Rite Aid reports $1.05 billion liquidity, cuts leverage, eyes market

By Paul Deckelman

New York, Sept. 20 - Rite Aid Corp. closed out the second quarter of the 2013 fiscal year with solid liquidity of some $1.05 billion and pointed to a drop in its debt-to-earnings leverage ratio, as well as other financial measures, as proof that the Camp Hill, Pa.-based Number-Three U.S. drugstore chain is on the right track with its turnaround plan, even as it continues to lose money.

And the company's chief financial officer said Thursday that Rite Aid - which did several junk bond transactions earlier this year in order to extend the maturities in its capital structure - continues to keep an opportunistic eye out for future such opportunities, although it has nothing in the pipeline right at this moment.

"We're always kind of looking at what's happening; obviously," CFO Frank G. Vitrano told analysts on the conference call following Rite Aid's release of its results for the 2013 fiscal second quarter ended Sept. 1.

He noted that as a result of the transactions earlier this year, "we don't have anything coming due now till 2016 from a first-and- second-lien [bond] perspective," although the company does face a June 2014 maturity on $1.04 billion of term loan debt.

Bond deals push out maturities

Early in the year, Rite Aid extinguished $459 million of its outstanding 8 5/8% senior guaranteed notes due in March 2015, with holders tendering $404.8 million of the bonds in an offer that concluded on March 13 and the company redeeming the remaining $54.2 million on March 28. It funded that takeout with the proceeds from a quickly shopped $481 million issue of senior guaranteed notes due 2020, pricing the bonds at par on Feb. 14 to yield 9¼%.

Then in May, Rite Aid sold another $421 million of paper as an add-on to that 2020 issue, pricing the notes at 101.25 on May 3 to yield 8.962%. It used the proceeds to take out its $405 million of 9 3/8% notes due in December 2015, as holders tendered $296.3 million of those bonds in an offer that wrapped on May 31, with the company redeeming the remaining $108.7 million on June 15.

According to the company's most recent quarterly 10-Q filing with the Securities and Exchange Commission in July, covering the period the 2013 fiscal first quarter ended June 2, even with those two issues of 2015 bonds now gone, Rite Aid's complex capital structure still did include some relatively short maturities.

These included $6 million of 9¼% senior notes due in June 2013; $180.2 million of 6 7/8% senior debentures due in August 2013; the June 2014 term loan; and $295 million of 8½% convertible notes due in May 2015.

2014 loan looms

Vitrano said that the company would look to address what to do about the big term loan obligation "probably at the beginning of next year."

In answer to an analyst's query about whether Rite Aid might use some of its liquidity cushion to call some of the more expensive debt it has out there - for instance, its $446.9 million of outstanding 10 3/8% senior secured second-lien notes due 2016, its $268.4 million of 10¼% senior secured second-lien notes due 2019 or its $405.6 million of 9¾% senior secured first-lien notes due 2016 - the CFO said that the company would weigh "the rate we think we can get versus what the call premium is going to be. Obviously [the call premium on the notes] does step down next year. Those are some of the things that we're looking at and thinking about."

Rite Aid ended the quarter with total debt, net of invested cash, of nearly $6.16 billion, versus year-ago net debt of $6.19 billion, a decrease of $32 million year-over-year.

Vitrano pointed out that the company's leverage ratio - defined as total debt less invested cash versus adjusted EBITDA for the last 12-month period - had fallen to 6.2 times at the end of the latest quarter, versus 7.1 times a year ago.

As of the end of the fiscal second quarter, Rite Aid had no borrowings drawn against its $1.175 billion senior secured revolving credit facility, although $125 million of outstanding letters of credit brought availability under that revolver down to $1.05 billion, accounting for most of its liquidity.

As of the current date, he said that the company has $1.256 billion of liquidity.

Vitrano also said that "we expect to be free cash-flow positive for the year."

Quarterly performance improves

During the quarter, Rite Aid's revenues for the quarter totaled $6.2 billion, off slightly from year-ago levels. However, its adjusted EBITDA grew to $218.6 million from $184.2 million a year earlier - the company's seventh straight quarter of increased adjusted EBITDA.

Its net loss shrank to $38.7 million, or 5 cents per diluted share, versus year-earlier red ink of $92.3 million, or 11 cents per share. It attributed the smaller losses in the latest quarter to the increase in adjusted EBITDA, as well as decreases in various charges against earnings it took related to inventories, store closings, closing and impairment and depreciation and amortization.

During his formal presentation as part of the conference call, Rite Aid's president, chairman and chief executive officer, John T. Standley, noted improved front-end sales - that is, sales of non-pharmaceutical or non-medicinal items such as food, beauty aids, books, magazines and DVDs, toys or household goods - as well as a seventh consecutive quarter of increased prescription counts in the pharmaceutical part of the operation.

Standley also touted the impact of company's ongoing "Wellness+" customer loyalty program and its ongoing makeover of many of its more than 4,600 U.S. stores to what it terms its new "Wellness" format aimed at improving the customer experience.

Standley declared that "we are pleased with our second-quarter results, as we continue to make significant progress in our turnaround efforts."

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