Rite Aid Warns That Earlier Forecasts Are Unreliable

The drugstore company also said it has been contacted by the SEC about its accounting practices.
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Rite Aid

(RAD) - Get Report

once again shocked Wall Street Wednesday, warning that forecasts of the company's profitability and cash flow made by Martin Grass, its one-time chief executive, were unreliable.

The drugstore company also said that it had been contacted by the

Securities and Exchange Commission

about its accounting practices. And it canceled a conference call with analysts, which was scheduled for Wednesday.

Rite Aid's disclosure about its earnings forecasts raised new doubts about its ability to manage its finances. The company's stock plunged after the announcement, dropping 2 9/16, or 32%, to 5 3/8 before trading was halted before 2:30 p.m. EST. The stock had traded as high as 51 1/8 in the last 52 weeks.

In a statement, the company advised investors "not to rely on forward-looking profitability and cash flow information shared at its Oct. 11, 1999, analyst and investor meeting.''

Within a week of that meeting, Grass resigned as chief executive and Rite Aid said it would restate its earnings downward by $500 million for the last three years. That restatement attracted the SEC's attention.

"We are under SEC review," said Karen Rugen, a Rite Aid spokeswoman. "No formal investigation is under way right now, but with the size of the restatement, one could be anticipated."

James Kumpel, an analyst at

Raymond James & Associates

, said, "The SEC is reviewing whether earnings were representative of the operations, which apparently they weren't."

But the SEC move is just the latest difficulty for Rite Aid. Grass has not been permanently replaced as chief executive. The drugstore chain is also searching for a new chief financial officer.

"It's like a rudderless ship," said Kumpel, whose firm downgraded Rite Aid's stock to neutral after Grass' resignation and has done no recent underwriting for it.

Leadership aside, Rite Aid had severely missed its earnings targets in part because of an overly aggressive expansion, Kumpel said.

The company has also been accused by the

Florida Attorney General's Office

of deceptive trade practices, civil theft, and racketeering for billing customers different prices for the same prescription drugs.

Kumpel said Rite Aid has also been squeezing its suppliers, demanding big rebates, because of its financial problems. "They are straining to meet earnings on the back of these suppliers, who are the backbone of their operations," he said.

Despite Rite Aid's difficulties, Kumpel hasn't completely abandoned the stock. If strong executives can be found to fill in the open executive offices, Kumpel said, the stock could recover to $9.