RITE AID CORPORATION Overview
We are a healthcare company with a retail footprint, providing our customers and communities with a high level of care and service through various programs we offer through our two reportable business segments, ourRetail Pharmacy segment and our Pharmacy Services segment. We accomplish our goal of delivering comprehensive care to our customers through our retail drugstores and our PBM, Elixir. We also offer fully integrated mail-order and specialty pharmacy services throughElixir Pharmacy . Additionally, throughElixir Insurance ("EI"), Elixir also serves 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
OurRetail Pharmacy segment sells brand and generic prescription drugs and provides various other pharmacy services, 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. OurRetail Pharmacy segment generates the majority of its revenue through the sale of prescription drugs and front-end products at our over 2,300 retail pharmacy locations across 17 states and through our e-commerce platform available at www.riteaid.com. 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.
Pharmacy Services Segment
Our Pharmacy Services segment provides a fully integrated suite of PBM offerings including technology solutions, mail delivery services, specialty pharmacy, network and rebate administration, claims adjudication and pharmacy discount programs. Elixir also provides prescription discount programs and Medicare Part D insurance offerings for individuals and groups. Elixir provides services to various clients across its different lines of business, including major health plans, commercial employers, labor groups and state and local governments, representing approximately 2.3 million covered lives, including approximately 0.7 million covered lives through our Medicare Part D insurance offerings. Elixir continues to focus its efforts and offerings to its target market of small to mid-market employers, labor unions and regional health plans, including provider-led health plans and government sponsored Medicaid and Medicare plans.
Restructuring
Beginning in Fiscal 2019, we initiated a series of restructuring plans designed to reorganize our executive management team, reduce managerial layers, and consolidate roles. InMarch 2020 , we announced the details of our RxEvolution strategy, which includes building tools to work with regional health plans to improve patient health outcomes, rationalizing SKU's in our front-end offering to free up working capital and update our merchandise assortment, assessing our pricing and promotional strategy, rebranding our retail pharmacy and pharmacy services business, launching our Store of the Future format and further reducing SG&A and headcount, including integrating certain back office functions in the Pharmacy Services segment both within the segment and acrossRite Aid . Other strategic initiatives include the expansion of our digital business, replacing and updating the Company's financial systems to improve efficiency, and movement to a common client platform at Elixir. InApril 2022 , we announced further strategic initiatives to reduce costs through the closure of unprofitable stores, reducing corporate administration expenses and improving efficiencies in worked payroll and other store labor costs as well as expense reductions at our Pharmacy Services segment. These and future restructuring activities are expected to provide future growth and expense efficiency benefits. There can be no assurance that our current and future restructuring charges will achieve the cost savings and remerchandising benefits in the amounts or time anticipated. 37 Table of Contents Impact of COVID-19 InMarch 2020 , the outbreak of COVID-19 caused by a novel strain of the coronavirus was recognized as a pandemic by theWorld Health Organization . The COVID-19 pandemic has severely impacted the economies ofthe United States and other countries around the world. Since the onset of the COVID-19 pandemic,Rite Aid has been on the front lines of providing communities with essential care, services and products, including the administration of COVID-19 testing and vaccines. We have taken numerous steps to ensure thatRite Aid can continue providing these vital services during this time of great need, including hiring additional full and part-time associates to support our stores and distribution center teams, providing our front line associates with ourHero Pay andHero Bonus programs and instituted a Pandemic Pay policy that ensures associates are compensated if diagnosed with the virus or quarantined due to exposure. We also implemented safety protocols to keep our associates and customers safe, and transitioned our office-based associates to a remote work environment. Our strong local presence and scale in communities in our markets enables us to play a central role in the response to COVID-19, as well as provide seamless support for our customers wherever they need it; at our stores and at their homes through our delivery services. The COVID-19 pandemic had a significant impact on our operating results for the thirteen week periods endedMay 28, 2022 andMay 29, 2021 and will continue to have an impact on several factors underlying our operating results in fiscal 2023. Those factors include the number of individuals that receive a COVID-19 vaccine or booster; demand for COVID-19 testing; the timing and extent to which elective procedures return to pre-pandemic levels; the demand for flu and other immunizations and the length and severity of the upcoming cough, cold and flu season.
Overview of Financial Results
Our net loss for the thirteen week period endedMay 28, 2022 was$110.2 million or$2.03 per basic and diluted share compared to a net loss of$13.1 million or$0.24 per basic and diluted share for the thirteen week period endedMay 29, 2021 . The increase in net loss for the thirteen week period endedMay 28, 2022 was due primarily to higher facility exit and impairment charges driven by the Company's previously announced store closure decisions and a decrease in Adjusted EBITDA. These items were partially offset by an increase in gain on sale of assets resulting from script file sales of certain of the store closures. Our Adjusted EBITDA for the thirteen week period endedMay 28, 2022 was$100.1 million or 1.7% of revenues compared to$138.9 million or 2.3% of revenues for the thirteen week period endedMay 29, 2021 . The decrease in Adjusted EBITDA for the thirteen week period endedMay 28, 2022 was due to declines in both theRetail Pharmacy segment and the Pharmacy Services segment. Adjusted EBITDA decreased$21.2 million in theRetail Pharmacy segment due primarily to a decrease in gross profit, partially offset by a decrease in Adjusted EBITDA selling, general and administrative expenses of$40.5 million . Adjusted EBITDA in the Pharmacy Services segment decreased$17.5 million due primarily to the decline in revenues associated with lost clients and an increase in the medical loss ratio at EI, partially offset by higher retained rebates from our new rebate aggregation arrangement.
