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Article by DailyStocks_admin    (07-16-08 05:21 AM)

Rite Aid Corp. CEO MARY F SAMMONS bought 486750 shares on 7-14-2008 at $1

BUSINESS OVERVIEW

Overview

We are the third largest retail drugstore chain in the United States based on revenues and number of stores. We operate our drugstores in 31 states across the country and in the District of Columbia. As of March 1, 2008, we operated 5,059 stores.

In our stores, we sell prescription drugs and a wide assortment of other merchandise, which we call "front-end" products. In fiscal 2008, prescription drug sales accounted for 66.7% of our total sales. We believe that our pharmacy operations will continue to represent a significant part of our business due to favorable industry trends, including an aging population, increased life expectancy, the federally funded prescription drug benefit program ("Medicare Part D"), the discovery of new and better drug therapies and our ongoing program of purchasing prescription files from independent pharmacies. We offer approximately 26,300 front-end products, which accounted for the remaining 33.3% of our total sales in fiscal 2008. Front end products include over-the-counter medications, health and beauty aids, personal care items, cosmetics, household items, beverages, convenience foods, greeting cards, seasonal merchandise and numerous other everyday and convenience products, as well as photo processing. We attempt to distinguish our stores from other national chain drugstores, in part, through our private brands and our strategic alliance with GNC, a leading retailer of vitamin and mineral supplements. We offer approximately 3,000 products under the Rite Aid private brand, which contributed approximately 12.9% of our front-end sales in the categories where private brand products were offered in fiscal 2008.

The overall average size of each store in our chain is approximately 12,400 square feet. The average size of our stores is larger in the western United States. As of March 1, 2008, approximately 56% of our stores are freestanding; approximately 47% of our stores include a drive-thru pharmacy; approximately 62% include one-hour photo shops; and approximately 29% include a GNC store-within-Rite Aid-store.

Our headquarters are located at 30 Hunter Lane, Camp Hill, Pennsylvania 17011, and our telephone number is (717) 761-2633. Our common stock is listed on the New York Stock Exchange under the trading symbol of "RAD". We were incorporated in 1968 and are a Delaware corporation.

Acquisition

On June 4, 2007, we acquired of all of the membership interests of JCG (PJC) USA, LLC ("Jean Coutu USA"), the holding company for the Brooks Eckerd drugstore chain ("Brooks Eckerd"), from Jean Coutu Group (PJC) Inc. ("Jean Coutu Group"), pursuant to the terms of the Stock Purchase Agreement (the "Agreement") dated August 23, 2006. As consideration for the acquisition of Jean Coutu USA (the "Acquisition"), we paid $2.3 billion and issued 250 million shares of Rite Aid common stock. We financed the cash payment via the establishment of a new term loan facility, issuance of senior notes and borrowings under our existing revolving credit facility. Our operating results include the results of the Brooks Eckerd stores from the date of acquisition.

As of March 1, 2008, the Jean Coutu Group owns 251.9 million shares of Rite Aid common stock, which represents approximately 28.6% of the total Rite Aid voting power. We expanded our Board of Directors to 14 members, with four of the seats being held by members designated by the Jean Coutu Group. In connection with the Acquisition, we entered into a Stockholder Agreement (the "Stockholder Agreement") with Jean Coutu Group and certain Coutu family members. The Stockholder Agreement contains provisions relating to Jean Coutu Group's ownership interest in the Company, board and board committee composition, corporate governance, stock ownership, stock purchase rights, transfer restrictions, voting arrangements and other matters. We also entered into a Registration Rights Agreement giving Jean Coutu Group certain rights with respect to the registration under the Securities Act of 1933, as amended, of the shares of Rite Aid common stock issued to Jean Coutu Group or acquired by Jean Coutu Group pursuant to certain stock purchase rights or open market rights under the Stockholder Agreement.

We believe the acquisition of Brooks Eckerd provides several strategic benefits, including the following:

•
a significant increase in the footprint and operating scale of our business, with increased presence in key strategic markets;

•
the creation of the leading drugstore retailer in the Eastern United States, which we believe will allow us to achieve the scale necessary to remain competitive with our major competitors;

•
long-term value creation through net reductions in costs and expenses, achievement of meaningful synergies, including additional operational efficiencies, greater economies of scale and revenue enhancements resulting in higher operating cash flow and a decrease in our leverage ratio;

•
better positioning to capture additional growth in a sector where growth is projected; and,

•
an opportunity to apply our scaleable infrastructure, including our programs, best practices and management capabilities, across a larger store network, which we believe will improve profitability through cost savings and sales growth.

Industry Trends

We believe pharmacy sales in the United States will grow between 2% and 3% in 2008 based upon a study published by a pharmaceutical market intelligence firm. This anticipated growth is expected to be driven by greater drug utilization, an aging population caused by the "baby boom" generation entering their sixties, the increasing life expectancy of the American population, the introduction of new drugs and the rate of inflation. The growth rate of pharmacy sales in the United States in recent years has slowed, due to an increased percentage of generic drug sales, new over-the-counter drugs that replace prescription drugs, safety concerns for certain drugs and a flattening of growth in the Medicare Part D program.

Generic prescription drugs help lower overall costs for customers and third party payors. We believe the utilization of existing generic pharmaceuticals will continue to increase. Further, we believe a significant number of new generics are expected to be introduced in the next few years. The gross profit from a generic drug prescription in the retail drugstore industry is greater than the gross profit from a brand drug prescription.

The retail drugstore industry is highly competitive and has been experiencing consolidation. We believe that the continued consolidation of the drugstore industry, continued new store openings, increased mail order, increased competition from internet based providers, drug importation and aggressive generic pricing programs at competitors such as Wal-Mart and Kroger will further increase competitive pressures in the industry. In addition, sales of generic pharmaceuticals continue to grow as a percentage of total prescription drug sales, which has a dampening effect on sales growth.

The retail drugstore industry relies significantly on third party payors. Third party payors, including the Medicare Part D plans and the state sponsored Medicaid agencies, periodically evaluate and at times change the eligibility requirements to reduce the number of participants or reduce certain reimbursement rates. These evaluations and resulting changes and reductions are expected to continue. When third-party payors, including the Medicare Part D program and state sponsored Medicaid agencies, reduce the number of participants or reduce their reimbursement rates, sales and margins in the industry could be reduced, and profitability of the industry could be adversely affected. These possible adverse effects can be partially or entirely offset by controlling expenses, dispensing more higher margin generics or dispensing more prescriptions overall.

Strategy

Our objectives and goals are to grow our sales, increase our market share and reach a leverage ratio that existed prior to the Brooks Eckerd acquisition. Our strategies for achieving our goals and objectives are to establish a marketing distinctiveness with our customers, improve the productivity of our existing stores, develop new and relocated stores in our strongest existing markets, leverage our size and scale for lower costs and improve our efficiencies and cost control. We believe that improving the sales of existing stores and growing our existing markets is critical to improving our profitability and cash flow. We believe the acquisition of Brooks Eckerd broadens and accelerates the achievement of our strategic goals and objectives.

The following paragraphs describe in more detail some of the components of our strategies which will result in achievement of our goals and objectives:

Complete the Integration of the Brooks Eckerd Stores. The Brooks Eckerd stores and distribution centers are being integrated in phases. We have completed integrating the six distribution centers and are well on our way to completing systems conversions in all of the acquired stores by the end of May 2008. We have also begun the minor remodel phase of the Brooks Eckerd stores, which we expect to complete by October 2008.

Develop Stores in Existing Markets Our new store, store relocation and store remodeling program is focused on our strongest existing markets. We expect to make significant investments for the next several years in new stores, store relocations and store remodels because the best return on capital is to invest in the store base. However, it is equally important that we complete the integration of the Brooks Eckerd stores, which includes the minor remodels described above, as well as maintain a balance between debt and operating cash flows that optimizes the cost of capital and provides reliable access to the capital and sale-leaseback markets. As a result, we will take these two factors into account when determining the number of new and relocated stores that we open and the number of stores that will be remodeled. We expect that more than 50% of the new stores that we open each year will be relocations. An integral part of the store development program is our new store prototype. At March 1, 2008, approximately 270 new or relocated stores have been constructed and opened utilizing the customer world prototype. We expect that almost all of the planned new and relocated stores will be the customer world prototype store.

Grow our Pharmacy Sales and Attract More Customers. We believe that customer service and convenience are key factors to growing pharmacy sales. To improve customer service, we are focused on our "With Us, It's Personal" program that is aimed at delivering more personalized service along with timely delivery to our customers. To help our pharmacists do this, we developed and implemented an automated customer satisfaction feedback and measurement system. Using the system, we establish improving customer satisfaction target goals each year and those goals are the basis for a significant portion of incentive compensation for management throughout the company. We also developed and implemented a pharmacy management and dispensing system. This system, which we call "Nexgen," provides our pharmacists with better tools and information to meet our customers' needs. In addition, Nexgen provides management with important information about the performance of each pharmacy in critical operating areas that drive customer service. We provide our customers with an easy and convenient way to order refills over the telephone or the internet using our automatic refill program. To provide better value to our customers we recommend, when appropriate, the utilization of generic drugs. Generic drugs, which cost our customers significantly less than a branded drug, are also more profitable for us. Our generic penetration continues to increase every year, and we are setting our goals even higher in future years to take advantage of the number of new generics expected to come to market.

