Bloomberg Oct 30, 09
By Frederic Tomesco and Carol Wolf
Oct. 30 (Bloomberg) -- Rite Aid Corp. board member and largest shareholder Francois Jean Coutu said the retailer may need to sell stores in western U.S. states and nab competitors’ sales in the east to return to profitability. Rite Aid, which has lost money for nine straight quarters, must gain market share in places like Pennsylvania and New York, where it is already a leader, to bolster earnings, Coutu, 54,chief executive officer of Jean Coutu Group Inc., said in an Oct. 27 interview in Longueuil, Quebec, where his company is based. Rite Aid said it doesn’t plan to sell western stores. “If there are no drastic changes in the drug-distribution market in the U.S., Rite Aid is going to have choices to make,”Coutu said. “I think it would probably be better for Rite Aid to focus its energy and strengths on a few markets.” Rite Aid, based in Camp Hill, Pennsylvania, operates more than 4,800 stores, including locations in Utah, Idaho, Washington and other western states. Coutu didn’t say which of the stores could be sold or when the retailer would be profitable. “We have no plans to sell our West Coast stores. Our plan is to remain a nationwide drugstore company,” Karen Rugen, a Rite Aid spokeswoman, said yesterday. “We would have to evaluate any proposal that came to us that made financial sense and delivered value for our shareholders.” Jean Coutu, Canada’s second-largest drugstore chain, sold more than 1,800 Brooks Eckerd stores to Rite Aid in 2007. As part of the agreement, Jean Coutu was given Rite Aid board seats and 250 million shares, making it the U.S. company’s largest common shareholder. Jean Coutu held a 28.4 percent equity interest in Rite Aid, according to its fiscal 2009 annual report.

Before the Recession
The transaction was completed before the U.S. entered a recession that stifled consumer spending. That hindered the integration of the Brooks Eckerd stores into Rite Aid and increased the cost of refinancing debt, Coutu said. Rite Aid fell 4 cents to $1.29 at 9:37 a.m. in New York Stock Exchange composite trading. The shares have jumped more than four fold this year. “Selling some assets might be a good idea for Rite Aid if it can help them cut debt,” said Pierre Bernard, who oversees assets of about C$850 million ($797 million) at IA Clarington Investments Inc. in Montreal and owns Jean Coutu shares. Rite Aid had total debt of $5.91 billion as of Aug. 29, according to a company filing.

Strategic Investment
On Oct. 6, Coutu wrote down the value of its investment in Rite Aid to zero as of the end of the company’s fiscal second quarter. This means that Coutu will no longer need to account for Rite Aid’s losses in its quarterly earnings. Coutu’s second-quarter profit of C$14.9 million included C$24.3 million in losses from Rite Aid. Rite Aid is expected to report a third-quarter loss of 17 cents a share, the average estimate of eight analysts surveyed
by Bloomberg. “I am very optimistic for the future of Rite Aid. They fill out more than 300 million prescriptions a year. This will always have a value,” Coutu said. “I cannot believe, given the size of the U.S. market and the wealth of the country, that this investment will not eventually pay off.”