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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Consolidated Results of Operations
Revenues and Other Operating Data
Thirteen Week Period Ended
May 28, May 29,
2022 2021
(dollars in thousands except per share amounts)
Revenues(a) $ 6,014,583 $ 6,160,985
Revenue (decline) growth (2.4) % 2.2 %
Net loss $ (110,191) $ (13,057)
Net loss per diluted share $ (2.03) $ (0.24)
Adjusted EBITDA(b) $ 100,130 $ 138,877
Adjusted Net (Loss) Income (b) $ (32,829) $ 20,934
Adjusted Net (Loss) Income per Diluted Share(b)
0.38
Revenues for the thirteen week periods ended
eliminated in consolidation.
(b) See "Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss)
per Diluted Share and Other Non-GAAP Measures" for additional details.
Revenues
Revenues decreased 2.4% for the thirteen weeks endedMay 28, 2022 , compared to an increase of 2.2% for the thirteen weeks endedMay 29, 2021 . Revenues for the thirteen week period endedMay 28, 2022 were impacted by a$6.3 million decrease inRetail Pharmacy segment revenues and a$146.4 million decrease in Pharmacy Services segment revenues. Please see the section entitled "Segment Analysis" below for additional details regarding revenues. Costs and Expenses Thirteen Week Period Ended May 28, May 29, 2022 2021 (dollars in thousands) Cost of revenues(a)$ 4,817,854 $ 4,876,110 Gross profit 1,196,729 1,284,875 Gross margin 19.9 % 20.9 %
Selling, general and administrative expenses$ 1,217,929 $
1,245,362
Selling, general and administrative expenses as a percentage of revenues 20.2 % 20.2 % Facility exit and impairment charges 66,571
8,831
Interest expense 48,119
49,121
Loss on debt retirements, net -
396
Gain on sale of assets, net (29,196) (6,558)
Cost of revenues for the thirteen week periods ended
(a) 2021 exclude
that is eliminated in consolidation.
Gross Profit and Cost of Revenues
Gross profit decreased by$88.1 million for the thirteen week period endedMay 28, 2022 compared to the thirteen week period endedMay 29, 2021 . Gross profit for the thirteen week period endedMay 28, 2022 includes a decrease of$72.5 million in ourRetail Pharmacy segment and a decrease of$15.6 million in our Pharmacy Services 39 Table of Contents
segment. Gross margin was 19.9% for the thirteen week period endedMay 28, 2022 compared to 20.9% for the thirteen week period endedMay 29, 2021 . Please see the section entitled "Segment Analysis" for a more detailed description of gross profit and gross margin results by segment.
Selling, General and Administrative Expenses
SG&A decreased by$27.4 million for the thirteen week period endedMay 28, 2022 , compared to the thirteen week period endedMay 29, 2021 . The decrease in SG&A for the thirteen week period endedMay 28, 2022 includes a decrease of$38.8 million relating to ourRetail Pharmacy segment, partially offset by an increase of$11.4 million relating to our Pharmacy Services segment. Please see the section entitled "Segment Analysis" below for additional details regarding SG&A.
Facility Exit and Impairment Charges
Facility exit and impairment charges consist of amounts as follows:
Thirteen Week
Period Ended
May 28, May 29,
2022 2021
Impairment charges $ 35,036 $ 4,313
Facility exit charges 31,535 4,518
$ 66,571 $ 8,831
Please refer to "Management's Discussion and Analysis of Financial Condition and
Results-Facility Exit and Impairment Charges" included in our Fiscal 2022 10-K
for a detailed description of our impairment and lease termination methodology.
Interest Expense
Interest expense was$48.1 million and$49.1 million for the thirteen week periods endedMay 28, 2022 andMay 29, 2021 , respectively. The weighted average interest rate on our indebtedness for the thirteen week periods endedMay 28, 2022 andMay 29, 2021 was 5.6% and 5.3%, respectively.