The Medicare Part D program provides prescription drug coverage to senior citizens, including those who previously were not covered by any drug benefit program. We communicate information on the Medicare Part D program to senior citizens. We also offer senior citizens newsletters and prescription discounts through our Living More senior loyalty program. We have also expanded our home health category to target senior citizens with products like wheelchairs, canes, electric scooters and products that enhance bath safety.

To help grow sales and script count, we acquire pharmacy files from other drug stores and have initiatives designed to attract and retain those customers. Other initiatives that we expect to grow our pharmacy sales include the opening of in-store health clinics such as those in the Los Angeles, California, Sacramento, California and Boise, Idaho areas, the implementation of technology that will enable our pharmacists to better monitor patient prescription compliance and the continuing pilot of a medication therapy management program, a fee for service arrangement, in conjunction with physicians and the University of Pittsburgh. We believe these initiatives have been effective at growing sales in their target markets and have scalable, replicable potential for future expansion.

Grow Front-End Sales. We intend to grow front-end sales through continued emphasis on core drugstore categories, a commitment to health and wellness products to enhance our pharmacy position, a focus on seasonal and cross-merchandising opportunities, a wider selection of products and services to our customers, an emphasis on our private brand offerings and effective promotions in our weekly advertising circulars. Our focus for expanding our products and services includes several fully integrated health condition marketing programs, e.g., diabetes, allergy, vitamins, heart health, skincare, weight and pain management, a continued strengthening of our collaborative relationship with our suppliers, an emphasis on our Rite Aid private brand products, which provide better value for our customers and higher margins for us, ethnic products in selected markets, expansion of the number of GNC store-within-Rite Aid-store, and state-of-the-art digital technology in our one-hour photo development through our new partnership with FUJI Film USA, Inc.

Focus on Customers and Associates. Our "With Us, It's Personal" commitment encourages associates to provide customers with a superior customer service experience. We obtain feedback on our customer service performance by utilizing an automated survey system that collects store specific information from customers shortly after the point of sale and from independent third party customer surveys. We also have programs in place that are designed to enhance customer satisfaction, an example of which is the maintenance of a customer support center that centrally receives and processes all customer calls. We continue to improve store-level operating procedures and monitor adherence to those standards and continue to develop and implement associate training programs such as our "Take 10" program to improve customer satisfaction and educate our associates about the products we offer. We have also implemented a customer focused store visit guide that can be used by field management to assess the quality of customer service provided by specific stores. We have implemented programs that create compensatory and other incentives for associates to provide customers with excellent service. We believe that these steps further enable and motivate our associates to deliver superior customer service.

Leverage Size and Reduce Expenses. Our strategy is to leverage our size and either lower expense or contain expense in order to increase the contribution from the pharmacy and front end sales growth strategies described earlier with a focus on reduction of expense in non-retail categories. The general categories of anticipated cost and expense reduction opportunities are cost of product, corporate administrative expenses, advertising expenses and other expense reduction opportunities. We budget and monitor all areas of expense and have also targeted areas of spending for continuous improvement. Our targeted expense areas are subject to analysis of the processes involved, with an emphasis on collaboration between areas in the company and vendors, utilization of competition between vendors and consolidation of spending volumes to achieve economies of scale.

Products and Services

Sales of prescription drugs represented approximately 66.7%, 63.7%, and 63.2% of our total sales in fiscal years 2008, 2007 and 2006, respectively. In fiscal years 2008, 2007 and 2006, prescription drug sales were $16.2 billion, $11.1 billion, and $10.9 billion, respectively. See "Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements.

We sell approximately 26,300 different types of non-prescription, or front-end products. The types and number of front-end products in each store vary, and selections are based on customer needs and preferences and available space.

We offer approximately 3,000 products under the Rite Aid private brand, which contributed approximately 12.9% of our front-end sales in the categories where private brand products were offered in fiscal 2008. We intend to continue to increase the number of private brand products.

We have a strategic alliance with GNC under which we have opened 1,486 GNC "stores-within-Rite Aid-stores" at March 1, 2008 and a contractual commitment to open an additional 866 stores by December 2014. We have incorporated the GNC store-within-Rite Aid store into our new and relocated stores and intend to incorporate the GNC store-within-Rite Aid-store concept into the Brooks Eckerd stores where appropriate.

Technology

All of our stores will be integrated, into a common information system, which enables our customers to fill or refill prescriptions in any of our stores throughout the country, reduces chances of adverse drug interactions, and enables our pharmacists to fill prescriptions more accurately and efficiently. This system can be expanded to accommodate new stores. Our customers may also order prescription refills over the Internet through www.riteaid.com powered by drugstore.com , or over the phone through our telephonic automated refill systems. As of March 1, 2008 we had installed ScriptPro automated pharmacy dispensing units, which are linked to our pharmacists' computers and fill and label prescription drug orders, in 1,328 stores, and we are extending this technology to the Brooks and Eckerd stores where appropriate. The efficiency of ScriptPro units allows our pharmacists to spend an increased amount of time consulting with our customers. Additionally, each of our stores employs point-of-sale technology that supports sales analysis and recognition of customer trends. This same point-of-sale technology facilitates the maintenance of perpetual inventory records which together are the basis for our automated inventory replenishment process.

Suppliers

We purchase almost all of our generic (non-brand name) pharmaceuticals directly from manufacturers. During fiscal 2008, we purchased brand pharmaceuticals and some generic pharmaceuticals, which amounted to approximately 93.7% of the dollar volume of our prescription drugs, from a single wholesaler, McKesson Corp ("McKesson"), under a contract, which runs through April 2010. Under the contract, with limited exceptions, we are required to purchase all of our branded pharmaceutical products from McKesson. If our relationship with McKesson was disrupted, we could temporarily have difficulty filling brand drug prescriptions until we executed a replacement wholesaler agreement or developed and implemented self-distribution processes, which could negatively affect our business.

We purchase our non-pharmaceutical merchandise from numerous manufacturers and wholesalers. We believe that competitive sources are readily available for substantially all of the non-pharmaceutical merchandise we carry and that the loss of any one supplier would not have a material effect on our business.

We sell private brand and co-branded products that generally are supplied by numerous competitive sources. The Rite Aid and GNC co-branded PharmAssure vitamin and mineral supplement products and the GNC branded vitamin and mineral supplement products that we sell in our stores are developed by GNC, and along with our Rite Aid brand vitamin and mineral supplements, are manufactured by GNC.

Customers and Third Party Payors

During fiscal 2008, our stores served an average of 2.5 million customers per day. The loss of any one customer would not have a material adverse impact on our results of operations.

In fiscal 2008, 95.9% of our pharmacy sales were to customers covered by health plan contracts which typically contract with third party payors (such as insurance companies, prescription benefit management companies, governmental agencies, private employers, health maintenance organizations or other managed care providers) that agree to pay for all or a portion of a customer's eligible prescription purchases and negotiate with us for reduced prescription rates. During fiscal 2008, the top five third party payors accounted for approximately 36.3% of our total sales, the largest of which represented 11.3% of our total sales. During fiscal 2008, Medicaid related sales were approximately 6.3% of our total sales, of which the largest single Medicaid payor was less than 2% of our total sales. During fiscal 2008, approximately 10.2% of our total sales were to customers covered by Medicare Part D.

Competition

The retail drugstore industry is highly competitive. We compete with, among others, retail drugstore chains, independently owned drugstores, supermarkets, mass merchandisers, discount stores, dollar stores and mail order pharmacies. We compete on the basis of store location and convenient access, customer service, product selection and price. We believe continued consolidation of the drugstore industry, continued new store openings and increased mail order will further increase competitive pressures in the industry.

CEO BACKGROUND

Mary F. Sammons. Ms. Sammons has been Chairman of the Board of the Company since June 2007 and has been President and a member of Rite Aid's Board of Directors since December 5, 1999 and Chief Executive Officer since June 2003. She was the Chief Operating Officer from December 1999 until June 2003. From April 1999 to December 1999, Ms. Sammons served as President and Chief Executive Officer of Fred Meyer Stores, Inc., a subsidiary of The Kroger Company. From January 1998 to April 1999, Ms. Sammons served as President and Chief Executive Officer of Fred Meyer Stores, Inc., a subsidiary of Fred Meyer, Inc. From 1985 through 1997, Ms. Sammons held several senior level positions with Fred Meyer Stores, Inc., the last being that of Executive Vice President. Ms. Sammons is also a member of the Board of the National Association of Chain Drug Stores, a trade association, and is a director of First Horizon National Corporation and of The Rite Aid Foundation.

