Rite Aid debt refinancing to help establish new stores

While the saving's impact is not expected to be substantial, the refinancing increases the firm's borrowing capacity.

By Trefis Feb 28, 2013 7:23PM
Quick Take
  • Rite Aid announces the completion of its debt refinancing
  • The transactions cost $117 million but the company gets to save $45 million per year in interest payments
  • The revised revolving credit facility has about $2 billion in borrowing capacity and matures in February 2018
  • We expect the freed cash to be used to open new stores and increase the footprint of the wellness+ format as the company looks to beat larger competitors: Walgreen (WAG), CVS (CVS) and Wal-Mart (WMT).

Fresh from reporting a profitable quarter in December Rite Aid (RAD), the third largest drugstore chain in the United States, announced the completion of a series of debt refinancing moves. The company had roughly $6 billion in debt as on December 1, 2012.


The refinancing moves are expected to result in a loss of $117 million, but will save it $45 million per year in interest payments. The savings from the initiative account for about 10% of the interest payments the company makes, but only 0.5% of its selling, general and administrative (SG&A) expenses.


Thus, the impact of the saving is not expected to be substantial -- but the refinancing increases the borrowing capacity of the firm by about $2 billion. We expect the company to utilize the benefits from the initiative by investing in new stores, converting more stores to the wellness format and supporting the wellness+ loyalty program.


Rite Aid currently operates in a smaller number of stores when compared to bigger peers Walgreen, CVS Caremark and Wal-Mart. Also, its marketing budget has been constrained by the huge debt the company carries.


Rite Aid Stock Break-UpTerms of refinancing


As a result of the completion of the refinancing transactions, the company has extended the maturity of a portion of its outstanding indebtedness and lowered interest expense.


The revised revolving credit facility has about $2 billion in borrowing capacity and matures in February 2018. The company also refinanced loans due in 2014 and 2018, with proceeds from new $1.2 billion loan due in 2020 and other borrowings. Senior notes that are due in 2016 were also refinanced, and the company is making a cash tender offer for $180.3 million in debt due in 2013.


Increased borrowing capacity can be used to launch more wellness stores


Rite Aid has set a goal of having nearly 800 wellness stores by the end of fiscal year 2013. The improved borrowing capacity could be used to finance the conversions of additional stores. The company converted 117 stores last quarter, bringing the total number of converted stores to 687.


The stores have had a positive impact on the sales so far, and we expect the company to continue these conversions to build on its wellness+ customer loyalty program in order to develop loyalty among customers.

At the end of the last quarter, the wellness+ program had approximately 25 million active members - defined as those who have used their card at least twice in the past 26 weeks. The number represents a 5% increase over the same period the previous year and it signals the growing loyalty towards the Rite Aid brand. Increased loyalty would further support a growth in same store prescription count, and front-end sales over the coming quarters.


We have a $1.5 Trefis price estimate of Rite Aid, which is about 5% below the market price.


Tags: CVSRAD
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