Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Death Spiral

Did a Major U.S. Retailer Just Collapse and Nobody Noticed It?

America’s ongoing retail apocalypse seems to be getting worse, and nobody cares. Another major U.S. retailer, drugstore operator Rite Aid (NYSE: RAD), might have just collapsed, and nobody noticed.

Rite Aid, which operates around 4,600 drugstores in 31 states and the District of Columbia, is about to be taken over by Walgreen Boots Alliance (NASDAQ: WBA). The press is treating the deal as just another corporate buyout, but to me, it sounds as if a very desperate Rite Aid effectively sold itself to Walgreens to avoid the humiliation of bankruptcy or the death spiral.

A New Retail Giant

This merger, if approved by the Federal Trade Commission, or FTC, would give Walgreens around 12,832 stores. Walgreens operated around 8,232 stores in all 50 states, Puerto Rico, the U.S. Virgin Islands, and Washington, DC, in February 2015. Obviously, Walgreens will close some stores and could be forced to sell some to comply with antitrust laws after the deal is complete, but this deal would still make it the largest drugstore and one of the largest small box operators.

** FILE ** Workers place half of a Rite Aid sign on sawhorse during sign installation at a new Rite Aid store in Philadelphia, Thursday, July 22, 2004. Rite Aid Corp. reported a second-quarter profit of $9.8 million on Thursday, Sept. 23, 2004, citing better cash flows and a reduction in inventory expenses. (AP Photo/Jacqueline Larma)
** FILE ** Workers place half of a Rite Aid sign on sawhorse during sign installation at a new Rite Aid store in Philadelphia, Thursday, July 22, 2004. Rite Aid Corp. reported a second-quarter profit of $9.8 million on Thursday, Sept. 23, 2004, citing better cash flows and a reduction in inventory expenses. (AP Photo/Jacqueline Larma)

That would make Walgreens the second largest operator of small-box discount stores in North America. Currently, the largest is Dollar Tree (NASDAQ: DLTR), which currently operates around 13,600 Family Dollar and Dollar Tree stores in the U.S. and Canada. It would make Walgreen larger than the fast-growing Dollar General Stores (NYSE: DG), which operates around 12,198 stores, and give it a huge edge on CVS Health (NYSE: CVS), which operates around 7,600 stores.

The deal is certainly reminiscent of Dollar Tree’s acquisition of the ailing Family Dollar last year. Family Dollar nearly collapsed because of over expansion and declining revenues.

If successful, this merger would make Walgreens a retail giant and give it the kind of revenue and buying power that could compete with the likes of Walmart Stores Inc. (NYSE: WMT), Kroger (NYSE: KR), Costco Wholesale (NYSE: COST) and that fast-growing upstart, Amazon (NASDAQ: AMZN). Walgreen, which operates small-box discount stores in its drugstores, would also be in a better position to deal with the rise of Dollar Tree and Dollar General.

Okay, that’s the possible good news, but the bad news is that a major retailer was not able to compete and instead collapsed. The changing retail landscape has become even more brutal. In the last year we’ve seen the disappearance of historic chains such as A&P and Alco, the collapse of Radio Shack and the slow moving demise of Sears Holdings (NASDAQ: SHLD), not to mention the closing of hundreds of Family Dollar locations.


It looks as if the retail apocalypse has come to Rite Aid and drugstores. America is about to see even more empty store fronts and lost jobs.

Did Rite Aid Collapse?

The financial numbers show us that Rite Aid was not a very healthy company. A few of the highlights it reported on August 31, 2015, include the following:

  • A free cash flow of -$186.08 million
  • A TTM revenue of $27.85 billion
  • A net income of $1.980 billion
  • A profit margin of .28%
  • Cash and short-term investments of $152.65 million
  • $628.30 million in cash from operations

These numbers indicate that Rite Aid might have been out of money or very close to it. The numbers certainly did not impress Mr. Market; Rite Aid’s stock was trading at $7.88 a share on October 30, 2015. It also had a market capitalization of $8.245 billion and an enterprise value of $15.48 billion on that day.

That means Walgreen is definitely getting a bargain—$27.85 billion in revenue for around $8 billion with this deal. That revenue is also growing fast; Rite Aid reported a TTM revenue of $25.94 billion in August 2014. Walgreen has gotten itself a significant new source of revenue that’s growing. It also keeps that revenue out of the hands of aggressive competitors like CVS and Walmart.

It could also make Walgreen larger than Costco. Walgreen reported a TTM revenue of $103.44 billion on August 31. If you add Rite Aid’s $27.85 billion to that figure, you get $131.29 billion. Costco reported a TTM revenue of $116.20 billion on August 31.
That could make Walgreen the third largest U.S. retailer, behind CVS Health at $145.58 billion and Walmart at $485.62 billion. This could give Walgreen a vast amount of revenue, and it raises serious doubts about the ability of companies like Family Dollar and Dollar Tree to compete in the small box arena.

Why Rite Aid May Have Collapsed

There are several reasons why Rite Aid might have collapsed. The causes of this chain’s possible demise show us how the retail environment is changing and what to invest in.

A few of the reasons why Rite Aid simply could not compete in today’s retail wars include:

  • The aggressive entry of retail giants like Walmart, Costco and Kroger into the drugstore business. These companies operate pharmacies in their stores and increasingly use prescriptions as a loss leader to lure in customers.


  • Competitors like Walmart, Costco and Kroger that are able to offer amenities that Rite Aid lacks, including filling stations, groceries, financial services, banking and clothing. Kroger offers discounts on fuel for its pharmacy customers, for example, and one stop shopping for groceries, cleaning supplies and prescriptions.



  • Walmart’s aggressive foray into the small box arena with its Neighborhood Markets, many of which offer pharmacies.


  • The fast growth of dollar stores like Dollar Tree and Dollar General, which often undercut drugstore prices on items like makeup, toiletries, cleaning supplies and snacks.


  • The fast growth of online retailers like, which compete directly against drug stores in the sale of items like cosmetics. Amazon is now aggressively marketing cleaning supplies and groceries.


  • Intense competition for what could be a declining customer base.


  • Growing use of mail order and online pharmacies, which eliminates the need for customers to go to drugstores.


  • Inability to match the deep discounting of competitors like Walmart, Amazon, Costco, Kroger and Dollar General.

It looks as if the retail environment has become a very bloody battlefield. If a company with 4,600 stores and $27 billion in revenue cannot survive, one has to wonder what other retailers will fall in this conflict. My prediction is that the carnage is only beginning; many more historic names in retail will be gone as the present retail wars keep escalating.

Disclosure the blogger holds shares of Kroger.