Michel Coutu. Mr. Michel Coutu is Non-Executive Co-Chairman of the Board. He served as President of the U.S. operations of Jean Coutu Group and Chief Executive Officer of Jean Coutu USA until June 2007. He has also served as a member of the Board of Directors of Jean Coutu Group since December 1985. Mr. Coutu holds a degree in finance and a license in law from the University of Sherbrooke and a Masters in Business Administration from the Simon School of Business at the University of Rochester.

Joseph B. Anderson, Jr. Mr. Anderson has been the Chairman of the Board and Chief Executive Officer of TAG Holdings, LLC, a manufacturing, service and technology business since January 2002. Mr. Anderson was Chairman of the Board and Chief Executive Officer of Chivas Industries, LLC from 1994 to 2002. Mr. Anderson also serves as a director of Quaker Chemical Corporation, ArvinMeritor, Inc., Sierra Pacific Resources and Valassis Communications, Inc.

André Belzile. Mr. Belzile has been the Senior Vice President, Finance and Corporate Affairs of Jean Coutu Group since May 2004. Prior to serving in this position, from 1992 until May 2004 he served as Vice President and Chief Financial Officer of Cascades Inc., a producer and marketer of packaging products. Mr. Belzile is a chartered accountant who earned a bachelor's degree at Les Hautes Études Commerciales (HEC MONTRÉAL).

François J. Coutu. Mr. François J. Coutu has served as President and Chief Executive Officer of Jean Coutu Group since October 2007. Previously, Mr. Coutu held the positions of President of Canadian Operations and Vice Chairman of the Board from 2005 to 2007, President and Chief Executive Officer from 2002 to 2005 and President and Chief Operating Officer of Jean Coutu Group from 1992 to 2002. Mr. Coutu has been a member of the Board of Directors of Jean Coutu Group since 1985. He is a pharmacist by profession, holds a Bachelor's Degree in Administration from McGill University and a Bachelor's Degree in Pharmacy from Samford University. He is a current director and former chair of the Canadian Association of Chain Drug Stores, a trade association, and previously served as a member of the Board of Directors of the National Bank of Canada, where he was a member of the Human Resources and Credit Committees.

James L. Donald. Mr. Donald is currently a self-employed private investor. Mr. Donald was President and Chief Executive Officer and a director of Starbucks Corporation from April 2005 to January 2008. From October 2004 to April 2005, Mr. Donald served as Starbuck's CEO designate. From October 2002 to October 2004, Mr. Donald served as President of Starbucks, North America. From October 1996 to October 2002, Mr. Donald served as Chairman, President and Chief Executive Officer of Pathmark Stores, Inc. and prior to that time he held a variety of senior management positions with Albertson's, Inc., Safeway, Inc. and Wal-Mart Stores, Inc. Mr. Donald was appointed to the Board in May 2008 on the recommendation of the Nominating and Governance Committee. Mr. Donald was recommended for consideration by the Nominating and Governance Committee by Mary Sammons, our Chairman, President and Chief Executive Officer.

Michael A. Friedman, MD. Dr. Friedman has been President and Chief Executive Officer of City of Hope, a National Cancer Institute-designated Comprehensive Cancer Center since May 2003. From October 2001 to April 2003, Dr. Friedman served as Chief Medical Officer for Biomedical Preparedness for the Pharmaceutical Research and Manufacturers of America, a pharmaceutical trade association. Additionally, he held the position of Senior Vice President of Research and Development, Medical and Public Policy for Pharmacia. He also has held executive positions in government and public health organizations. In addition to serving as Acting Commissioner of the U.S. Food and Drug Administration from 1997 to 1998, he was Associate Director of the Cancer Therapy Evaluation Program at the National Cancer Institute, National Institutes of Health from 1988 to 1995. He joined the National Cancer Institute in 1983 as Chief of the Clinical Investigations Branch of the Division of Cancer Treatment. Before that he spent nearly a decade at the University of California at San Francisco Medical Center in various positions, from Assistant Professor of Medicine in 1975 to Interim Director of the Cancer Research Institute from 1981 to 1983. Author of more than 150 scientific papers and books, Dr. Friedman has received commendations, including the Surgeon General's Medallion in 1999.

George G. Golleher. In June 2007, Mr. Golleher was appointed as Chairman and Chief Executive Officer of Smart and Final. From June 1999 to June 2007, Mr. Golleher worked as a self-employed business consultant and a private equity investor following his retirement after 28 years of experience in the Southern California food industry. Mr. Golleher was the Chief Executive Officer of Simon Worldwide Inc., a promotional marketing firm, from May 2003 to April 2006. From March 1998 to May 1999, Mr. Golleher served as President, Chief Operating Officer and director of Fred Meyer, Inc. Prior to joining Fred Meyer, Inc., Mr. Golleher served for 15 years with Ralphs Grocery Company and its predecessors and was Chief Executive Officer when Ralphs Grocery Company merged with Fred Meyer, Inc. in March 1998. Mr. Golleher serves as a director of Linens 'N Things, Inc. and Claires Stores, Inc. He also served as a director of Simon Worldwide, Inc. from November 1999 to April 2006 and of General Nutrition Centers, Inc. from December 2003 to March 2007.

Robert G. Miller. Mr. Miller has been Chief Executive Officer of Albertsons LLC since June 2006. Mr. Miller has been a member of Rite Aid's Board of Directors since December 1999, serving as our Chairman of the Board from December 1999 until June 2007. From December 1999 until June 2003, Mr. Miller was also Rite Aid's Chief Executive Officer. Previously, Mr. Miller served as Vice Chairman and Chief Operating Officer of The Kroger Company, a retail food company. Mr. Miller joined the Kroger Company in March 1999, when Kroger acquired Fred Meyer, Inc., a food, drug and general merchandise chain. From 1991 until the March 1999 acquisition, he served as Chief Executive Officer of Fred Meyer, Inc. Mr. Miller also is a director of Nordstrom, Inc.

Michael N. Regan. Mr. Regan is currently a self-employed private equity investor. Mr. Regan served as Chief Financial Officer of The St. Joe Company, a major real estate development company based in Florida, from November 2006 to May 2007. From 1997 to November 2006, he served as Senior Vice President, Finance and held various other positions with The St. Joe Company and was a member of the senior management team. Prior to joining St. Joe's, he served as Vice President and Controller of Harrah's Entertainment from 1991 to 1997. From 1980 until 1991 he held a series of progressively more responsible positions for Harrah's Entertainment, Inc. and its prior parent companies, Holiday Corporation and The Promus Companies.

Philip G. Satre. Mr. Satre is currently a self-employed private investor. Mr. Satre served as Chief Executive Officer of Harrah's Entertainment, Inc. from 1993 to January 2003. Mr. Satre was a director of Harrah's from 1988 through 2004, serving as Chairman of the Board of Harrah's since 1997. He presently serves on the Boards of Directors of the National Center for Responsible Gaming, The National World War II Museum, the Nevada Cancer Institute, Sierra Pacific Resources and Nordstrom, Inc., and is a trustee of Stanford University.

Jonathan D. Sokoloff. Mr. Sokoloff has been a Managing Partner of Leonard Green & Partners, L.P. since 1994. Leonard Green & Partners, L.P. is an affiliate of Green Equity Investors III, L.P. and is a private equity firm based in Los Angeles, California. Since 1990, Mr. Sokoloff has also been a partner in a merchant banking firm affiliated with Leonard Green & Partners, L.P. Mr. Sokoloff previously was elected as a director pursuant to director nomination rights granted to Green Equity Investors III, L.P. under an October 27, 1999 agreement between Rite Aid and Green Equity Investors with respect to the purchase of 3,000,000 shares of Rite Aid preferred stock.

Marcy Syms. Ms. Syms has been Chief Executive Officer and a director of Syms Corp, a chain of retail clothing stores, since 1983. She currently serves on the Boards of Directors of New York Chapter of the American Heart Association and the New Jersey Economic Growth Council. Ms. Syms also is a founding member of the Board of Directors of the Syms School of Business at Yeshiva University.

Dennis Wood, O.C. Mr. Wood is Chairman, President and Chief Executive Officer of Dennis Wood Holdings Inc., a privately owned portfolio company, a position he has held since 1973. Since April 2005, he has served as Interim President and Chief Executive Officer of Groupe Bocenor Inc., a window and door manufacturer, and also serves as a director and as Chair of its Executive Committee. Between 1992 and 2001, Mr. Wood served as Chairman, President and Chief Executive Officer of C-MAC Industries Inc., a designer and manufacturer of integrated electronic manufacturing solutions. Mr. Wood has been a member of the Board of Jean Coutu Group since March 2004. In April 2007, he was appointed Chairman of the Board of Azimut Exploration Inc. and serves as a member of the Board of Directors Transat A.T. Inc. Futhermore, Mr. Wood serves on the Boards of: National Bank Trust and Blue Mountain Wallcoverings Inc., a privately held company. He has been awarded Canada's top honor, the Order of Canada and has an honorary degree from the University of Sherbrooke.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

Net loss for fiscal 2008 was $1,079.0 or $1.54 per basic and diluted share, compared to net income for fiscal 2007 of $26.8 million or net loss of $0.01 per diluted share, and $1,273.0 million, or $1.89 per diluted share in fiscal 2006. Our operating results are described in detail in the Results of Operations section of this Item 7. However, some of the key factors that impacted our results in fiscal 2008, 2007, and 2006 are summarized as follows:

Income Tax Valuation Allowance Adjustments. Net loss for fiscal 2008 included income tax expense of $802.7 million. The income tax expense was primarily due to a non-cash increase of the valuation allowance on federal and state net deferred tax assets. Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109") requires a company to evaluate its deferred tax assets on a regular basis to determine if a valuation allowance against the net deferred tax assets is required. According to SFAS No. 109, a cumulative loss in recent years is significant negative evidence in considering whether deferred tax assets are realizable. Based on the negative evidence, SFAS 109 precludes relying on projections of future taxable income to support the recognition of deferred tax assets.

