Five takeaways about the new Walgreens-Rite Aid deal
The drug store industry awoke Thursday morning to arguably the biggest story of the year — the news that Walgreens and Rite Aid had agreed to scrap their original merger agreement one more time, this time in favor of a much smaller, seemingly more manageable deal to purchase 2,186 Rite Aid stores for $5.18 billion in cash.
In the first several hours following the announcement of the deal, Chain Store Age sister publication, Drug Store News identified five important takeaways from the blockbuster agreement.
1. The Federal Trade Commission hates health-related mergers and acquisitions.
Certainly, the news suggests that Federal trade regulators take a rather critical view of mergers among large healthcare stakeholders. The 18-month saga of Walgreens-Rite Aid follows the FTC’s opposition to other big health-related deals, including Aetna and Humana, Anthem and Cigna, and Allergan and Pfizer, suggesting the FTC has very real concerns about any one entity becoming big enough to control healthcare prices.
While the new Walgreens-Rite Aid deal presumably has a better chance of clearing the FTC, it’s still not a slam dunk. How much pharmacy market share is too much for the FTC is still unknown. “There’s a chance that it won’t go — that’s just the reality of the process,” Rite Aid chairman and CEO John Standley said in a June 29 conference call with analysts. “We believe [the new deal] makes sense, we just have to wait to see how it plays out.”
2. Amazon-Walgreens partnership?
As one door closes. … Unrelated to the Rite Aid deal, Walgreens Boots Alliance executive vice chairman and CEO Stefano Pessina was asked during a call with analysts if the company was concerned about the potential threat of Amazon’s purported interest in pharmacy. On the contrary, Pessina sees it as an opportunity. “I don’t believe Amazon will be interested in [the healthcare market] in the next few years,” he said during the June 29 earnings call. “If we were wrong [and they did enter the healthcare space], we wouldn’t exclude a partnership with them.”
Indeed, Walgreens has reinvented several aspects of its business around unique and innovative partnerships, including, most recently, its announcement that it would work with LabCorp to develop an in-store diagnostics business in select Walgreens stores.
3. What’s next for Rite Aid? (Part 1)
For one thing, Rite Aid emerges as a much leaner, multi-regional chain with its stores concentrated in the middle and west coast of the country, and with a bunch of cash to finally pay off its debt and improve its balance sheet — something the leadership team under Standley already has shown a talent for when cash was much harder to come by.
The remaining store base is concentrated on the West Coast, Pennsylvania, Ohio, Michigan and New Jersey. “[This store base] is a financially stronger group of stores on a per-store basis than the store base today,” Standley said. “We will have higher front-end average sales, script count and EBITDA per store. Almost 60% of the stores have been remodeled to the groundbreaking Wellness format, and these stores are in cities and communities where we have strong market share.”
As a footnote to the deal, Rite Aid has signed a two-year noncompete, agreeing not to re-enter or build new stores in markets where the divested stores are located.
4. What’s next for Rite Aid (Part 2)
What’s more, a new, even smaller Rite Aid could emerge with even greater purchasing power. That’s because as part of the deal, Rite Aid still has the option of joining Walgreens Boots Alliance’s generic buying consortium, giving it the buying strength of a much larger company.
“This provides us with an important tool for us to mitigate the reimbursement rate pressure we expect to continue,” Standley said. “The option to purchase from [Walgreens Boots Alliance Development] in the future is important in that it helps ensure that we continue to have access to competitive drug [pricing], whether it’s through that option or through McKesson or otherwise,” Standley added.
5. What’s next for Walgreens?
With the Rite Aid saga behind it, Walgreens will be able to focus 100% on Walgreens again. “Our focus will be mainly on Walgreens and on the stores,” Pessina said. “We have started to collect information and data on our customers in order to understand better what they want,” he said. “Now it’s time to put all of this together [and] reorganize our stores.” Looking ahead, Walgreens will focus on those categories that really resonate with their shoppers, Pessina said. “It’s not particularly useful to offer a bit of everything if people are not really appreciating it. We are focusing more on health and beauty, particularly.”
“We are moving into a phase beyond the beauty differentiation phase of simplifying our core offer,” Alex Gourlay, co-COO Walgreens Boots Alliance added. “The idea is to simplify these stores to such an extent that customers can find products more easily, and we can [rationalize the mix] on their behalf using the data we’ve been collecting the last three years.”
Report: Staples to be split into three units
Sycamore Partners has a plan for its newest retail acquisition, Staples.
The private equity firm, which purchased the office supply giant for $6.9 billion on Wednesday, plans to divide the chain into three separately financed units: U.S. retail; Canadian retail; and corporate-supply businesses, reported The Wall Street Journal reported. The three units will all remain under the same corporate umbrella.
The move is designed to make the sale an easier sell to bond and loan investors whose appetite for retail holdings has waned among the industry's struggles, according to the report. Wells Fargo & Co. will finance the U.S. retail segment with a loan backed by Staples' assets, according to the WSJ.
Home decor retailer cuts Q1 loss; online continues to grow
Pier I Imports reduced its loss in the first quarter amid a boost in its gross margin and other operational improvements.
Pier 1 reported its first-quarter loss narrowed to $3 million, or 4 cents a share, from $6 million, or 7 cents a share, a year earlier. Its results beat expectations.
Revenue fell to $409.5 million, less than expected, from $418.4 million. The home decor retailer noted that the average number of stores operating in the quarter decreased approximately 1% compared to the year-ago period. Same-store sales were flat.
Analyst Neil Saunders, managing director of GlobalData Retail, commented that Pier's I's poor store performance is partially due to the fact that some of its stores are in locations that suffer from weak customer traffic. Another problem is the nature of the stores themselves, he said.
"While we recognize that improvements have been made to the layout, we maintain our view that the proposition is not as clear and compelling as it should or could be," Saunders said. "Pier 1 has some nice pieces, often at good price points, but these can be hard to find. Meanwhile, categories like furniture need more space if they are to be showcased properly. In short, stores are not terrible; but neither are they compelling enough to drive visitation."
Online sales totaled $99.3 million, representing year-over-year growth of approximately 23%. E-commerce represented approximately 24% of net sales in quarter, as compared to approximately 19% last year.
Pier I opened one store and closed three during the quarter, ending with 1,106 stores as of May 27. It plans to close a net of 20 to 25 stores by the end of the current fiscal year.
“Whilst we’ve shown operational improvement for several consecutive quarters, there is still much to be done to build the business to its full potential, significantly strengthen our profitability and increase shareholder value.” said Alasdair James, who took the reins as Pier I president and CEO on May 2. "Pier 1 Imports has a loyal customer base, productive store portfolio, large and growing e-Commerce presence and strong balance sheet."
For the full year, Pier 1 expects net sales growth in the 1.5% to 2.5% range, same-store sales increase of 1% to 2%, and earnings per share in the range of 46 cents to 52 cents.