Income Taxes
We recorded an income tax expense of$3.5 million and$0.8 million for the thirteen week periods endedMay 28, 2022 andMay 29, 2021 , respectively. The effective tax rate for the thirteen week periods endedMay 28, 2022 andMay 29, 2021 was (3.3)% and (6.4)%, respectively. The effective tax rate for the thirteen week periods endedMay 28, 2022 andMay 29, 2021 was net of an adjustment of (37.6)% and (18.5)%, respectively, to adjust the valuation allowance against deferred tax assets. We recognize tax liabilities in accordance with the guidance for uncertain tax positions and management adjusts these liabilities with changes in judgment as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities. We believe that it is reasonably possible that a decrease of up to$25.1 million in unrecognized tax benefits related to state exposures may be necessary in the next twelve months; however, management does not expect the change to have a material impact on the results of operations or the financial position of the Company. We regularly evaluate valuation allowances established for deferred tax assets for which future realization is uncertain. We will continue to monitor all available evidence related to the net deferred tax assets that may change the most recent assessment, including events that have occurred or are anticipated to occur. We continue to maintain a valuation allowance against net deferred tax assets of$1,862.8 million and$1,822.7 million , which relates to federal and 40 Table of Contents
state deferred tax assets that may not be realized based on our future
projections of taxable income at
Segment Analysis
We evaluate the
Retail Pharmacy Intersegment
Pharmacy Services Eliminations(1) Consolidated
Thirteen Week Period Ended
May 28, 2022:
Revenues $ 4,345,356 $ 1,725,857 $ (56,630) $ 6,014,583
Gross Profit 1,097,357 99,372 - 1,196,729
Adjusted EBITDA(*) 73,682 26,448 - 100,130
May 29, 2021:
Revenues $ 4,351,682 $ 1,872,282 $ (62,979) $ 6,160,985
Gross Profit 1,169,934 114,941 - 1,284,875
Adjusted EBITDA(*) 94,914 43,963 - 138,877
Intersegment eliminations include intersegment revenues and corresponding
cost of revenues that occur when Pharmacy Services segment customers use
(1)
occurs, both the
revenue on a stand-alone basis.
(*) See "Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures" for additional details.
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Retail Pharmacy Segment Results of Operations
Revenues and Other Operating Data
Thirteen Week Period Ended
May 28, May 29,
2022 2021
(dollars in thousands)
Revenues $ 4,345,356 $ 4,351,682
Revenue (decline) growth (0.1) % 5.5 %
Same store sales growth 4.6 % 1.4 %
Pharmacy sales growth 1.9% 14.1 % Same store prescription count growth, adjusted to 30-day equivalents
0.9 % 11.2 %
Same store pharmacy sales growth 6.6 % 8.2 %
Pharmacy sales as a % of total retail sales 70.8 % 68.9 %
Front-end sales decline (4.6) % (9.8) %
Same store front-end sales decline (0.5) % (12.0) %
Front-end sales as a % of total retail sales 29.2 % 31.1 %
Adjusted EBITDA(*) $ 73,682 $ 94,914
Store data:
Total stores (beginning of period) 2,450
2,510
New stores - 1
Store acquisitions - -
Closed stores (89) (5)
Total stores (end of period) 2,361 2,506
Relocated stores 1 -
Remodeled and expanded stores 2 6
(*) See "Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures" for additional details.
Revenues
Revenues decreased 0.1% for the thirteen weeks endedMay 28, 2022 compared to an increase of 5.5% for the thirteen weeks endedMay 29, 2021 . The decrease in revenues for the thirteen week period endedMay 28, 2022 was driven by a reduction in COVID vaccine and testing revenue as well as store closures, offset by an increase in non-COVID prescriptions. Pharmacy same store sales increased by 6.6% for the thirteen week period endedMay 28, 2022 compared to an increase of 8.2% in the thirteen week period endedMay 29, 2021 . The increase in pharmacy same store sales is due to the increase in same store prescription count. Same store prescription count, adjusted to 30-day equivalents, increased 0.9% for the thirteen week period endedMay 28, 2022 driven primarily by an increase in non-COVID same store prescriptions of 3.7%, with same store maintenance prescriptions increasing 1.4% and other same store acute prescriptions increasing 11.9%. Front-end same store sales decreased 0.5% during the thirteen week period endedMay 28, 2022 compared to a decrease of 12.0% during the thirteen week period endedMay 29, 2021 . Front-end same store sales, excluding cigarettes and tobacco products, were flat. Front-end same store sales were driven by increases in over-the-counter products, offset by decreases in alcohol and seasonal sales, due to supply chain disruptions. We include in same store sales all stores that have been open at least one year. Relocated and acquired stores are not included in same store sales until one year has lapsed. 42 Table of Contents Costs and Expenses Thirteen Week Period Ended May 28, May 29, 2022 2021 (dollars in thousands) Cost of revenues$ 3,247,999 $ 3,181,748 Gross profit 1,097,357 1,169,934 Gross margin 25.3 % 26.9 % FIFO gross profit(*) 1,097,357 1,165,941 FIFO gross margin(*) 25.3 % 26.8 %
Selling, general and administrative expenses 1,117,214
1,156,039
Selling, general and administrative expenses as a percentage of revenues 25.7 %
26.6 %
(*) See "Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures" for additional details.
