Dive Brief:
- Fitch downgraded Rite Aid this week over "continued operational challenges" at the drugstore retailer, which analysts said "have heightened questions regarding the company's longer-term market position and the sustainability of its capital structure."
- Fitch lowered Rite Aid's long-term default rating to B-, from B, accounting for the retailer's weak position in a relatively stable sector, according to a Wednesday press release emailed to Retail Dive. The ratings firm has a stable outlook for Rite Aid.
- Mitigating Rite Aid's challenges are its strong liquidity (more than $1 billion), good real estate position in local markets, a stable pharmacy benefits manager business and the nearly four years it has until major debt maturities.
Dive Insight:
Fitch analysts noted that competition is intensifying in the drugstore retail space as existing players like CVS and Walgreens enlarge themselves through acquisitions and partnerships. Amazon, too, is a possible future threat, they noted. Rite Aid, meanwhile, is "structurally disadvantaged," with regional concentration but a lack of national scale like its largest competitors, according to Fitch.
The company's retail operations are also under pressure. For the first half of the year, Rite Aid's front-end sales were down 1.1% and down 1.8% for the second quarter.
Fitch analysts expect Rite Aid to keep losing market share. They noted the retailer has "benefits from close relationships with end customers," giving it an advantage. But as the pharmacy and healthcare industries grow increasingly complex, its regional focus is a competitive weakness.
As sales continued to fall in Q2, Rite Aid CEO Heyward Donigan, just a few weeks on the job at that time, said she was "optimistic about our future" while also expressing "urgency" over the retailer's strategic direction. Her team is working to finalize a new strategic plan, the key points of which are due out in the coming months.
The company carries $3.8 billion in long-term debt, pushing interest expenses to $60.1 million in Q2. During the period, Rite Aid managed to slash around $40 million out of its cost of sales and nearly $20 million out of its administrative expenses compared to a year ago. Earlier this year, the retailer cut hundreds of jobs in an effort to save $55 million a year.
Moody's Vice President Mickey Chadha at the time called the cuts necessary "in light of the intense competitive pressures the company faces from much larger and well capitalized competitors like CVS and Walgreens in the changing pharmacy landscape as scale become increasingly important within the pharmacy sector."
