Rite Aid Corp. has outlined efforts that management expects to significantly improve the company’s operating results.

Rite Aid, John Standley, pharmacy, drug store, drug store chain, Geoff Walden

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Rite Aid forges plan to improve results

April 20th, 2009

CAMP HILL, Pa. – Rite Aid Corp. has outlined efforts that management expects to significantly improve the company’s operating results.

In a conference call with financial analysts after Rite Aid released its fourth quarter and full year results, president and chief operating officer John Standley discussed several initiatives, either in preparation or already implemented.

Major projects include store segmentation and associated store operating models, SKU optimization, distribution network consolidation, private label expansion and a pharmacy loyalty program.

Standley noted that Rite Aid has a diverse customer base and store base in terms of operating performance. During the current fiscal year, he said, the company will implement a new operating model for low-volume stores that involves changes to store labor, delivery frequency, advertising formats and merchandise assortments.

Also, a new operating model for stores in metropolitan markets has been tested in Philadelphia and is being implemented in another market.

“During the fourth quarter we reorganized the field structure to place more direct supervision closer to our higher volume and hard-to-operate stores while eliminating some higher-level field supervision to make this change cost-neutral,” Standley told analysts.

The chain’s store segmentation strategy is supported by several other initiatives, including a strategic pricing application and promotional and seasonal demand forecasting. Those tools will help Rite Aid reduce product distribution to low-volume and metro stores, which typically do not sell a great deal of seasonal items, while allocating more to higher-volume suburban outlets.

Meanwhile, Rite Aid has completed SKU optimization for three categories, and it is now being implemented in planograms for those areas.

“We plan to use the same models for all new planograms, starting in the third quarter,” Standley said. “We’re really trying to look at the number and mix of SKUs inside the store. That’s a fairly big effort to take some inventory out, so that’s a portion of our target for next fiscal year.”

Part of the process involves a backroom inventory project that gives store associates a better grasp of where merchandise is stored so that it can be retrieved more efficiently. One expected benefit of the SKU optimization effort is to reduce the drug store chain’s historically large number of returns, Standley added.

Elsewhere on the logistics front, Rite Aid said it would close a full-service distribution center in Newnan, Ga. That followed an announcement during the fourth quarter that the company plans to close a satellite distribution facility in Bohemia, N.Y. The closures will save the company $3.6 million and $1.3 million annually, respectively, Standley said.

Rite Aid also is pushing store brand development, and Standley said he sees “a great opportunity” in the current economic environment. Private label now constitutes 14.4% of the chain’s top line, and the retailer plans to add 250 store brand SKUs this year and redesign packaging for many items. “We expect private brand penetration to grow another 100 basis points during fiscal 2010,” he said.

The pharmacy loyalty program is slated to launch in test markets in the second half of the year and be supported by targeted regional marketing campaigns, a new ad format that touts Rite Aid’s health and wellness positioning, and efforts to improve the chain’s value positioning.

“We’re doing a lot of things to power the stores, we’re trying to simplify things, and we’re trying to make it easier to run a lower-volume store,” Standley said. “As we do that, ultimately our store conditions are going to get a lot better because it’s just going to be flat-out easier to execute. That’s what’s going to drive the long-term sales growth of this company.”