Reverse stock split or not, Rite Aid Corporation (NYSE: RAD) has been under the gun and its future is far from certain.  There was a period in time in 2007 when it looked like the investor boat was going to be turned for the better.  But that is in the past and the current climate does not bode well for independent standalone retail companies (even drugstores).  Chairman & CEO Mary Sammons was deemed as a good fit and was probably within view of the home stretch of the turnaround finish line.  But then the rug was yanked out from under the company’s feet.  You might be able to argue that the company pulled the rug out from under its own feet this time, and now the economy weakening rapidly may only act further against it.

First, Mary Sammons was a great executive for Rite Aid before.  She still may be a great presence at the company goingforward.  We want to be clear here before enraging some Sammons fansand Rite Aid holders.  This is not a call for Sammons to be fired norfor her to leave the company entirely.

When she came over from Fred Meyer she did get this ship turned aroundfor the most part.  The company even became profitable again.  Thatturnaround did take quite a long time as it came about during and aftera recession.  She was also credited with much of the turnaround andreceived much praise from publications earlier this decade.  So fortoday’s "calling a CEO out" we want to offer a more strategic changerather than any sort of ouster.  CEO’s that do it once deserve morecredit than CEO’s who stay on that did nothing.

In 2007, the company grew its footprint massively when it purchasedapproximately 1,850 Brooks and Eckerd stores and six distributioncenters, primarily located on the East Coast and in the Mid-Atlanticstates from the from The Jean Coutu Group.  This added roughly anotherhalf to the company.  The problem is that this was also the peak of thestock and these new additions are not performing as well as the companywould have hoped.  This acquisition leveraged up Rite Aid, so the decision in retrospect looks like it will be a "total win or lose" strategy.  That acquisition will likely have marked the ultimate pivot point, for better or worse.

Both CVS Caremark (NYSE: CVS) and Walgreens (NYSE: WAG) have held upsubstantially better as stocks.  Wall Street has anointed Rite Aid asthe weakling in the pharmacy group that is worth attacking.  The latestshort interest was actually a tad lower than the prior report, but itstill sits with a days-to-cover ratio of 6.5 days volume. That is twicethe number of Walgreens and 3-times the number of CVS Caremark.  Thedrop in sales yesterday and the lower same store sales data also putanother quarter of revenues slightly under expectations. 

Sammons and other managers did purchase shares this year and have bought more since then.  Jim Cramer gave her very high marks on CNBC just in 2007 in aninterview and she was part of the reason this was one of his top 2007speculative picks.

This latest reverse stock split is a mere act of desperation.Unfortunately, it was essentially all the company could do to keep that$1.00 hurdle from getting its stock de-listed at the NYSE.  What isinteresting is that the holders approved the reverse split without theratio being set and with the date coming "before the Feb. 28, 2009fiscal year end."  Reverse stock splits rarely work.  It just lets shortsellers get back in that could otherwise not short a stock because itsprice was too low.  Despite the proxy firms recommending approval ofthe reverse split, this was because no other choices existed.

Debt ratings agencies are also still negative on the company.  Analystsexpect the losses to continue and the newest data from same store salesand the weakening economy may cause some questions about the slightsales gains expected by analysts over the next year.  Wall Streetanalysts have by and large stopped giving much new coverage in thisstock.

Sammons did make a critical change in late September after the companygave disappointing results.  This move is why we are only looking atstrategic change rather than an outright ouster.  The company tossedout three executives and brought back its former Chief FinancialOfficer John Standley to return as president and chief operatingofficer to replace COO Robert Easley. Frank Vitrano was hired as CFOand chief administrative officer, replacing Kevin Twomey and PierreLegault. Both Standley and Vitrano previously worked at PathmarkStores.  These two were partially credited with getting Pathmark backon track and ultimately bought by The Great Atlantic & Pacific TeaCompany.

So what is this strategic recommendation?  Sammons turned the role ofpresident over to Standley.  She kept the roleof Chairman and CEO.  She has about six months before having to give a line in the sand review.  At that point, Sammons willneed to decide if she should turn the CEO role over as well.  Thismight seem like it is detail-oriented, but literally each move maydetermine the fate of Rite Aid.  The problem is that Joe Public isbroke and more workers are losing jobs each day.  The macroeconomicfactors are not Rite Aid’s fault and certainly no fault of Sammons.But those factors combined are still a problem for the company.

In about six months we’d expect to see Sammons either turn over the CEOposition to Standley where she will remain Chairman, or we expect herto take more of the role she relinquished back. This depends upon the turnaround strategy’s execution and results. That is the state ofthe world right now, and ultimately shareholders have to judgecompanies by their returns.

If you go through the list of 2008 CEO’s to go, almost all of thosecalled out have moved on by now and many in the same strategic sense weoutlined.  If you go through our list of 2007 CEO’s to go, you’ll seethat most have also moved on or have adopted similar changes.

Jon C. Ogg
December 5, 2008

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