Net income for fiscal 2007 and 2006 included non-cash income tax benefits of $19.8 million and 1,231.1 million, respectively, related to the recognition of net deferred tax assets as a result of the release of a tax valuation allowance. Based upon a review of a number of factors, including historical operating performance and our expectation that we could generate sustainable consolidated taxable income for the foreseeable future, we concluded at the end of fiscal 2006 that the majority of the net deferred tax assets would be recognized. Thus, pursuant to SFAS No. 109, we recorded a tax benefit during fiscal 2006 releasing a majority of the remaining valuation allowance, resulting in a non-cash increase in net income of $1,231.1 million.

Acquisition of Brooks Eckerd. On June 4, 2007, we acquired all of the membership interests of Jean Coutu USA, the holding company for Brooks Eckerd, from Jean Coutu Group, pursuant to the terms of the Agreement dated August 23, 2006. As consideration for the Acquisition, we paid $2.31 billion in cash and issued 250 million shares of Rite Aid common stock. We financed our cash payment via the establishment of a new term loan facility, issuance of senior notes and borrowings under our existing revolving credit facility. As part of the arrangement of the financing necessary to complete the Acquisition, we incurred a $12.9 million fee for bridge financing that ultimately was not needed. This fee was recorded as an acquisition related financing commitment charge in our statement of operations for fiscal 2008.

As of March 1, 2008, Jean Coutu Group owns 251.9 million shares of Rite Aid common stock, which represents approximately 28.6% of the total Rite Aid voting power. We expanded our Board of Directors to 14 members, with four of the seats being held by members designated by the Jean Coutu Group. In connection with the Acquisition, we entered into a Stockholder Agreement (the "Stockholder Agreement") with Jean Coutu Group and certain family members. The Stockholder Agreement contains provisions relating to Jean Coutu Group's ownership interest in the Company, board and board committee composition, corporate governance, stock ownership, stock purchase rights, transfer restrictions, voting arrangements and other matters. We have also entered into a Registration Rights Agreement with Jean Coutu Group giving Jean Coutu Group certain rights with respect to the registration under the Securities Act of 1933, as amended, of the shares of our common stock issued to Jean Coutu Group or acquired by Jean Coutu Group pursuant to certain stock purchase rights or open market rights under the Stockholder Agreement.

The Brooks Eckerd stores and distribution centers are being integrated in phases. We have completed integrating the six distribution centers and are well on our way to completing systems conversions in all of the acquired stores by the end of May 2008. We have also begun the minor remodel phase of the Brooks Eckerd stores, which we expect to complete by October 2008.

Debt Refinancing. In fiscal years 2007 and 2006, we took several steps to extend the terms of our debt, lower our interest rates and obtain more flexibility. In fiscal 2007, we issued our 7.5% senior secured notes due January 2015, the proceeds of which were used to redeem our 9.5% senior secured notes due February 2011. We incurred a charge to call these notes prior to maturity and recorded a write-off of unamortized debt issue costs. These items totaled $18.7 million, which was recorded as a loss on debt modification in fiscal 2007. In fiscal 2006, we amended our senior secured credit facility to consist solely of a $1.75 billion revolving credit facility, paid at maturity the remaining outstanding principal on two existing notes and completed the early redemption of another existing note. As a result of amending our senior secured credit facility and the early redemption of an existing note, we recorded a loss on debt modification of $9.2 million

Hurricane Katrina. On August 27, 2005, Hurricane Katrina made landfall in Louisiana and proceeded to move through Mississippi and Alabama, causing one of the worst natural disasters in the history of the United States. As a result of this disaster, we had to close 14 stores, which resulted in lost inventory and fixed assets. We also incurred repair and maintenance charges related to our clean-up efforts. In February 2007, we entered into a final binding settlement of our claims under Hurricane Katrina with our insurance carriers. As a result of this settlement, we recorded a gain in fiscal 2007 of $17.6 million. The portion of this gain related to reimbursement for lost and damaged fixed assets was $9.4 million and was recorded as a gain on sale of assets and investments. The portion relating to reimbursement for lost or damaged inventory was $2.2 million and was recorded as a reduction of costs of goods sold. The portion of this gain related to repair and maintenance and other clean-up charges was $6.0 million and was recorded as a reduction of selling, general and administrative expenses ("SG&A").

Dilutive Equity Issuances. At March 1, 2008, 830.2 million shares of common stock were outstanding and an additional 141.8 million shares of common stock were issuable related to outstanding stock options and preferred stock.

Results of Operations

The results of operations for the fiscal years ended March 1, 2008, March 3, 2007 and March 4, 2006 have been adjusted to reflect the operations of our 28 stores in the Las Vegas market area as a discontinued operation, as the Company has entered into an agreement to sell the prescription files and terminate the operations of these stores. This disposition was announced on January 4, 2008.

Revenues

Fiscal 2008 compared to Fiscal 2007: The 39.8% growth in revenue was driven primarily by the acquisition of Brooks Eckerd. In addition, same store sales increased 1.3% over the prior year. This increase consisted of 1.7% pharmacy same store sales increase and a 0.7% increase in front end same store sales. Same store sales trends which do not include the results of the Brooks Eckerd stores are described in the following paragraphs. We include in same store sales all stores that have been opened at least one year. Stores in liquidation are considered closed. Relocation stores are not included in same store sales until one year has lapsed. Brooks Eckerd store sales decreased from last year's comparable period due primarily to the expected impact of current and ongoing integration activities. The Brooks Eckerd stores are being integrated in phases, and therefore integration activities are expected to have a negative impact on Brooks Eckerd store sales trends in future periods.

Pharmacy same store sales increased 1.7%, primarily driven by an increase in price per prescription and by same store prescription growth of 0.5%. In addition to favorable demographic trends, our script growth was positively impacted by Medicare Part D and by initiatives such as our focus on customer satisfaction, prescription file buys, our senior citizen loyalty program and the new and relocated store program. Partially offsetting these items was an increase in generic sales and lower reimbursement including lower reimbursement rates from the new Medicare Part D program. The rate of same store pharmacy sales growth has declined from the previous year primarily due to a lower rate of new enrollment in the Medicare Part D program, a greater mix of generic prescriptions and a weaker cough, cold and flu season.

Front end same store sales increased 0.7% from the prior year, due to strong performance in core categories, such as over-the-counter and consumables and a higher percentage of promotional sales were offset somewhat by the impact of a difficult economic environment during the holiday season and a weaker cough, cold and flu season than in the prior year.

Fiscal 2007 compared to Fiscal 2006: The 1.4% growth in revenues for fiscal 2007 was driven by front-end sales growth of 0.1% and pharmacy sales growth of 2.2%. Sales growth in front-end and pharmacy was driven by increases in same store sales, which are discussed in more detail in the paragraphs below, offset somewhat by the additional week in fiscal 2006.

Fiscal 2007 pharmacy same store sales increased 4.4% due to same store prescription growth of 2.0% and an increase in price per prescription. In addition to favorable demographic trends, our script growth was positively impacted by Medicare Part D and by initiatives such as our focus on customer satisfaction, prescription file buys, our senior loyalty program, our health condition programs and the new and relocated store program. These items were partially offset by an increase in generic sales, a milder cough, cold and flu season and lower reimbursement rates, including lower reimbursement rates from the Medicare Part D program.

Fiscal 2007 front-end same store sales increased 1.9%, primarily as a result of strong performance in core categories, such as over-the-counter and health and beauty and an increase in sales driven by promotional activities. These items were partially offset primarily by a decrease in photo and film sales and a milder cough, cold and flu season.

Cost of Goods Sold

Gross margin rate was 27.3% for fiscal 2008 compared to 26.9% in fiscal 2007. The improvement in gross margin rate was driven by an improvement in pharmacy gross margin rates, front end gross margin rates, and a lower LIFO charge than the prior year. The improvement in the pharmacy gross margin rate was primarily due to an increase in the percentage of generic drugs sold and a lower cost of generics partially offset by lower reimbursement rates and an increase in Medicare Part D sales as a percentage of total pharmacy sales. The improvement in the front-end gross margin rate was primarily due to an increase in vendor promotional support. The reduction in LIFO charges was primarily due to lower pharmacy product inflation than in the prior year. These improvements were partially offset by an increase in distribution expense as a percentage of sales, due to higher fuel costs and increases in other expenses not offset by productivity improvements.

