turnaround plans hit a roadblock Thursday, suggesting that even drugstores aren't immune to recession.
The company, the nation's third-largest drugstore chain, dumped a pile of bad news on investors, including a bigger loss in the third quarter than anticipated. It also said its cash flow will be much lower than expected in 2002.
The news irked investors, who had slowly begun believing that the company was righting its ship. Just over a year ago, Rite Aid was teetering on the edge of bankruptcy because of a huge debt load and alleged financial shenanigans.
Shares were off lately $1.06, or 26%, to $3.03, well below their 52-week high of $9.99 reached in June. Several brokerages, including Merrill Lynch and UBS Warburg, downgraded the stock. Merrill lowered its rating to neutral from buy, while UBS dropped it to hold from buy.
Rite Aid said it lost 23 cents a share in the third quarter, compared with expectations for a 14-cent loss. The company said its earnings before interest, taxes, depreciation and amortization, or EBITDA, a measure of cash flow, were $77.5 million in the third quarter, lower than the $105.7 million in last year's third quarter. It cited a decline in margins in its pharmacy business.
The company, based in Camp Hill, Pa., said it would take a $35 million charge to fourth-quarter earnings to purchase 12 stores from rival
Even more troubling for investors was the company's announcement that free cash flow would be $25 million in 2002, compared with previous guidance of $125 million to $175 million. Cash-flow figures are especially important for investors in Rite Aid because of its history of liquidity problems and accounting irregularities. The company has faced civil and criminal inquiries stemming from allegations it manipulated earnings in 1997, 1998 and 1999.
Last year, however, the Rite Aid showed signs it was putting its history to bed. Its stock rose, while it
reduced its debt at a faster clip than analysts expected.
Drugstore chains have historically performed well during times of recession, because items such as prescription drugs and toiletries are seen as necessities. But in recent years, drugstores have come to rely more on so-called front-end items such as snacks and lightbulbs, putting them in direct competition with mass merchandisers like Wal-Mart
that can offer the goods at lower prices. That has meant that drugstore chains, despite this supposedly countercyclical nature, have increasingly traded with the ebb and flow of the economy along with the rest of the retail industry.
And with recession here, that trend has meant bad things for investors, as Rite Aid shareholders discovered Thursday.