Analysis and analysis by the management of RITE AID CORP of the financial situation and the results of continuing operations (form 10-Q)


Overview

We are a healthcare company with a retail presence, providing our customers and communities with a high level of care and service through various programs that we offer in our two reportable lines of business, our Retail pharmacy segment and our Pharmacy Services segment. We achieve our goal of providing comprehensive care to our customers through our retail pharmacies and our PBM, Elixir. We also offer fully integrated mail order and specialty pharmacy services through Elixir Pharmacy. In addition, through Elixir Insurance (“EI”), Elixir also serves seniors enrolled in Medicare Part D. When combined with our retail platform, this comprehensive suite of services enables us to deliver value and choice to customers. , patients and payers and enables us to be competitive in today’s changing healthcare. Marlet.


Retail Pharmacy Segment


Our Retail pharmacy The segment sells branded and generic prescription drugs and provides various other pharmaceutical services, as well as an assortment of commodities including health and beauty products, personal care products, seasonal merchandise and a wide range of products. range of private label products. Our Retail pharmacy The segment generates the majority of its revenue through the sale of prescription drugs and basic products through our more than 2,400 retail pharmacies in 17 states. We re-stock our retail stores through a combination of direct in-store pharmaceutical delivery facilitated by our pharmaceutical purchase and delivery agreement with McKesson, and the majority of our front-end products through our distribution center network.


Pharmacy Services Segment


Our Pharmacy Services segment provides a fully integrated suite of PBM offerings, including technology solutions, mail delivery services, specialty pharmacies, network and rebate administration, claims processing and rebate programs. pharmaceuticals. Elixir also offers prescription rebate programs and Medicare Part D insurance offerings for individuals and groups. Elixir provides services to a variety of clients across its various lines of business, including major healthcare plans, commercial employers, worker groups, and state and local governments, accounting for approximately 3.2 million lives covered, of which approximately 0.8 million lives covered through our Medicare Part D insurance offerings. Elixir continues to focus its efforts and offerings on its target market of small and medium employers, labor unions, and regional health plans, including provider-managed health plans; and government-sponsored Medicaid and Medicare plans.

Restructuring

Starting in fiscal 2019, we launched a series of restructuring plans aimed at reorganizing our management team, reducing management levels and consolidating roles. In march 2020, we announced the details of our RxEvolution strategy, which includes creating tools to work with regional health plans to improve patient health outcomes, streamlining SKUs in our front-end offering to unlock fund operating and updating our merchandise assortment, evaluating our pricing and promotions strategy, rebranding our retail pharmacy and pharmaceutical services business, launching our Store of the Future format and reducing overheads and costs. workforce, including the integration of certain back-office functions in the pharmacy services segment both within the segment and through Rite Help. Other strategic initiatives include expanding our digital business, replacing and updating the Company’s financial systems to improve efficiency and moving to a common customer platform at Elixir.

These and future restructuring activities are expected to yield future benefits in terms of growth and cost efficiency. There can be no assurance that our current and future restructuring charges will achieve the cost savings and remarketing benefits in the amounts or on time anticipated.


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  Table of Contents

Asset Sale to WBA


At September 18, 2017, we entered into the Amended and Restated Asset Purchase Agreement with Walgreens Boots Alliance, Inc. (“WBA”) and Walgreen Co., a
Illinois company and wholly-owned subsidiary of WBA (“Buyer”), in which Buyer has purchased from Rite Help 1,932 stores, three distribution centers, related inventory and other specified assets and liabilities for a total purchase price of $ 4,375,000, on a cashless and debt free basis.

During the first quarter of fiscal 2021, we completed the sale of the final distribution center and related assets to WBA for proceeds of $ 94,289. The impact of the sale of the distribution center and related assets resulted in a pre-tax gain of $ 12,690, which was included in operating results and cash flows from discontinued operations during the thirteen week period ended May 30, 2020. The transfer of the final distribution center and related assets constitutes the final close under the Amended and Restated Asset Purchase Agreement.