Gross margin rate was 26.9% for fiscal 2007 compared to 27.2% in fiscal 2006. Gross margin rate was primarily negatively impacted by a decline in front-end gross margin rate, which was caused by a higher mix of promotional sales and a reduction in photo and film gross profit. Gross margin rate was also negatively impacted by the recording of a LIFO charge of $43.0 million in fiscal 2007 compared to a $32.2 million charge in fiscal 2006. Our pharmacy gross profit had a slight positive contribution to consolidated gross margin rate due to the increase in sales. However, our pharmacy gross margin rate was down slightly. Although there was an increase in generic prescriptions and a reduction in pharmacy shrink, these positive factors were offset by a reduction in reimbursement rates, particularly from Medicare Part D prescriptions.

We use the last-in, first-out (LIFO) method of inventory valuation. The LIFO charge was $16.1 million in fiscal 2008, $43.0 million in fiscal 2007 and $32.2 million in fiscal 2006.

Selling, General and Administrative Expenses

SG&A for fiscal 2008 was 26.2% as a percentage of revenue, compared to 25.0% in fiscal 2007. The increase in SG&A as a percentage of revenues was primarily due to an increase in expenses related to the integration of the Brooks Eckerd stores and distribution centers, an increase in depreciation and amortization expense related primarily to increased intangible assets resulting from the preliminary allocation of the purchase price of Brooks Eckerd and an increase in rent and occupancy expense from new and relocated stores and the sale and leaseback of owned stores. These increases were partially offset by expense control in other expense categories. We will continue to incur expenses related to the integration of the Brooks Eckerd stores in fiscal 2009.

SG&A for fiscal 2007 was 25.0% as a percentage of revenues, compared to 24.9% in fiscal 2006. SG&A was positively impacted by effective labor and expense control, offset by an increase in rent and occupancy expense from new and relocated stores and the sale-leaseback of owned stores and an increase in depreciation and amortization expense resulting from capital expenditures related to prescription file buys and new and relocated stores. Also negatively impacting the comparison to fiscal 2006 was a $20.0 million accrual reversal recorded in fiscal 2006 resulting from the United States Attorney closing its investigation involving matters related to prior management's business practices.

Store Closing and Impairment Charges


Impairment Charges. In fiscal 2008, 2007, and 2006, store closing and impairment charges include non-cash charges of $30.8 million, $31.4 million and $46.1 million, respectively, for the impairment of long-lived assets at 420, 342, and 414 stores, respectively. These amounts include the write-down of long-lived assets to estimated fair value at stores that were identified for impairment as part of our on-going store performance review at all of our stores or management's intention to relocate or close a specific store.

Store and Equipment Lease Exit Charges. In fiscal 2008, 2007, and 2006, we recorded charges for 66, 49, and 43 stores, respectively, to be closed or relocated under long-term leases. Charges to close a store, which principally consist of lease termination costs, are recorded at the time the store is closed and all inventory is liquidated, pursuant to the guidance set forth in SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". We calculate our liability for closed stores on a store-by-store basis. The calculation includes the discounted effect of future minimum lease payments and related ancillary costs, from the date of closure to the end of the remaining lease term, net of estimated cost recoveries that may be achieved through subletting properties or favorable lease terminations. We evaluate these assumptions each quarter and adjust the liability accordingly. The increase in the store and equipment lease exit charge for the fiscal year 2008 was primarily due to an increase in the number of stores closed and a decrease in the discount rate used to calculate the store lease exit charge liability.

As part of our ongoing business activities, we assess stores for potential closure. Decisions to close stores in future periods would result in charges for store lease exit costs and liquidation of inventory, as well as impairment of assets at these stores.

Interest Expense

In fiscal 2008, 2007, and 2006, interest expense was $449.6 million, $275.2 million and $277.0 million, respectively. The increase in interest expense in 2008 compared to 2007 was primarily due to increased borrowings to fund the Brooks Eckerd acquisition and related integration activities partially offset by lower interest rates. Interest expense for 2007 decreased from 2006 due to an extra week in fiscal 2006 which was partially offset by slightly higher borrowings and slightly higher interest rates.

The annual weighted average interest rates on our indebtedness in fiscal 2008, 2007 and 2006 were 7.5%, 7.6% and 7.4%, respectively.

Income Taxes

Income tax expense of $802.7 million and income tax benefits of $11.6 million, and $1,228.1 million have been recorded for fiscal 2008, fiscal 2007 and fiscal 2006, respectively. The fiscal 2008 income tax expense included non-cash income tax expense of $920.4 million related to the increase of the valuation allowance on federal and state net deferred tax assets. SFAS No. 109 requires a company to evaluate its deferred tax assets on a regular basis to determine if a valuation allowance against the net deferred tax assets is required. In determining whether a valuation allowance is required, we take into account all available positive and negative evidence with regard to the recognition of a deferred tax asset including our past earnings history, expected future earnings, the character and jurisdiction of such earnings, unsettled circumstances that, if unfavorably resolved, would adversely affect recognition of a deferred tax asset, carryback and carryforward periods, and tax planning strategies that could potentially enhance the likelihood of realization of a deferred tax asset. According to SFAS No. 109, a cumulative loss in recent years is significant negative evidence in considering whether deferred tax assets are realizable. Based on the negative evidence, SFAS No. 109 precludes relying on projections of future taxable income to support the recognition of deferred tax assets. The ultimate realization of deferred tax assets is dependent upon the existence of sufficient taxable income generated in the carryforward periods.

The existence of negative evidence at March 1, 2008, was primarily the result of the recently completed acquisition of Brooks Eckerd and the impact on current year earnings due to planned integration and acquisition activities, compounded by the weakening economy during the later half of the year.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations

Revenue growth was 49.3% for the thirteen week period ended May 31, 2008. This revenue growth was driven primarily by the acquisition of Brooks Eckerd. Same store sales trends, which do not include the Brooks Eckerd stores, are described in the following paragraphs.

Pharmacy same store sales increased by 1.4% in the thirteen week period ended May 31, 2008, primarily driven by an increase in price per prescription and by same store prescription growth of 0.2%. Our script growth was positively impacted by initiatives such as our focus on customer satisfaction, prescription file buys, our senior citizen loyalty program and the new and relocated store program. Partially offsetting these items was an increase in generic sales, slower growth in the Medicare Part D program, a growing number of 90 day prescriptions, switches of prescriptions to over-the-counter products and the economic environment.

Front-end same store sales increased by 1.7% in the thirteen week period ended May 31, 2008. The increase was primarily due to a higher percentage of promotional sales and strong performance in our consumable and over-the-counter categories. These items were offset somewhat by weakness in the overall economic environment and decreases in photo sales, which were due to the continuing trend of consumers printing fewer images and the conversion of our photo technology to FUJI digital equipment.

We include in same store sales all stores that have been open or owned at least one year. Relocated stores are not included in the same store sales for one year. Stores in liquidation are considered closed. Brooks Eckerd store sales are not included in same store sales, since we have not owned the Brooks Eckerd stores for one year. The Brooks Eckerd stores will be included in same store sales beginning in the thirteen week period ending August 30, 2008.

Front-end same store sales trends for the Brooks Eckerd stores were negative 13.7% for the third quarter of fiscal 2008, negative 10.0% for the fourth quarter of fiscal 2008 and negative 8.8% for the first quarter of fiscal 2009. Pharmacy same store sales trends for Brooks Eckerd were negative 4.7% in the third quarter of fiscal 2008, negative 6.0% in the fourth quarter of fiscal 2008 and negative 6.7% in the first quarter of fiscal 2009. These negative results were primarily due to changes in front-end promotion offers, removal of non-go-forward inventory, retro-fitting of planograms, prescription drug switches to over-the-counter medications, photo department conversions, the pharmacy systems integration, and the minor remodels. These sales trends are improving, after considering these negative factors, and we expect them to continue to improve as we complete integration activities and anniversary prior year activities. Positive same store sales in the Brooks Eckerd stores are expected beginning our third quarter of fiscal 2009.

Cost of Goods Sold

Gross margin rate was 27.3% for the thirteen week period ended May 31, 2008 compared to 27.4% for the thirteen week period ended June 2, 2007. The decrease in gross margin rate is due to a decrease in front-end gross margin rate, caused by higher levels of promotional sales than in prior year and higher product handling and distribution costs. The increases in product handling and distribution costs are due to increased labor costs due to expanded product assortment and disruptions from minor store remodels and higher fuel costs. These items were mostly offset by an improvement in pharmacy gross margin rate, due to an increase in the mix of generic sales and improved generic purchasing costs that resulted from the Brooks Eckerd acquisition.

We use the last-in, first-out (LIFO) method of inventory valuation, which is determined annually when inflation rates and inventory levels are finalized. Therefore, LIFO costs for interim period financial statements are estimated. Cost of sales includes LIFO charges of $15.1 million for the thirteen week period ended May 31, 2008 versus LIFO charges of $9.3 million for the thirteen week period ended June 2, 2007.

