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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