Gross Profit and Cost of Revenues
Gross profit decreased$72.5 million for the thirteen week period endedMay 28, 2022 compared to the thirteen week period endedMay 29, 2021 . The decrease in gross profit was driven by the decline in COVID-19 vaccinations and testing. The gross profit headwind from reduced COVID related services was partially offset by an increase in prescriptions filled and improved front end gross margin. Gross margin was 25.3% of sales for the thirteen week period endedMay 28, 2022 compared to 26.9% of sales for the thirteen week period endedMay 29, 2021 . The decline in gross margin as a percentage of revenues is due primarily to the reduction in COVID-19 vaccinations and testing. We use the last-in, first-out ("LIFO") method of inventory valuation, which is estimated on a quarterly basis and is finalized at year end when inflation rates and inventory levels are final. Therefore, LIFO costs for interim period financial statements are estimated. LIFO charges were$0 for the thirteen week period endedMay 28, 2022 , compared to LIFO credits of$4.0 million for the thirteen week period endedMay 29, 2021 . The reduction in LIFO credits in the thirteen week period endedMay 28, 2022 was mostly due to higher anticipated front-end inflation in fiscal 2023.
Selling, General and Administrative Expenses
SG&A expenses decreased$38.8 million for the thirteen week period endedMay 28, 2022 due primarily to lower payroll, occupancy and other operating costs due to store closures and cost control initiatives. SG&A expenses as a percentage of revenues for the thirteen week period endedMay 28, 2022 was 25.7% compared to 26.6% for the thirteen week period endedMay 29, 2021 . The decrease is due primarily to the items noted above.
Pharmacy Services Segment Results of Operations
Revenues and Other Operating Data
Thirteen Week Period Ended
May 28, May 29,
2022 2021
(dollars in thousands)
Revenues $ 1,725,857 $ 1,872,282
Revenue decline (7.8) % (5.3) %
Adjusted EBITDA(*) $ 26,448 $ 43,963 (*) See "Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures" for additional details.
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Revenues
Revenues decreased $146.4 million for the thirteen week period ended May 28,
2022 compared to the thirteen week period ended May 29, 2021 . The decrease in
revenues was primarily the result of a planned decrease in EI membership and a
previously announced client loss due to industry consolidation, offset by higher
retained rebates from our new rebate aggregation arrangement and increased
utilization of higher cost drugs.
Costs and Expenses
Thirteen Week Period Ended
May 28, May 29,
2022 2021
(dollars in thousands)
Cost of revenues $ 1,626,485 $ 1,757,341
Gross profit 99,372 114,941
Gross margin 5.8 % 6.1 %Selling, general and administrative expenses 100,715
89,323
Selling, general and administrative expenses as a percentage of revenues 5.8 %
4.8 %
Gross Profit and Cost of Revenues
Gross profit decreased$15.6 million for the thirteen week period endedMay 28, 2022 compared to the thirteen week period endedMay 29, 2021 . The decrease in gross profit is primarily due to the decline in revenues associated with lost clients, as discussed above, and an increase in the medical loss ratio at EI, partially offset by higher retained rebates from our new rebate aggregation arrangement. Gross margin was 5.8% of sales for the thirteen week period endedMay 28, 2022 compared to 6.1% of sales for the thirteen week period endedMay 29, 2021 . The decline in gross margin is due primarily to the items noted above.
Selling, General and Administrative Expenses
SG&A expenses increased$11.4 million for the thirteen week period endedMay 28, 2022 compared to the thirteen week period endedMay 29, 2021 due primarily to increased litigation and other contractual settlements related to manufacturer audit disputes from the former rebate aggregation business and restructuring expenses, partially offset by further consolidation of administrative functions. SG&A expenses as a percentage of revenue was 5.8% for the thirteen week period endedMay 28, 2022 compared to 4.8% for the thirteen week period endedMay 29, 2021 . The increase in the thirteen week period selling, general and administrative expenses as a percentage of revenues is due primarily to the items noted above and the loss of sales volume.
Liquidity and Capital Resources
General
We have two primary sources of liquidity: (i) cash provided by operating activities and (ii) borrowings under our revolving credit facility. Our principal uses of cash are to provide working capital for operations, to service our obligations to pay interest and principal on debt and to fund capital expenditures. Total liquidity as ofMay 28, 2022 was$1,709.5 million , which consisted of revolver borrowing capacity of$1,672.3 million and invested cash of$37.2 million . Credit Facilities
On
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provided for facilities consisting of a $2.7 billion senior secured asset-based
revolving credit facility ("Initial Senior Secured Revolving Credit Facility")
and a $450.0 million "first-in, last out" senior secured term loan facility
("Initial Senior Secured Term Loan," and together with the Initial Senior
Secured Revolving Credit Facility, collectively, the "Initial Facilities"). In
December 2018 , we used proceeds from the Initial Facilities to refinance our
prior $2.7 billion existing credit agreement.