Selling, General and Administrative Expenses

SG&A as a percentage of revenues was 27.1% in the thirteen week period ended May 31, 2008 compared to 25.3% in the thirteen week period ended June 2, 2007. The increase in SG&A as a percentage of revenues is due to an increase in expenses related to the integration of the Brooks Eckerd stores and distribution centers, an increase in depreciation and amortization expense related primarily to increased intangible assets resulting from the allocation of the purchase price of Brooks Eckerd, an increase in rent and occupancy expense from new and relocated stores and the sale and leaseback of owned stores and inflation in salaries and benefit costs.

Impairment Charges: Impairment charges include non-cash charges of $2.6 million and $1.7 million in the thirteen week periods ended May 31, 2008 and June 2, 2007, respectively, for the impairment of long- lived assets at 30 and 15 stores, respectively. These amounts include the write-down of long-lived assets at stores that were assessed for impairment because of management's intention to relocate or close the store or because of changes in circumstances that indicate the carrying value of an asset may not be recoverable.

Store and Equipment Lease Exit Charges: During the thirteen week periods ended May 31, 2008 and June 2, 2007, we recorded charges for 49 and 11 stores, respectively, closed or relocated under long-term leases. Charges to close a store, which principally consist of lease termination costs, are recorded at the time the store is closed and all inventory is liquidated, pursuant to the guidance set forth in SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". We calculate our liability for closed stores on a store-by-store basis. The calculation includes the discounted effect of future minimum lease payments and related ancillary costs, from the date of closure to the end of the remaining lease term, net of estimated cost recoveries that may be achieved through subletting properties or favorable lease terminations. We evaluate these assumptions each quarter and adjust the liability accordingly. The increase in the store and equipment lease exit charge for the thirteen week period ended May 31, 2008 is primarily due to an increase in stores closed.

As part of our ongoing business activities, we assess stores for potential closure. Decisions to close stores in future periods would result in charges for store lease exit costs and liquidation of inventory, as well as impairment of assets at these stores.

Interest Expense

Interest expense was $118.2 million for the thirteen week period ended May 31, 2008, compared to $68.7 million for the thirteen week period ended June 2, 2007. The increase in interest expense for the thirteen week period ended May 31, 2008 was primarily due to increased borrowings to fund the Brooks Eckerd acquisition and related integration activities, offset somewhat by a decrease in the interest rate on the senior secured credit facility.

The weighted average interest rates on our indebtedness for the thirteen week periods ended May 31, 2008 and June 2, 2007 were 7.0% and 7.9%, respectively.

Income Taxes

We recorded an income tax expense from continuing operations of $5.0 million and an income tax benefit from continuing operations of $0.9 million for the thirteen week periods ended May 31, 2008 and June 2, 2007, respectively. The expense for income taxes for the thirteen week period ended May 31, 2008 is primarily attributable to the accrual of state and local taxes. The provision for income taxes for the thirteen week period ended June 2, 2007 was net of a benefit of $5.4 million for the increase in deferred tax assets as a result of enacted state tax legislation as well as a net benefit of $2.4 million for discrete items related to the recognition of previously unrecognized tax benefits. The discrete items associated with the previously unrecognized tax benefits included $2.1 million and related interest of $1.7 million due to expiration of certain state statutes.

As a result of the implementation of FIN 48, our tax contingencies decreased $6.6 million, and after the deferred tax impact of $2.2 million, the net effect was accounted for as an increase to retained earnings of $4.5 million. The decrease in unrecognized tax benefits would have decreased income tax expense in prior periods. As of May 31, 2008 the total amount of unrecognized tax benefits that would be recorded as an adjustment to goodwill and not impact the effective tax rate in a future period was $237.0 million. The remaining unrecognized tax benefits would impact the effective tax rate in a future period. Upon the adoption of SFAS 141(R) which applies to our fiscal year 2010, changes in income tax uncertainties recorded in a business combination will also affect income tax expense and will no longer impact goodwill. Additionally, any impact on the effective rate may be mitigated by the valuation allowance that is maintained against our net deferred tax assets. While it is expected that the amount of unrecognized tax benefits will change in the next twelve months, we do not expect the change to have a significant impact on the results of operations or the financial position of our company.

We recognize tax liabilities in accordance with FIN 48 and management adjusts these liabilities with changes in judgment as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities.

Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109") requires a company to evaluate its deferred tax assets on a regular basis to determine if a valuation allowance against the net deferred tax assets is required. In determining whether a valuation allowance is required, we take into account all available positive and negative evidence with regard to the recognition of a deferred tax asset including our past earnings history, expected future earnings, the character and jurisdiction of such earnings, unsettled circumstances that, if unfavorably resolved, would adversely affect recognition of a deferred tax asset, carryback and carryforward periods, and tax planning strategies that could potentially enhance the likelihood of realization of a deferred tax asset. According to SFAS No. 109, a cumulative loss in recent years is significant negative evidence in considering whether deferred tax assets are realizable. Based on the negative evidence, SFAS No. 109 precludes relying on projections of future taxable income to support the recognition of deferred tax assets. Accordingly, the valuation allowance on federal and state net deferred tax assets was increased during the fourth quarter of 2008. The ultimate realization of deferred tax assets is dependent upon the existence of sufficient taxable income generated in the carryforward periods.

CONF CALL

Kevin Twomey

Good morning everyone. We welcome you to our first quarter conference call. Mary Sammons, our Chairman, President and CEO and Rob Easley our Chief Operating Officer are also on the call with me. Our agenda for today’s call will be as follows: Mary will give an overview of our first quarter results along with a brief update on the acquired stores integration. I will review the first quarter financial results and cover guidance for fiscal 2009 and then we’ll take questions.

Before we start I’d like to remind you that today’s conference call includes certain forward-looking statements. These forward-looking statements are made in the context of certain risks and uncertainties that could cause actual results to differ. Also, we will be using a non-GAAP financial measure. The risks, uncertainties and definition of the non-GAAP financial measure along with reconciliation to the related GAAP measure are described in our press release.

With these introductory remarks in mind, let’s get started. Mary?

Mary F. Sammons

Good morning everyone and thank you for joining us today. It was a challenging first quarter as the economic climate continued to impact most retailers with rising unemployment and higher food and fuel costs. Despite these headwinds our business in the pharmacy continued to improve as we increased pharmacy same store sales, filled more prescriptions and increased pharmacy gross margin rates. Front end same store sales also increased and importantly sales trends in the acquired Brooks Eckerd stores continued moving in a positive direction. Increased promotional activity continued to allure overall margin during the quarter which negatively impacted our adjusted EBITDA. Our promotional plan going forward will continue to deliver good value to attract the more cost conscious customer to keep markdowns and margins in better balance at the same time. Although SG&A was negatively impacted by wage and benefit inflation and higher occupancy costs associated with our new store program, our team did a good job of expense control in other areas of our business without impacting the customer shopping experience.

Customer satisfaction ratings which include the acquired stores improved in both pharmacy and front end this quarter compared to last year’s fourth quarter. We passed a major milestone in our integration plan completing all store systems conversions of the acquired stores in May. Pharmacy dispensing, cash registers and all business applications are now consistent in all stores and we can now manage our business seamlessly nationwide. During the quarter we also completed minor remodels in nearly 600 stores and finished combining about 90% of the stores in close proximity. We’re in the home stretch now with just about 30% of the store minor remodels left to complete which will be on schedule by October this year.

As I mentioned earlier, same store sales trends in the acquired stores continue to improve although they were still negative during the first quarter. As you would expect, front end sales are improving more quickly and we’ve cut the rate of decline in half with strong growth in core drugstore categories like OTC and vitamins which include higher margin Rite Aid brands. In fact, the acquired stores private brand penetration reached 11.5% at the end of May, earlier than we anticipated. We expect front end same store sales to grow even more quickly as we stifle aggressive below cost promotions from Brooks Eckerd’s old advertising program in mid to late July when we anniversary the start of our common ad vehicle where we had to limit assortments until planogram changes were made and when we start advertising the grand openings of these stores by market as the remodels wrap up.

While pharmacy sales take longer to improve, both sales and prescription volume are moving in the right direction. Gross profit per script is up as the acquired stores achieved a 66% plus generic dispense rate in the quarter, continuing to close the gap with the 68% plus at core Rite Aid stores. We expect these positive trends to continue with a systems conversion now behind us, targeting market initiatives to gain back patients and chain light initiatives at new customers which I will talk about in a few minutes. Kevin will give you a breakdown of same store sales in the former Brooks Eckerd stores in his remarks. As we said on the last call, we expect same store sales in the acquired stores to turn positive in the third quarter of this year.

