase
Agreement and the distribution center closing. We have also agreed to provide
transition services to Buyer for up to three years after the initial closing of
the Sale. Under the terms of the TSA, we provide various services on behalf of
WBA, including but not limited to the purchase and distribution of inventory and
virtually all selling, general and administrative activities. The term of the
TSA has been extended to October 17, 2020. In connection with these services, we
purchase the related inventory and incur cash payments for the selling, general
and administrative activities, which, we bill on a cash neutral basis to WBA in
accordance with terms as outlined in the TSA. Total billings for these items
during the thirteen and thirty-nine week periods ended November 30, 2019 were
$0.6 billion and $2.7 billion, respectively, of which $105.4 million is included
in Accounts receivable, net. Total billings for these items during the thirteen
and thirty-nine week periods ended December 1, 2018 were $1.6 billion and $5.5
billion, respectively, of which $327.9 million is included in Accounts
receivable, net. We recorded WBA TSA fees of $7.9 million and $33.4 million
during the thirteen and thirty-nine week periods ended November 30, 2019,
respectively, which are reflected as a reduction to selling, general and
administrative expenses. We recorded WBA TSA fees of $17.9 million and $64.8
million during the thirteen and thirty-nine week periods ended December 1, 2018,
respectively, which are reflected as a reduction to selling, general and
administrative expenses.
Based on its magnitude and because we exited certain markets, the Sale
represented a significant strategic shift that has a material effect on our
operations and financial results. Accordingly, we have applied discontinued
operations treatment for the Sale as required by GAAP.
Overview of Financial Results from Continuing Operations
Our net income from continuing operations for the thirteen week period ended
November 30, 2019 was $52.3 million or $0.98 per basic and diluted share
compared to a net loss of $17.3 million or $0.33 per basic and diluted share for
the thirteen week period ended December 1, 2018. The improvement in our
operating results for the thirteen week period ended November 30, 2019 was due
primarily to the $55.7 million gain on debt retirement in connection with the
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repurchase of $57.6 million of our 7.7% notes due February 2027 and $99.0
million of our 6.875% fixed-rate senior notes due December 2028 at a discount
and lower SG&A expenses resulting from lower labor and benefits expense,
partially offset by a reduction in WBA TSA fee income and restructuring-related
costs incurred in connection with our Path to the Future initiative in the
current year.
Our net loss from continuing operations for the thirty-nine week period ended
November 30, 2019 was $125.8 million or $2.37 per basic and diluted share
compared to a net loss of $411.3 million or $7.79 per basic and diluted share
for the thirty-nine week period ended December 1, 2018. The improvement in our
operating results for the thirty-nine week period ended November 30, 2019 was
due primarily to goodwill and intangible asset impairment charges recognized in
the prior year of $375.2 million, the gain on debt retirement noted above, lower
labor and benefits expense, lower depreciation and amortization and lease
termination and impairment charges. These benefits were partially offset by
restructuring-related costs incurred in connection with our Path to the Future
initiative in the current year and higher income tax expense and lower WBA TSA
fee income.
Our Adjusted EBITDA from continuing operations for the thirteen and thirty-nine
week periods ended November 30, 2019 was $158.1 million or 2.9 percent of
revenues and $402.6 million or 2.5 percent of revenues, respectively, compared
to $142.8 million or 2.6 percent of revenues and $429.4 million or 2.6 percent
of revenues for the thirteen and thirty-nine week periods ended December 1,
2018, respectively. The increase in Adjusted EBITDA for the thirteen week period
ended November 30, 2019 was due to increases in both the Retail Pharmacy segment
and the Pharmacy Services segment. Adjusted EBITDA increased $7.4 million in the
Retail Pharmacy segment due primarily to lower salaries and benefit expense
related to our previously announced corporate restructuring and strong labor,
benefits and other expense control at the stores, partially offset by lower
gross profit. In addition, there was a reduction in WBA TSA fee income due to
fewer stores being serviced under the TSA. Adjusted EBITDA increased by $7.9
million in the Pharmacy Services segment. Pharmacy Services segment Adjusted
EBITDA benefited from improvements in pharmacy network performance, partially
offset by increases in SG&A expense related to our growth in Medicare Part D
membership.
The decrease in Adjusted EBITDA for the thirty-nine week period ended November
30, 2019 was due primarily to a decrease of $23.7 million in the Retail Pharmacy
segment. The decrease in the Retail Pharmacy segment Adjusted EBITDA was due
primarily to a reduction in gross profit, partially offset by decreases in SG&A.
The reduction in gross profit was due primarily to a reduction in front-end
sales and lower reimbursement rates. Retail Pharmacy segment SG&A improvement
was driven by strong labor and expense control at the stores and labor savings
and expense management relating to the recent corporate restructuring. Adjusted
EBITDA decreased by $3.0 million in the Pharmacy Services segment. The decline
in the Pharmacy Services segment Adjusted EBITDA was primarily the result of
increased commissions due to growth in Medicare Part D membership and growth in
consumer pharmacy programs. Please see the sections entitled "Segment Analysis"
and "Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per
Diluted Share and Other Non-GAAP Measures" below for additional details.
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