As part of the asset sale, we have agreed to provide transition services to the buyer. Pursuant to the Transition Services Agreement (“TSA”), we have provided various services on behalf of WBA, including, but not limited to, the purchase and distribution of inventory and substantially all sales activities, general and administrative. As part of these services, we purchased the related inventory and incurred cash payments for sales, general and administrative activities, which we billed on a cash neutral basis to WBA in accordance with the terms described in the TSA. Total billings for these items during the completed thirteen and thirty-nine week periods November 28, 2020 were 0 million dollars and $ 35.2 million, respectively. We have recorded a WBA TSA fee of 0 million dollars and $ 1.5 million
during the completed thirteen and thirty-nine week periods November 28, 2020, respectively, which are reflected as a reduction in selling, general and administrative expenses. At October 17, 2020, we and WBA have mutually agreed to terminate the Services under the TSA.

Given its scale and the fact that we have withdrawn from certain markets, the sale represented a significant strategic shift which had a significant effect on our operations and financial results. Accordingly, we have applied the treatment of discontinued operations as required by GAAP.

Overview of the financial results of continuing operations

Our net loss from continuing operations for the thirteen-week period ended
November 27, 2021 has been $ 36.1 million Where $ 0.67 per basic and diluted share compared to the net income of $ 4.3 million Where $ 0.08 per basic and diluted share for the thirteen-week period ended November 28, 2020. Our net loss from continuing operations for the thirty-nine week period ended November 27, 2021 has been $ 149.4 million Where $ 2.77 per basic and diluted share compared to a net loss of $ 81.6 million Where $ 1.52 per basic and diluted share for the thirty-nine week period ended November 28, 2020.

The increase in net loss for the thirteen-week period ended November 27, 2021
was mainly due to higher facility exit and depreciation charges, a LIFO charge in the current quarter compared to a LIFO credit in the third quarter of the previous year and a lower gain on asset sale . These items were partially offset by an increase in Adjusted EBITDA, lower restructuring costs and lower amortization charges.

The increase in net loss for the thirty-nine week period ended November 27, 2021
was mainly due to higher litigation settlements, an increase in asset exit and depreciation charges, a LIFO charge in the current year compared to a LIFO credit in the previous year and at a lower capital gain on the sale of assets. These items were partially offset by an increase in Adjusted EBITDA, lower restructuring costs and lower amortization charges. In addition, the first quarter of the previous fiscal year included impairment charges for intangible assets associated with the rebranding of Elixir.

Our adjusted EBITDA from continuing operations for the thirteen and thirty-nine week period ended November 27, 2021 has been $ 154.8 million or 2.5% of turnover and
$ 399.8 million or 2.2% of sales, respectively, compared to $ 137.4 million i.e. 2.3% of turnover and $ 396.4 million or 2.2% of earnings, respectively, for the thirteen and thirty-nine week period ended November 28, 2020.

The increase in Adjusted EBITDA for the thirteen-week period ended November 27, 2021, was due to an increase in Retail pharmacy sector, partially offset by a decrease in the Pharmacy services sector. Adjusted

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Contents

EBITDA up $ 37.4 million in the Retail pharmacy segment driven by an increase in gross margin, partially offset by an increase in selling and administrative expenses. Pharmacy Services segment adjusted EBITDA decrease $ 20.0 million driven by lower revenues, reduced rebates and an increase in the EI medical claim rate.

The increase in Adjusted EBITDA for the thirty-nine week period ended November 27, 2021 was due to an increase in Retail pharmacy sector, partially offset by a decrease in the Pharmacy services sector. Adjusted EBITDA up $ 16.3 million in the Retail pharmacy mainly due to an increase in gross margin, partially offset by an increase in selling and administrative expenses. Pharmacy Services segment adjusted EBITDA decrease $ 12.9 million driven by lower revenues, reduced rebates and increased EI medical claims rates. Please see the sections titled “Segment Analysis” and “Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures” below for further details.

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