Now, let me give you some more details on the first quarter. Same store sales which do not include the acquired stores increased 1.5% with pharmacy sales up 1.4%. Prescription volume was up slightly, a reflection of overall slower prescription growth across the industry and the shift to the popular allergy medicine Zyrtec to OTC. As I said earlier, pharmacy gross margin rate also improved in large part to growth in generic dispensing. We finished the quarter with another industry high generic dispense rate of 67.7% which includes all stores. The rate has increased for 28 consecutive quarters and we expect to boost it to 70%. Improved customer satisfaction and targeted marketing initiatives contributed to the increase in our pharmacy business as did growth in our living more senior loyalty programs at 3.5 million members. And, we continue to see good results with our telephone compliance programs focusing on generic prescription refills.

Our health and wellness initiatives during the quarter included health condition marketing programs on heart health and allergies and the pilot program with the Philadelphia healthcare system on home delivery to patients just getting released from the hospital. We announced an agreement with Multi Care Health System for more in store clinics, this time in the Tacoma Washington area and we held a very successful health and beauty expo at Charlotte, North Carolina, a new market for us where thousands of people lined up for two days for free health screenings. Our filed by and acquisition program returned record results including the completion of the purchase of the Pharm stores in Ohio. We are on track to meet our aggressive goals for the year.

Early in the quarter we also hired a new vice president with extensive Internet marketing experience to focus on eCommerce initiatives for our company especially in the pharmacy. In the front end same stores sales increased 1.7% especially benefitting from strong category gains in OTC which included positive impact of Zyrtec switch and in consumables and vitamins. We saw significant increase in private brand sales in these core drugstore categories as price conscious customers increasingly look for value. Our exclusive GNC vitamin department again delivered strong results and we now have more than 1,600 of them including 366 that have been added to the acquired stores. Seasonal sales were weak due to colder weather than usual but started to improve significantly as the weather warmed up in June. Photo’s negative contribution increased as we began transitioning from Kodak to upgraded state of the art Fuji film technology products and services in our photo department. We expect the transition which will be fully completed in July to help reverse the downward trend in the second half of the year. Cosmetics were negatively impacted by a reset of the cosmetics department in all of our stores which is also set to be completed in July. The good news is that about 50% of the stores are done now and we are already seeing a lift in sales.

Lower sales in these three high margin categories negatively impacted front end margin rate as did grand opening advertising for the converted stores but higher promotional activities chain life had the biggest effect. As I said at the start, our forward promotion plan gives us a better balance between markdowns and margins and as a result the negative impact lessened at the end of the quarter in May. And as categories like photo, cosmetics and seasonal strengthen in contribution, we expect front end margin to improve in second quarter and the rest of the year.

Salaries and benefit expenses were higher this quarter because of a full year impact from last year’s minimum wage increase, higher pharmacist rate and the fact that our mix continues to change to more generic. More generics mean lower sales negatively impacting SG&A rate but deliver a higher margin. Distribution costs were negatively impacted by higher fuel costs but we continued to see the benefit from our expanded efficiency program in other areas of the company. We also made progress on our end-to-end supply initiative. We are evaluating all facets of our supply chain as we look to responsibly reduce inventory, improve turns and rationalize the distribution network after acquiring six new distribution centers. Going forward, we are focused on improving profitable sales and growing prescription count with special emphasize on the acquired stores. That includes continuing to improve customer satisfaction and building on our health and wellness products and services.

Our goal this year is to expand living more and to capitalize on the success of that program by developing additional loyalty programs that respond to the unique needs to individual customer segments. In the pharmacy we’ll continued targeted script growth promotions like fill up and fuel up which rewards the patient with a $30 gift and a chance to win a year’s worth of free gas for transferring a prescription. You may have heard of this promotion. We launched it in early June and it’s received a lot of publicity for being an unusual in the drugstore sector. It runs until the end of January and is being very well received, as I said, outperforming our normal transfers in the first week out there. Also being well received by patients is the new Rite Aid Rx savings card which provides significant saving on more than 400 generic medications and savings on more than 10,000 prescription drugs overall. We launched the card in Michigan June 1st and will expand the card in to other parts of the country later this summer. Unlike some other prescription savings cards that charges an enrollment fee, our card is free to anyone who fills out an application. We designed it to benefit patients with no or limited prescription insurance and for seniors stuck in the Medicare Part D donut hole but it’s available to anyone. With the card a 30 day supply of more than 400 generic prescriptions is only $8.99 and a 90 day supply only $15.99. Patients also get a 20% discount on most other generic and most brand prescription and unlike generic programs at mass stores, you also get 10% savings on more than 3,200 Rite Aid brand including more than 1,500 over-the-counter medications. We’ve already signed up thousands of patients and it’s only been available for three weeks and in only one state.

We expect our plans to increase compliance efforts, expand the form of Brooks Eckerd courtesy refill program chain life and train pharmacists at the acquired stores to give immunizations as well as continuing our aggressive prescription follow by program will also attract new pharmacy customers to our stores. We believe as we complete the cosmetic resets, roll off the new Fuji photo solutions programs, take advantage of improved weather and keep our operational team focused on execution and improving customer satisfaction in the stores, we will strengthen front end sales too. While we expect the business environment to remain challenging we believe that completing the minor remodels in the acquired stores sales, sales turning positive in the acquired stores in the third quarter and new and expanded pharmacy and front end initiatives I discussed, will contribute to strong results in the second half of our fiscal year.

I will now turn it over to Kevin.

Kevin Twomey

As I review our results, keep in mind the following two items to assist in the comparisons. First, this year’s first quarter included the results of the Brooks Eckerd acquisition and integration related activities. Last year’s first quarter did not include Brooks Eckerd results. And second, we have treated the exit of the Las Vegas market as discontinued operations with its own standalone line at the bottom of the operating statement. Las Vegas’ results have been excluded from the other line in the operating statement in this year’s quarter and last year’s quarter.

Let’s begin and talk through the operating statement which was attached to the press release. Revenues for this quarter were $6.61 billion compared to $4.43 billion last year, an increase of $2.2 billion or 49.3% increase. The increase was driven primarily by the acquired stores. There was also positive contribution from the 1.5% increase in same store sales of core Rite Aid stores that Mary described. The acquired stores are not included in the sales calculation but will be included starting in June, 2008.

We opened 11 new and relocated stores in the quarter and acquired eight stores in the quarter. We also closed or sold 68 stores in the quarter, the majority of which were related to combining acquired stores in close proximity to other stores. Front end same store sales which exclude the acquired stores, increased 1.7%. Sales are growing but there was a higher percent of promotion sales in this year’s first quarter when compared to last year’s first quarter. Also, the weather has not been our friend as Mary described and the gross margin rate on weather related sales were missed. The Brooks Eckerd same store sales, as I said, will be included in the total same store sales beginning with the June sales report which is on July 3rd. In that announcement, we will of course disclose the total company same store sales but we will also disclose core Rite Aid and core Brooks Eckerd separately.

That visibility is important but what is more important is the trend. As Mary said, the Brooks Eckerd front end sales were negative during the quarter but their sales trend continues to improve. The Brooks Eckerd front end same store sales going back a couple of quarters were as follows: third quarter fiscal 2008 were a -13.7% including the removal of the non-go forward inventory, the retro fitting of the planograms and the minor remodels; the fourth quarter of fiscal 2008 was a -10% including a weaker cough cold and flu season, commencement of the minor remodels, all of which were partially offset by the Zyrtec switch that May described; and first quarter fiscal 2009 was a -7.6% including the minor remodel, the systems conversion, the photo and cosmetics disruptions, all of which were partially offset by the Zyrtec switch. So, the quarterly progression of a negative 13.7% to 10% to 7.6% validates the progress.

Pharmacy same store sales which exclude the acquired stores increased 1.4%. New generics has an approximately 366 negative basis points impact on pharmacy same store sales during the quarter. The increase in pharmacy same store sales was due to a .2% increase in the number of prescriptions, mix changes and inflation. Similar to the Brooks Eckerd stores front end same store sales the acquired stores pharmacy same store sales were also negative during the quarter but the sales trend continues to improve. More specifically, the third quarter fiscal 2008 pharmacy same store sales were a -4.7%. The fourth quarter fiscal 2008 pharmacy same store sales were a -6% including a higher mix of generics, the pharmacy systems conversion, a weaker cough cold and flu season and one month of the Zyrtec switch. The first quarter fiscal 2009 pharmacy same stores sales for the acquired stores were -5.2% including increasing generic mix again, the final pharmacy systems conversion and three months of the Zyrtec switch. So, the quarterly progression of the -4.7% to -6% to -5.2% after considering the factors I described shows the progress we are making. The progress is pharmacy is different than the progress in front end because of the nature of the customer and their decision where to shop.

Overall, we have seen a slower rate of growth in prescription as has the rest of the drug store industry. This is due to a lot of different factors, to name a few slower growth in Medicare Part D program and prescription drug switching to over-the-counter medications. In the first quarter Medicare Part D sales continued to grow and represented approximately 16% of pharmacy sales. Our mix of generic prescriptions continue to increase during the quarter all generic prescriptions were 67.7% of total prescriptions which was over 357 basis points higher than last year’s first quarter. We expect generics and Medicare Part D to continue to become a larger part of our pharmacy business. Medicaid sales represented approximately 9.5% of pharmacy sales during our first quarter.