On August 20, 2021 , we entered in to the Second Amendment to Credit Agreement
(the "Second Amendment"), which, among other things, amended the Credit
Agreement to provide for a $2.8 billion senior secured asset-based revolving
credit facility ("Senior Secured Revolving Credit Facility") and a $350 million
"first-in, last out" senior secured term loan facility ("Senior Secured Term
Loan," and together with the Senior Secured Revolving Credit Facility,
collectively, the "Amended Facilities") and incorporate customary "hardwired"
LIBOR transition provisions. The Amended Facilities extend our debt maturity
profile and provide additional liquidity. Borrowings under the Senior Secured
Revolving Credit Facility bear interest at a rate per annum equal to, at our
option, (x) a base rate (determined in a customary manner) plus a margin of
between 0.25% to 0.75% or (y) an adjusted LIBOR rate (determined in a customary
manner) plus a margin of between 1.25% and 1.75%, in each case based upon the
Average ABL Availability (as defined in the Amended Credit Agreement).
Borrowings under the Senior Secured Term Loan bear interest at a rate per annum
equal to, at our option, of (x) a base rate (determined in a customary manner)
plus a margin of 1.75% or (y) an adjusted LIBOR rate (determined in a customary
manner) plus a margin of 2.75%. We are required to pay fees between 0.250% and
0.375% per annum on the daily unused amount of the commitments under the Senior
Secured Revolving Credit Facility, depending on Average ABL Availability. The
Amended Facilities are scheduled to mature on August 20, 2026 (subject to a
springing maturity if certain of our existing secured notes are not refinanced
or repaid prior to the date that is 91 days prior to the stated maturity
thereof).
Our borrowing capacity under the Senior Secured Revolving Credit Facility is
based upon a specified borrowing base consisting of accounts receivable,
inventory and prescription files. At May 28, 2022 , we had approximately $1,350.0
million of borrowings outstanding under the Amended Facilities and had letters
of credit outstanding under the Senior Secured Revolving Credit Facility in a
face amount of approximately $127.7 million , which resulted in remaining
borrowing capacity under the Senior Secured Revolving Credit Facility of
$1,672.3 million . If at any time the total credit exposure outstanding under the
Senior Secured Revolving Credit Facility exceeds the borrowing base, we will be
required to repay amounts outstanding to eliminate such shortfall.
The Amended Credit Agreement restricts us and all of our subsidiaries, including
the subsidiaries that guarantee our obligations under the Amended Facilities,
the secured guaranteed notes and unsecured guaranteed notes (collectively, the
"Subsidiary Guarantors") from accumulating cash on hand in excess of
$200.0 million at any time when revolving loans are outstanding (not including
cash located in our store and lockbox deposit accounts and cash necessary to
cover our current liabilities). The Amended Credit Agreement also states that if
at any time (other than following the exercise of remedies or acceleration of
any senior obligations or second priority debt and receipt of a triggering
notice by the senior collateral agent from a representative of the senior
obligations or the second priority debt) either (i) an event of default exists
under the Amended Facilities or (ii) the sum of our borrowing capacity under our
Senior Secured Revolving Credit Facility and certain amounts held on deposit
with the senior collateral agent in a concentration account is less than
$275.0 million for three consecutive business days or less than or equal to
$200.0 million on any day (a "cash sweep period"), the funds in our deposit
accounts will be swept to a concentration account with the senior collateral
agent and will be applied first to repay outstanding revolving loans under the
Amended Facilities, and then held as collateral for the senior obligations until
such cash sweep period is rescinded pursuant to the terms of the Amended
Facilities.
Our obligations under the Amended Facilities and the Subsidiary Guarantors'
obligations under the related guarantees are secured by (i) a first-priority
lien on all of the Subsidiary Guarantors' cash and cash equivalents, accounts
receivable, inventory, prescription files (including eligible script lists),
intellectual property (prior to the repayment of the Senior Secured Term Loan)
and certain other assets arising therefrom or related thereto (including
substantially all of their deposit accounts, collectively, the "ABL priority
collateral") and (ii) a second-priority lien on all of the Subsidiary
Guarantors' equipment, fixtures, investment property (other than equity
interests in subsidiaries), intellectual property (following the repayment of
the Senior Secured Term Loan) and all other assets that do not constitute ABL
priority collateral, in each case, subject to customary exceptions and
limitations.
