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, our Retail Pharmacy segment
and our Pharmacy Services segment. We accomplish our goal of delivering
comprehensive care to our customers through our retail drugstores and our
transparent and traditional PBM, Elixir. We also offer fully integrated
mail-order and specialty pharmacy services through Elixir Pharmacy.
Additionally, through Elixir Insurance, Elixir 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 and
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. Our Retail Pharmacy segment generates
the majority of its revenue through the sale of prescription drugs and front-end
products at our over 2,400 retail pharmacy locations across 18 states. 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 full range of pharmacy benefit services
through Elixir. The Pharmacy Services segment provides both transparent and
traditional PBM options through its Elixir PBM. Elixir also offers fully
integrated mail-order and specialty pharmacy services through Elixir Pharmacy;
an innovative claims adjudication software platform in Laker Software; and a
national Medicare Part D prescription drug plan through Elixir Insurance's
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
Beginning in Fiscal 2019, we initiated a series of restructuring plans designed
to reorganize our executive management team, reduce managerial layers, and
consolidate roles. In March 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 across Rite Aid.
As a result of the restructuring that we announced in March 2019, we achieved
annual cost savings of approximately $55.0 million. These savings offset the
reduction in TSA fees that we experienced in fiscal 2020. We have implemented
further restructuring activities in support of our RxEvolution and other
initiatives, which resulted in additional restructuring charges due to further
reductions in corporate staffing levels, charges associated with rationalizing
SKU's in our front-end offering and other operational changes. These
restructuring activities are expected to provide future growth and expense
efficiency benefits. We anticipate our total fiscal 2021 restructuring-related
costs to be approximately $80.0 million and expect to realize annualized cost
savings of approximately $55.0 million over the next two years, as well as
benefits to sales, productivity and working capital from our remerchandise
initiatives, although a prolonged impact of COVID-19 could impact the amount and
timing of the benefit recognized. There can be no
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assurance that we will not incur additional restructuring charges or that we
will achieve the cost savings and remerchandising benefits in the amounts or
time anticipated.
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 purchased 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 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.
During fiscal 2019, we completed the sale of one of our distribution centers and
related assets to WBA for proceeds of $61.2 million. The impact of the sale of
the distribution center and related assets resulted in a pre-tax gain of $14.2
million, which has been included in the results of operations and cash flows of
discontinued operations during the fifty-two week period ended March 2, 2019.
During fiscal 2020, we completed the sale of the second distribution center and
related assets to WBA for proceeds of $62.8 million. The impact of the sale of
the distribution center and related assets resulted in a pre-tax gain of $19.3
million, which has been included in the results of operations and cash flows of
discontinued operations during the fifty-two week period ended February 29,
2020. During the first quarter of fiscal 2021, we completed the sale of the
final distribution center and related assets to WBA for proceeds of $94.3
million. The impact of the sale of the distribution center and related assets
resulted in a pre-tax gain of $12.7 million, which has been included in the
results of operations and cash flows of discontinued operations during the
thirteen week period ended May 30, 2020. The transfer of the final distribution
center and related assets constitutes the final closing under the Amended and
Restated Asset Purchase Agreement.
We had 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 provided
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 had been extended to October 17, 2020, unless
earlier terminated. In connection with these services, we purchased the related
inventory and incurred cash payments for the selling, general and administrative
activities, which, we billed 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 28, 2020 were $0.0 million and $35.2
million, respectively. 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. We recorded WBA TSA fees of $0 million and $1.5 million during
the thirteen and thirty-nine week periods ended November 28, 2020, respectively,
which are reflected as a reduction to selling, general and administrative
expenses. 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. In conjunction with the transfer of the final distribution center
during the quarter ended May 30, 2020, we have substantially completed our
obligations under the TSA. On July 14, 2020, we entered into a letter agreement
with WBA to terminate the services under the TSA, other than certain specified
services relating to real estate, accounting, tax, and accounts receivable
systems that continued until October 17, 2020 and certain specified services
relating to human resources to be performed after October 17, 2020.
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 28, 2020 was $4.3 million or $0.08 per basic and diluted share compared
to net income of $52.3 million or $0.98 per basic and diluted share for the
thirteen week period ended November 30, 2019. The decline in net income for the
thirteen week period ended November 28, 2020 was due primarily to a $55.7
million gain on debt retirements in the prior year and a decrease in
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Adjusted EBITDA, partially offset by lower restructuring-related costs and a
higher gain on sale of assets resulting from the sale-leaseback of our Perryman,
MD distribution center.
Our net loss from continuing operations for the thirty-nine week period ended
November 28, 2020 was $81.6 million or $1.52 per basic and diluted share
compared to a net loss of $125.8 million or $2.37 per basic and diluted share
for the thirty-nine week period ended November 30, 2019. The improvement in net
loss for the thirty-nine week period ended November 28, 2020 was due primarily
to decreases in income tax and interest expense and a LIFO credit in the current
year compared to a LIFO charge in the prior year. These benefits were partially
offset by a gain on debt retirements in the prior year, current year intangible
asset impairment charges associated with the rebranding of Elixir and higher
lease termination and impairment charges caused by the wind down of our
RediClinic business.
Our Adjusted EBITDA from continuing operations for the thirteen and thirty-nine
week periods ended November 28, 2020 was $137.4 million or 2.3% of revenues and
$396.4 million or 2.2% of revenues, respectively, compared to $158.1 million or
2.9% of revenues and $402.6 million or 2.5% of revenues, respectively, for the
thirteen and thirty-nine week periods ended November 30, 2019. The decrease in
Adjusted EBITDA for the thirteen week period ended November 28, 2020 was due to
a decrease in both the Retail Pharmacy and Pharmacy Services segments. Adjusted
EBITDA decreased $20.0 million in the Retail Pharmacy segment due primarily to
higher SG&A expenses, partially offset by increased gross profit. SG&A expenses
were negatively impacted by incremental costs associated with the COVID-19
pandemic and the absence of TSA income in the current quarter, as services under
that agreement have been completed. Gross profit benefited from increased
revenue, partially offset by continued pharmacy reimbursement rate pressure and
the impact of the reduction in over-the-counter front-end sales on front-end
margin. Adjusted EBITDA decreased by $0.7 million in the Pharmacy Services
segment.
The decrease in Adjusted EBITDA for the thirty-nine week period ended November
28, 2020 was due to a decrease in the Retail Pharmacy segment, partially offset
an increase in the Pharmacy Services segment. Adjusted EBITDA decreased $11.4
million in the Retail Pharmacy segment due primarily to an increase in SG&A
expenses, incremental costs associated with the COVID-19 pandemic and the
completion of services provided under the TSA. Adjusted EBITDA increased by $5.2
million in the Pharmacy Services segment due primarily to increased revenues and
improved pharmacy network management, partially offset by reduced rebates
resulting from the change in rebate aggregator at our MedTrak subsidiary. 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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