Moody’s Cuts Rite Aid, Prematurely?
Moody’s Investors Service cut Camp Hill, Pennsylvania-based Rite Aid Corp.’s credit and debt ratings, warning that the struggling number-three U.S. drugstore chain could have difficulty making interest payments and that it may not be able to “reliably” pay interest on all its debt going forward. The downgrade, which
follows four years of losses and a failed expansion that left it near bankruptcy, strikes a blow at Rite Aid’s months-long bid to turn its 3,520 stores around and compete more effectively with Walgreen Co. and CVS Corp., as well as other retail competitors.
Moody’s cut Rite Aid’s ratings, which affect $4.1 billion of debt, one notch. It cut Rite Aid’s secured bank credit line to “B2”, its fifth highest of 11 “junk” grades, from “B1”, and its senior unsecured notes to “Caa3”, its ninth highest, from “Caa2”. It also cut Rite Aid’s convertible subordinated notes to “C”, its lowest grade, from “Ca”. It said noteholders would likely recover “minimal” amounts of their principal in a “distress scenario”. Moody’s rating outlook is negative.
Moderator Comment: Moody’s got it wrong — right?
While we are sure that Moody’s had legitimate reasons to arrive at its decision to cut Rite Aid’s credit and debt ratings, the decision was still wrong. The distress scenario envisioned by Moody’s is not going to happen and the reason for that is Robert G. Miller.
Mr. Miller, chairman and chief executive of Rite Aid inherited the mess left by Martin Grass and has created stability and pride where there was once only chaos and derision. Same store sales grew 8.3 percent in January following a 6.8 percent versus previous year increase in December.
We are cognizant that the chain still has a long way to go and is not out of the woods. It is moving in the right direction, however. Operating losses for the third quarter were slashed from 0.74 per share to 0.23.
The moves that Mr. Miller and his team have made have improved store performance and allowed the chain to get the credit it needs to meet its responsibilities and make the investments needed to grow the business.
The chairman of Rite Aid also believes that he and his team will succeed and is putting his money where his strategy is. Last month, Mr. Miller purchased 450,450 shares of company stock. His current stock holdings in Rite Aid (RAD — NYSE) now stand at 2.1 million shares. [George
Anderson – Moderator]