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The Amended Credit Agreement allows us to have outstanding, at any time, up to an aggregate principal amount of$1.5 billion in secured second priority debt, split-priority debt, unsecured debt and disqualified preferred stock in addition to borrowings under the Amended Facilities and other existing indebtedness, provided that not in excess of$750.0 million of such secured second priority debt, split-priority debt, unsecured debt and disqualified preferred stock shall mature or require scheduled payments of principal prior to 90 days after the latest maturity date of any Term Loan or Other Revolving Commitment (each as defined in the Amended Credit Agreement) (excluding bridge facilities allowing extensions on customary terms to at least the date that is 90 days after such date). Subject to the limitations described in the immediately preceding sentence, the Amended Credit Agreement additionally allows us to issue or incur an unlimited amount of unsecured debt and disqualified preferred stock so long as a Financial Covenant Effectiveness Period (as defined in the Amended Credit Agreement) is not in effect; provided, however, that certain of our other outstanding indebtedness limits the amount of unsecured debt that can be incurred if certain interest coverage levels are not met at the time of incurrence or other exemptions are not available. The Amended Credit Agreement also contains certain restrictions on the amount of secured first priority debt we are able to incur. The Amended Credit Agreement also allows for the voluntary repurchase of any debt or other convertible debt, so long as the Amended Facilities are not in default and we maintain availability under our revolver of more than$365.0 million . The Amended Credit Agreement has a financial covenant that requires us to maintain a minimum fixed charge coverage ratio of 1.00 to 1.00 (i) on any date on which availability under the Senior Secured Revolving Credit Facility is less than$200.0 million or (ii) on the third consecutive business day on which availability under the Senior Secured Revolving Credit Facility is less than$250.0 million and, in each case, ending on and excluding the first day thereafter, if any, which is the 30th consecutive calendar day on which availability under the revolver is equal to or greater than$250.0 million . As ofMay 28, 2022 , our fixed charge coverage ratio was greater than 1.00 to 1.00, and we were in compliance with the Amended Credit Agreement's financial covenant. The Amended Credit Agreement also contains covenants which place restrictions on the incurrence of debt, the payments of dividends, the making of investments, sale of assets, mergers and acquisitions and the granting of liens. The Amended Credit Agreement provides for customary events of default including nonpayment, misrepresentation, breach of covenants and bankruptcy. It is also an event of default if we fail to make any required payment on debt having a principal amount in excess of$50.0 million or any event occurs that enables, or which with the giving of notice or the lapse of time would enable, the holder of such debt to accelerate the maturity or require the repayment repurchase, redemption or defeasance of such debt. The indentures that govern our unsecured notes and secured notes contain restrictions on the amount of additional secured and unsecured debt that we may incur. As ofMay 28, 2022 , we had the ability to issue additional secured and unsecured debt under the indentures governing our unguaranteed unsecured notes, including the ability to draw the full amount of our Senior Secured Revolving Credit Facility and enter into certain sale and leaseback transactions.
Guarantor Summarized Financial Information
Certain of our subsidiaries, which are listed on Exhibit 22 to this Quarterly
Report on Form 10-Q, have guaranteed our obligations under the 6.125% Notes, the
7.500% Notes and the 8.00% Notes (collectively, the "Guaranteed Notes"). As
discussed in Note 11 to the condensed consolidated financial statements, the
Guaranteed Notes were issued by us, as the parent company, and are guaranteed by
substantially all of the parent company's consolidated subsidiaries (the
"guarantors" or "Subsidiary Guarantors") except for EI (the "non-guarantor").
The parent company and guarantors are referred to as the "obligor group". The
Subsidiary Guarantors fully and unconditionally and jointly and severally
guarantee the Guaranteed Notes. The 6.125% Notes and the obligations under the
related guarantees are unsecured. The 7.500% Notes, the 8.00% Notes and the
obligations under the related guarantees are secured by (i) a first-priority
lien on all of the Subsidiary Guarantors' equipment, fixtures, investment
property (other than equity interests in subsidiaries), intellectual property
(following the repayment of the Senior Secured Term Loan) and other collateral
to the extent it does not constitute ABL priority collateral (as defined below),
and (ii) a second-priority lien on all of the Subsidiary Guarantors' cash and
cash equivalents, accounts receivables, payment intangibles, inventory,
prescription files (including eligible script lists) and, intellectual property
(prior to the repayment of the Senior Secured Term Loan) (collectively, the "ABL
priority collateral"), which, in each case, also secure the Amended Facilities.
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Under certain circumstances, subsidiaries may be released from their guarantees
without consent of the note holders. Our subsidiaries conduct substantially all
of our operations and have significant liabilities, including trade payables. If
the subsidiary guarantees are invalid or unenforceable or are limited by
fraudulent conveyance or other laws, the registered debt will be structurally
subordinated to the substantial liabilities of our subsidiaries.
Condensed Combined Financial Information
The following tables include summarized financial information of the obligor
group. Investments in and the equity in the earnings of EI, which is not a
member of the obligor group, have been excluded. The summarized financial
information of the obligor group is presented on a combined basis with
intercompany balances and transactions between entities in the obligor group
eliminated. The obligor group's amounts due to/from and transactions with EI
have been presented in separate line items, if material.
