Bankrupt retail chain closing dozens more store locations

Rite Aid, currently under Chapter 11 bankruptcy protection, has filed a fourth notice to close an additional 111 stores, bringing the total to 472 closures as part of its restructuring plan. The closures span across multiple states, including California and New York, and are part of a broader strategy to potentially shutter all of its approximately 1,240 locations. This follows similar cost-cutting measures by Walgreens and CVS, which have also announced significant store closures in recent years due to factors like theft, underperformance, and high lease rates, signaling continued distress in the drugstore retail sector.

Analysis

The drugstore retail sector is undergoing significant contraction, exemplified by Rite Aid's ongoing Chapter 11 bankruptcy proceedings and extensive store closures. Rite Aid, operating as New Rite Aid LLC, has filed a fourth notice to shutter an additional 111 stores, bringing the cumulative approved closures to 472 locations across 13 states, with Pennsylvania (177), California (98 including the new 39), and New York (76 including the new 39) being heavily impacted. The company anticipates filing further closure notices, potentially liquidating all of its approximately 1,240 stores. This distress is not isolated; major competitors are also rationalizing their footprints. Walgreens, which agreed to be sold to Sycamore Partners, plans to close 500 stores in fiscal year 2025 out of 1,200 identified for closure, targeting locations with negative cash flow or expiring leases, and may close up to a quarter of its 8,600 stores. Similarly, CVS initiated a plan in 2021 to close 900 of its nearly 9,900 stores by the end of 2024, closing 300 locations annually. Common drivers for these widespread closures include losses from merchandise theft, underperformance of individual stores, and unfavorable lease terms, signaling a systemic challenge within the sector.

Key Decisions for Investors

• Investors should exercise extreme caution regarding Rite Aid equity, given its Chapter 11 bankruptcy and plans to close all stores, which typically results in minimal to no recovery for shareholders.
• For Walgreens (WBA) and CVS (CVS), monitor the pace and financial impact of their respective store closure programs, assessing their ability to improve profitability and navigate the challenging retail environment, including the potential for market share shifts as competitors exit.
• Consider the broader implications for commercial real estate landlords heavily exposed to drugstore tenants, as increasing vacancies could pressure rental income and property valuations in affected submarkets.
• Evaluate potential second-order effects on suppliers and distributors to the drugstore sector, as reduced store counts will likely lead to decreased order volumes.