Gross profit was $1.81 billion or 27.34% of revenues for this quarter versus $1.22 billion or 27.44% of revenues for last year. Gross profit dollars increased primarily due to the sales increase in spite of a lower gross margin rate. The current quarter included a non-cash LIPO charge of $15.1 million versus a $9.3 million charge in last year’s quarter. The increase in the LIPO charge in the current fiscal year’s quarter was due primarily due to higher inventory levels than last year due to the acquired stores and our estimated product cost inflation. Excluding LIPO this quarter’s FIFO gross margin was 27.57% of revenues compared to 27.65% of revenues last year, a decrease of eight basis points. In general, the decrease is primarily the net result of a lower front end gross margin rate and an increase in product handling expense and distribution expenses as a percent of revenues mostly offset by an increase in the gross margin rate for pharmacy.

Pharmacy gross margin rate was 108 basis points better. Positively impacting the pharmacy gross margin rate were first the increase in the generic sales mix. That increase came from new generics as well as dispensing more of older generics. Second, the generic purchasing synergies related to the acquisition that lowered the cost of product. These positive factors were partially offset by continued reimbursement rate pressures. The front end gross margin rate was 75 basis points. Although we had strong vendor support for our promotions, we were more promotional in order to meet competitor offerings and to support the grand reopening of acquired stores minor remodels.

Product handling and distribution expenses as a percent of revenues for the current quarter were 15 basis points more than the prior year’s first quarter. This was due primarily to an increase in the cost of fuel and lower productivity of the acquired distribution centers. Selling, general and administrative expenses for the quarter increased as a percent of revenues by 184 basis points compared to the prior year. 47 basis points of the increase was due to $44.5 million of acquisition related expenses in the current quarter whereas the prior year’s quarter only had $11.2 million. This year’s first quarter also had a 43 basis point increase in occupancy expense primarily due to our new and relocated store openings and a 64 basis point increase in depreciation and amortization due to the acquisition, the prescription [inaudible] purchases and the new and relocated store programs. After considering these items, SG&A as a percent of revenue between the quarters increased 30 basis points which was due primarily to increases in wage and benefit expense partially offset by expense reductions in other areas. We have initiated new cost reductions but we will not see the results of those until later in the year.

Adjusted EBITDA for the current first quarter was $236.4 million or 3.6% of revenues, an increase of $43.6 million from the prior year. The increase was primarily due to the increase in revenue and an increase in pharmacy gross margin rates. Partially offsetting these positive factors was the front end gross margin decrease along with the increase in wage and benefit expenses relative to revenues. The schedule attached to the press release reconciled the net loss to our adjusted EBITDA.

Turning to the cash flow statement which was also attached the press release, net cash used in operations was $105.3 million this quarter versus cash provided by operations of $186.3 million in last year’s first quarter. The change from a source of cash to a use of cash was primarily due to a temporary increase in working capital and an increase in integration expense. The timing varies throughout the year for account receivable remittances, inventory receipt and vendor payment. We expect the net change in working capital to be a net source of cash for the full year primarily coming from a decrease in inventory, albeit later in the year. Also remember integration expenses go away by the end of the year. An increase in cash interest expense, as I said also contributed to the net cash used in operations. The increase in adjusted EBITDA partially offset these negative factors.

Net cash used in investing activities for this quarter were $93.8 million versus $1.4 billion for last year’s first quarter. Last year’s $1.4 billion included $1.2 billion we placed in escrow in anticipation of closing on the Brooks Eckerd acquisition at the very beginning of the second quarter on June 4, 2007. Setting that aside, the cash used in investing activities for the current quarter was $27 million less than the previous year’s first quarter. The current quarter has a higher level of capital expenditures partially offset by a higher level of sales lease back proceeds. For the quarter, we spent $149.9 million for property, plant and equipment and $36.1 million for prescription file purchases for a total of $186 million of capital expenditures in the quarter. During the quarter we opened five new stores, relocated six stores, acquired eight stores and remodeled 39 stores. We also completed the acquired stores system conversion, combined 40 stores and completed 557 minor remodels. The remaining integration activities are the minor remodels which are expected to be completed by October, the shutting down of the old headquarters which is expected to be completed by August, and complete the combination of eight stores.

We had sale and lease back proceeds of $99 million in the current fiscal quarter. $88 million of it is shown in the investing section of the cash flow statement and $11 million of it is shown in the financing section. Net cash provided by financing activities for this quarter were $195.6 million versus $1.2 billion for last year’s first quarter. Again, last year’s $1.2 billion included the $1.2 billion of bonds we issued in anticipation of closing on the Brooks Eckerd acquisition at the beginning of the second quarter on June 4. Setting that aside, the current quarter’s cash provided by financing activities was primarily due to additional borrowings under the revolver to fund the negative cash flow. The cash from the issuance from the convertible note approximated the cash out for the retirement of the six and one-eight note.

Now, let’s discuss debt and liquidity. Total debt at the end of the first quarter increased $195 million since the beginning of the fiscal year and advances from the sale of accounts receivable increased $70 million. The combination of the balances at the end of the first quarter increased $265 million since the beginning of the fiscal year. The increase was due primarily to the temporary increase in working capital I described earlier. Current liquidity has already increased since quarter end due to a reversal of some of these temporary differences in working capital. With the completion of our announced refinancing, availability of the revolver would have been $530 million at the end of the first quarter on a pro forma basis. At the end of the first quarter we had $1,035,000 outstanding under the $1.75 billion senior secured revolving credit facility. We also had outstanding letters of credit of $185.3 million at the end of the quarter. At the end of the current first quarter we had utilized the securitization agreements from $505 million. The eligible receivables will continue to grow and we expect to use the securitization agreements for additional liquidity. The sale and lease back markets continue to be open to us and we’re working on additional transactions.

As previously announced, during the quarter we issued the 8.5% convertible notes and redeemed the Section [18] note that we’re going to mature in December, 2008. We have no significant required maturities in the foreseeable future. Our required maturities are currently less than $20 million for the next 23 months. Once we complete the refinancing the only significant required maturity from now until August of 2013 is the revolver and the $145 million term loan. When the time comes, we expect to be able to refinance them with similar first liens secured debt because of the amount and quality of the collateral.

Finally, let’s discuss guidance. Our guidance is based on the following assumptions and outlook: successful completion of the acquired stores integration including minor remodels completed by October, store sales growth turning positive starting in the third quarter which is starting September, realization of our $300 million of cost savings, integration expenses of $110 million. Our guidance is also based on the assumption that a tough economy and aggressive competition will continue. Competitors are being more promotional and we must respond. There is a continuation of slower prescription growth assumed, fewer new generics than fiscal 2008 are expected but more total generic prescriptions for the year are expected. Pharmacy reimbursement pressures are expected to continue. We will continue our expense control and see some traction from additional expense reductions. And, we are planning on opening 85 new and relocated stores during the year.

One more comment about guidance before we get in to the details. We have said that normally our first and fourth quarters are the strongest because of the number events or holidays and in the case of the fourth quarter, the cough cold and flu season. We’ve also said that fiscal 2009’s results will be negatively affected by the acquired stores negative sales growth in the first half of the year. Further, we have said we expect the acquired stores sales growth to turn positive in the last half of the year. I mentioned these factors because many of you make quarterly estimates although we do not provide quarterly guidance. We hope that investors understand that when one considers both the seasonality of our business and the expected sales trend of the acquired stores turning positive later in the year combined with good expense control that our operating results for the year are expected to be weighted accordingly.

We are estimating fiscal 2009 sales to be in the range of $26.7 billion to $27.2 billion. Same stores sales guidance which includes the Brooks Eckerd stores starting June, 2008 is 2% to 4%. We are estimating fiscal 2009 adjusted EBITDA to be in the range of $1.0 billion to $1.1 billion. Our fourth quarter is expected to be our strongest quarter. We’re estimating our operating results for fiscal 2009 to be a net loss between $260 million to $375 million or a loss between $0.34 to $0.48 per diluted share. The net loss estimates include acquisition related integration expenses of $110 million and a full year effect of higher interest expense and depreciation expense. Attached to our press release is a table that reconciles our adjusted guidance to our guidance for net loss.

Capital expenditures before sale and lease back proceeds which includes the continuing new and relocated store program integration rated capital expenditures are estimated to be $600 million for fiscal 2009. We are also expecting sales and lease back proceeds to be $150 million. We expect fiscal 2009 investment and working capital to be lower than what it is today and along with the results of operations we expect fiscal 2009 operating cash flows to exceed our capital expenditures net of sales lease backs. Our objective is to improve our leverage ratio and get it back to the level it was just before the Brooks Eckerd acquisition. That means our goal for the leverage ratio is 4.5 times and we expect to get there by fiscal 2011 or earlier. Keep in mind our best return on capital is to invest in the store base so our plans are not necessarily to reduce the borrowings under the revolver by a significant amount but to keep things in balance.


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