May 28, February 26,
In millions 2022 2022
Due from EI $ 95.7 $ 26.5
Other current assets 3,361.0 3,314.9
Total current assets $ 3,456.7 $ 3,341.4
Operating lease right-of-use assets $ 2,723.4 $ 2,813.5
Goodwill 879.1 879.1
Other noncurrent assets 1,417.6 1,428.8
Total noncurrent assets $ 5,020.1 $ 5,121.4
Due to EI $ - $ -
Other current liabilities 2,779.4 2,891.1
Total current liabilities $ 2,779.4 $ 2,891.1 Long-term debt less current maturities
2,597.1
Other noncurrent liabilities 152.7 142.7
Total noncurrent liabilities $ 5,705.8 $ 5,472.8
Thirteen Week Period Ended
In millions May 28, 2022
Revenues (a) $ 5,877.8
Cost of revenues (b) 4,682.1
Gross profit 1,195.7
Net loss $ (105.8)
Net loss attributable to Rite Aid $ (110.2)
(a) Includes
thirteen week period ended
(b) Includes
non-guarantor for the thirteen week period ended
Net Cash Provided by/Used in Operating, Investing and Financing Activities
Cash used in operating activities was$252.2 million compared to cash provided by operating activities of$13.9 million for the thirteen week periods endedMay 28, 2022 andMay 29, 2021 , respectively. Operating cash flow was 47
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negatively impacted by the build of the CMS receivable, increases in rebates receivable and timing of accounts payable payments.
Cash used in investing activities was$54.6 million and$54.7 million for the thirteen week periods endedMay 28, 2022 andMay 29, 2021 , respectively. During the thirteen week period endedMay 28, 2022 , we spent$73.2 million on the purchase of property, plant and equipment,$12.2 million on prescription file purchases and received proceeds of$30.8 million from prescription file sales driven by our store closures. Cash flow provided by financing activities was$323.2 million compared to cash used by financing activities of$1.6 million for the thirteen week periods endedMay 28, 2022 andMay 29, 2021 , respectively. Cash provided by financing activities for the thirteen weeks endedMay 28, 2022 reflects incremental revolver borrowings and the change in our zero balance accounts due to timing of payments. Capital Expenditures
During the thirteen week periods ended
Thirteen Week Period Ended
May 28, May 29,
2022 2021
New store construction, store relocation and store remodel
projects $ 11,775
61,401 25,870
Purchase of prescription files from other retail
pharmacies 12,248 5,436
Total capital expenditures $ 85,424 $ 64,600
The Company anticipates incurring approximately $250,000 of capital expenditures
during fiscal 2023.
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Future Liquidity
We are highly leveraged. Our high level of indebtedness could: (i) limit our
ability to obtain additional financing; (ii) limit our flexibility in planning
for, or reacting to, changes in our business and the industry; (iii) place us at
a competitive disadvantage relative to our competitors with less debt; (iv)
render us more vulnerable to general adverse economic and industry conditions,
including those resulting from COVID-19 or a decline in the overall economy; and
(v) require us to dedicate a substantial portion of our cash flow to service our
debt. Based upon our current levels of operations, we believe that cash flow
from operations together with available borrowings under the revolver and other
sources of liquidity will be adequate to meet our requirements for working
capital, debt service, capital expenditures and other strategic investments at
least for the next twelve months. Based on our liquidity position, which we
expect to remain strong, we do not expect to be subject to the minimum fixed
charge covenant in the Amended Facilities in the next twelve months. We will
continue to assess our liquidity position and potential sources of supplemental
liquidity in light of our operating performance, and other relevant
circumstances, and we may evaluate alternative sources of liquidity, including
further opportunities related to any receivable due to us from CMS, sale and
leaseback transactions, and other transactions to optimize our asset base. From
time to time, we may seek additional deleveraging or refinancing transactions,
including entering into transactions to exchange debt for shares of common stock
or other debt securities (including additional secured debt), issuance of equity
(including preferred stock and convertible securities), repurchase or redemption
of outstanding indebtedness, including our recent cash tender offers whereby we
purchased $150.0 million of certain of our outstanding series of senior notes as
announced on June 13, 2022 , or seek to refinance our outstanding debt (including
the Amended Facilities) or may otherwise seek transactions to reduce interest
expense and extend debt maturities. We may also look to make additional
investments in our business to further our strategic objectives, including
targeted acquisitions or other transactions to optimize our asset base. Any of
these transactions could impact our financial results, including additional
changes or realization of cancellation of indebtedness-income.
Critical Accounting Policies and Estimates
For a description of the critical accounting policies that require the use of significant judgments and estimates by management, refer to "Management's Discussion and Analysis of Financial Condition and Results-Critical Accounting Policies and Estimates" included in our Fiscal 2022 10-K, which we filed with theSEC onApril 25, 2022 .
Factors Affecting Our Future Prospects
For a discussion of risks related to our financial condition, operations and industry, refer to "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results" included in our Fiscal 2022 10-K.
Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures
In addition to net income (loss) determined in accordance with GAAP, we use
certain non-GAAP measures, such as "Adjusted EBITDA", in assessing our operating
performance. We believe the non-GAAP measures serve as an appropriate measure in
evaluating the performance of our business. We define Adjusted EBITDA as net
income (loss) excluding the impact of income taxes, interest expense,
depreciation and amortization, LIFO adjustments (which removes the entire impact
of LIFO, and effectively reflects the results as if we were on a FIFO inventory
basis), charges or credits for facility closing and impairment, goodwill and
intangible asset impairment charges, inventory write-downs related to store
closings, gains or losses on debt modifications and retirements, and other items
(including stock-based compensation expense, merger and acquisition-related
costs, non-recurring litigation and other contractual settlements, severance,
restructuring-related costs and costs related to facility closures, gain or loss
on sale of assets and the loss on Bartell acquisition). We reference this
particular non-GAAP financial measure frequently in our decision-making because
it provides supplemental information that facilitates internal comparisons to
the historical periods and external comparisons to competitors. In addition,
incentive compensation is primarily based on Adjusted EBITDA and we base certain
of our forward-looking estimates on Adjusted EBITDA to facilitate quantification
of planned business activities and enhance subsequent follow-up with comparisons
of actual to planned Adjusted EBITDA.
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The following is a reconciliation of our net income (loss) to Adjusted EBITDA
for the thirteen week periods ended
Thirteen Week Period Ended
May 28, May 29,
2022 2021
(dollars in thousands)
Net loss $ (110,191) $ (13,057)
Interest expense 48,119 49,121
Income tax expense 3,497 780Depreciation and amortization 70,073
75,859
LIFO credit -
(3,993)
Facility exit and impairment charges 66,571
8,831
Loss on debt retirements, net -
396
Merger and Acquisitionrelated costs -
3,886
Stock-based compensation expense 3,334
2,811
Restructuring-related costs 22,646
5,932
Inventory write-downs related to store closings 7,955
472
Litigation and other contractual settlements 18,271
14,000 Gain on sale of assets, net (29,196) (6,558) Other (949) 397 Adjusted EBITDA$ 100,130 $ 138,877
The following is a reconciliation of our net income (loss) to Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Diluted Share for the thirteen week periods endedMay 28, 2022 andMay 29, 2021 . Adjusted Net Income (Loss) is defined as net income (loss) excluding the impact of amortization expense, merger and acquisition-related costs, non-recurring litigation and other contractual settlements, gains or losses on debt modifications and retirements, LIFO adjustments (which removes the entire impact of LIFO, and effectively reflects the results as if we were on a FIFO inventory basis), goodwill and intangible asset impairment charges, restructuring-related costs, and the loss on Bartell acquisition. We calculate Adjusted Net Income (Loss) per Diluted Share using our above-referenced definition of Adjusted Net Income (Loss). We believe Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Diluted Share are useful indicators of our operating performance over multiple periods. Thirteen Week Period Ended May 28, May 29, 2022 2021 (dollars in thousands) Net loss$ (110,191) $ (13,057)
Add back - Income tax expense 3,497
780 Loss before income taxes (106,694) (12,277) Adjustments: Amortization expense 20,626 20,460 LIFO credit - (3,993)
Loss on debt retirements, net -
396
Merger and Acquisitionrelated costs -
3,886
Restructuring-related costs 22,646
5,932
Litigation and other contractual settlements 18,271
14,000
Adjusted (loss) income before income taxes (45,151)
28,404
Adjusted income tax (benefit) expense (a) (12,322) 7,470 Adjusted net (loss) income$ (32,829) $ 20,934 Net loss per diluted share$ (2.03) $ (0.24)
Adjusted net (loss) income per diluted share
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The fiscal year 2023 and 2022 annual effective tax rates, calculated using a (a) federal rate plus a net state rate that excluded the impact of state NOL's,
state credits and valuation allowance, was used for the thirteen weeks ended
In addition to Adjusted EBITDA, Adjusted Net (Loss) Income and Adjusted Net (Loss) Income per Diluted Share, we occasionally refer to several other Non-GAAP measures, on a less frequent basis, in order to describe certain components of our business and how we utilize them to describe our results. These measures include but are not limited to Adjusted EBITDA Gross Margin and Gross Profit (gross margin/gross profit excluding non-Adjusted EBITDA items), Adjusted EBITDA SG&A (SG&A expenses excluding non-Adjusted EBITDA items), FIFO Gross Margin and FIFO Gross Profit (gross margin/gross profit before LIFO charges), and Free Cash Flow (Adjusted EBITDA less cash paid for interest, rent on closed stores, capital expenditures, restructuring-related costs and the change in working capital). We include these non-GAAP financial measures in our earnings announcements in order to provide transparency to our investors and enable investors to better compare our operating performance with the operating performance of our competitors including with those of our competitors having different capital structures. Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share or other non-GAAP measures should not be considered in isolation from, and are not intended to represent an alternative measure of, operating results or of cash flows from operating activities, as determined in accordance with GAAP. Our definition of these non-GAAP measures may not be comparable to similarly titled measurements reported by other companies.
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