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Will Lawsuits and Debts Drive Rite Aid Into Chapter 11?
Rite Aid is reportedly preparing for a Chapter 11 bankruptcy filing in the near future that would help the retailer navigate its $3.3 billion debt load and pending lawsuits regarding its alleged involvement in the overprescription of opioid painkillers, people familiar with the matter told The Wall Street Journal.
Rite Aid has not yet reached a settlement with federal, state, or private opioid plaintiffs to resolve the liabilities in a potential Chapter 11, according to the sources. The retailer plans to treat them as general unsecured claims, which would come after its collateralized debt in bankruptcy. They would be part of the debts left over after secured claims are paid in full. However, the people noted that the terms offered to Rite Aid’s opioid-related claimants in potential bankruptcy proceedings could change.
More than a thousand federal lawsuits Rite Aid faces have been consolidated into multidistrict litigation in Ohio. The retailer is also dealing with state lawsuits that claim that it contributed to the opioid epidemic, in addition to a civil lawsuit filed by the Justice Department that states that Rite Aid violated the False Claims Act and Controlled Substances Act in the way it dispensed controlled substances.
Rite Aid has also been struggling with challenges beyond the opioid lawsuits as it seeks a path to profitability. Revenue dropped 6% in fiscal Q1 2024, which ended June 3, while the company’s net loss nearly tripled year-over-year to $306.7 million, up from $110.2 million in the year prior. Same-store sales increased 8.4% year-over-year, driven by a 13.3% increase in pharmacy sales that offset a 4.4% decrease in front-end sales.
One contributor to the overall loss was Elixir, Rite Aid’s pharmacy services segment. The business reported revenue of $1.2 billion in Q1 2024, which was down 30% year-over-year due to declining membership. The medtail space has become more and more crowded as CVS experiments with formats following its acquisition of Aetna and retail giants like Amazon and Walmart become more involved in the space while introducing new benefits.
A bankruptcy filing could be the only path forward for Rite Aid to manage its debt and get through the lawsuits it is facing. However, it remains to be seen if the pharmaceutical retailer will be able to return to its former heights.
Discussion Questions
Is bankruptcy the right path forward for Rite Aid? Do you believe Rite Aid can return to growth, or is it another older retailer doomed to fade away in the modern market?
Poll
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Dave Wendland
Vice President, Strategic RelationsHamacher Resource Group
Bob Phibbs
President/CEO, The Retail Doctor
Rite Aid is currently sitting on over $3.3 billion of debt. In the latest quarter this debt cost $65 million in interest payments, contributing to a $306 million net loss. For the current full fiscal year, Rite Aid is looking at a total loss of at least $650 million. Its liabilities exceed its assets by almost $1 billion, and it has only $135 million of cash on hand. The company is basically running on the fumes of cash it generates in the day-to-day business. Rightly or wrongly, Rite Aid cannot afford opioid settlements – which would likely cost in the ballpark of $1 billion. The only sensible course of action is bankruptcy which would allow Rite Aid to restructure its debt and to potentially address the various opioid settlement as part of one process.
Rite Aid has had many challenges, and the opioid lawsuit will likely be the catalyst that pushes it into bankruptcy. Operating some 2,000 stores, and generating over $20B in annual revenue, this is still a big operation, and so there is a business that may be worth saving. However, Rite Aid is in bad shape financially and it will take a serious re-set for it to return to a growth posture.
I kept thinking RiteAid would be sold. It wasn’t. It’s a tough time for chain drug stores,since every kind of stores seems to have a prescription department now.
Aside from that, I think the whole opioid reaction has gotten way out of hand,
personally. The Sacklers lied. Apparently everyone believed them. Do the drugs have valid uses? Yes. Go have a knee replacement and find out. When I had mine done 5 years ago, it was like a torture. Both staying ahead of the pain and having to have my wife drive up for a new prescription every week we’re unfair to all of us. It’s worse now.
we are a society that loves extremes. Chains like RiteAid are collateral damage. It’s a pity.
Overshadowing the many positives that Rite Aid has implemented is daunting debt (nothing new for this financially-troubled retailer). The opioid settlement may well be the straw that precipitates sweeping change … and the Phoenix that rises may look nothing like the existing entity.
Rite Aid should just wave a white flag, and sell the assets for something, anything. A reorganization with the current balance sheet and business outlook just delays the inevitable. This epitaph was written a long time ago.
There seems to be no happy ending for Rite Aid. It’s a tragedy that some companies didn’t pull the plug on widespread opioid use sooner.
I’m not sure Rite Aid survives a bankruptcy filing. Once in bankruptcy, creditors may find more value in selling off stores and real estate than reorganizing the chain. CVS and Walgreens may pick off their best store locations. Landlords may find other tenants that drive more traffic and generate high rents. Rite Aid simply hasn’t been a growing retailer for many years so going Chapter 11 may not be the answer.
An organization this far in debt and acknowledging their part in the opioid scandal are linked. I believe many turned a blind eye as prescriptions mounted and they didn’t look at root causes. Neil is right, they are operating on fumes and tried to beat the competition by opening locations across from Walgreens and CVS instead of being profitable in their existing stores.
As is usually the case, the Chap 11 seems to be a technical issue, if you will, so I’m not sure I would describe it as a “path”; i.e. filing – or not filing – doesn’t really provide any kind of framework as to what they will do ,or should do, next.
“Return to growth” ?? that phrasing implies they were (actually) growing at one point; I’m not sure when that was. At any rate they’ve long been a distant third, and It’s hard to see anything happening that will change that. So much like JCP I would put their future on the iffy list.
As a publicly traded company, using bankruptcy to better manage its debts, and ability to run its business, might be the best way for Rite Aid to evolve and survive. Bankruptcy is a solution that is not always a bad one, and should be viewed as an alternative to Rite Aid not paying its debts. We don’t know enough about their full fiscal situation and other solutions (like a leveraged buyout) to really assess the impact that bankruptcy offers.