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Rite Aid Blames Walgreens Deal Drama for Poor Performance

September 28, 2017

Rite Aid (RAD) shares took a big beating on Thursday when the No. 3 U.S. drugstore chain reported weak quarterly results for which it blamed drama around a failed attempt to be bought whole by Walgreens Boots Alliance (WBA).

The company, which with Walgreens first announced a deal in 2015, saw shares fall 11% after reporting that comparable sales in its pharmacy business (filling prescriptions) fell 4.6% last quarter which it said was partly caused by more generic drugs hitting the market, and that comparable sales of general merchandise were down 0.9%. Total revenue fell to $7.68 billion from $8.03 billion.

Walgreens, the much larger of the two and on par in size with CVS Health (CVS), finally won government approval last week to buy about 40% of Rite Aid’s 4,500 stores for $4.375 billion in cash as a consolation prize. That two months after the two companies scrapped a much bigger deal for all of Rite Aid that did not pass muster with the anti-trust regulators at the Federal Trade Commission despite many amendments such as deal to sell hundreds of stores to regional chain Fred’s (FRED). The deal they finally got through significantly lessens Rite Aid’s large debt load but it also means Rite Aid has to wow investors with its now much smaller core business.

And so far they have been underwhelmed. Rite Aid shares sank to about $2, their lowest levels since 2013. In 2017 so far, they have lost about 75% of their value because of the Walgreens merger’s undoing.

“Our performance for the quarter reflects a challenging reimbursement rate environment and the effects of an extended merger and asset sale process,” Rite Aid CEO John Standley said in a statement, noting that the company’s reduced debt would it give it more financial flexibility. In the last decade, Rite Aid has indeed not been able to invest as much in improving its stores as its deeper-pocketed rivals Walgreen and CVS have.

Rite Aid tried to mitigate the blow by announcing it had tapped a respected executive in the drugstore industry to be its new president and operations chief. Kermit Crawford, who spent 30 years at Walgreens but left in 2014, will join the company next Thursday. At Walgreens, he had last served as executive vice president and president of pharmacy health and wellness.

Camp Hill, Pennsylvania-based Rite-Aid reported a profit of $170.7 million, or 16 cents per share, for the quarter ended Sept. 2, helped by a termination fee for the aborted deal with Walgreens. Its losses, adjusted for non-recurring gains, came to one cent per share.