Los Angeles, CA -- (ReleaseWire) -- 06/15/2018 --Today Chris Komatinsky released the following follow-up open letter to stockholders of Rite Aid Corporation (NYSE:RAD):

Fellow Stockholders:

Update to my first letter (http://www.digitaljournal.com/pr/3802994) to address the problems with both company leadership/stewardship and shareholder leadership.

First, I would like to thank Forbes and Bruce Japsen for taking an interest in covering our individual shareholder effort. A link to their piece is provided below:

https://www.forbes.com/sites/brucejapsen/2018/06/06/some-rite-aid-investors-rally-to-stop-albertsons-deal/?utm_source=yahoo&utm_medium=partner&utm_campaign=yahootix&partner=yahootix&yptr=yahoo#77cf527c6689

Insiders haven't "bought" what they're selling with their proposed deal:

Rite Aid's continued response to the merger is "The merger with Albertsons will "deliver compelling long-term value for Rite Aid shareholders and its customers."". If the merged value is so "compelling" why hasn't Cerberus (who can own up to 30% of the merged company) made any open market purchases of Rite Aid stock since the 20 February merger announcement? In the 4 months since the merger announcement why haven't Rite Aid Executive Officers and Board Members executed any open market purchases given this "compelling" long term value? One would think that if there was compelling value of the proposed merger, they would be eager to expand their share ownership and commitment to the proposed vision using their personal funds especially with the shares falling 30% since the deal was announced. It appears that Rite Aid's Leadership is only interested in accumulating additional shares if the shares are given to them

Grocery competition heating up to a war:

Increased competitiveness of the grocery sector amongst Amazon/Whole Foods, Walmart, and Kroger on price, service, and selection ramped up further with Target joining the fray. Walgreens also inked a deal to offer meal kits in select New York area stores. The sector is headed to a full on price war as the bigger players have implemented growth initiatives including online ordering, drive up and go, home delivery services and meal kit options. Given the rapid developments in this segment and the financial strength of the aforementioned competitors, it is highly unlikely that a highly leveraged Albertson's will be able to compete and grow profits as proposed.

https://www.engadget.com/2018/06/07/target-expands-pickup-and-same-day-delivery/

http://wtvr.com/2018/06/06/costco-target-walmart-and-kroger-price-wars-best-prices/

http://www.supermarketnews.com/deli/chef-d-meal-kits-hit-walgreens-duane-reade-drugstores

Would any competent management team merge into this environment with the highest leveraged grocery operator? Would any rational investor buy a Public Offering of a highly leveraged grocery operator in this environment? Investors wouldn't buy into the Albertson's IPO on two separate occasions when the grocery market was less competitive than it is now. Rite Aid leadership is asking Rite Aid stockholders to buy into the Albertson's IPO in approving this merger. Rite Aid's Executives and Board of Directors appear stuck in their decision/path regardless of what is happening externally in the market. This current environment exposes Rite Aid shareholders to even greater risk with likely less reward. More rational for why changes are needed to this leadership team immediately.

With the $1.70 RAD closing price on Friday June 8th, the stock market is valuing the merged equity value at $6 Billion compared to guided merged company adjusted 2019 EBITDA of $3.4 Billion. Clearly the market believes that the adjusted EBIDTA targets will not be met and that debt reduction will be difficult.

Shareholder activism gaining traction

We've received a flood of additional individual shareholders with like views on the proposed merger in the past few days and have breached the 34 million share count against the proposed merger. I encourage small shareholders who have questions to contact me by e-mail or phone. You can also visit a website set up by another individual investor – http://www.riteaidmerger.com – to log your e-mail address and stockholding. Every share matters in this effort.

We're still working to engage with large institutional shareholders for their support against the merger as well. We're real, we're rational, we've assembled a large block of shares (> 34 million), and we're ready to have a discussion on maximizing Rite Aid shareholder value.

Opportunities available to add more value than merging with Albertsons

Rite Aid as a stand alone

Following the asset sales agreement with Walgreens, Rite Aid executives indicated the plan was to use the funds to deleverage and run as a stand alone business with a focus on growing the PBM and taking advantage of the WBA generic drug purchase agreement to be more competitive. Before rushing into a deal, there needs to be a baseline set that Rite Aid can be run as a profitable standalone business. The focus should be to cut back on the capital spending for Wellness store remodels and invest some of the money in different front-of-store concepts that either drive more frequent visits or drive higher margins. While the Wellness format drives incremental improvement is sales, retail has changed significantly since the Wellness format was first rolled out. Split the remainder between debt reduction and stock buybacks. Focus activity on improving store operations and customer satisfaction.

Pharmacy Merger or Strategic Partnership with Kroger

Smaller pharmacy chains like Kroger's have experienced a drop in profitably due to reimbursement rates and concentration of prescriptions in the big three chains. Merge or partner Kroger's pharmacy chain into Rite Aid, enabling the pharmacies to participate in narrow networks and access better drug purchasing. The increased pharmacy traffic will benefit Kroger through increased traffic and sales. Similar benefits could be achieved through a strategic partnership where Rite Aid helps with the pharmacy and the grocer helps with the Rite Aid front-of-store. There's no need for Rite Aid shareholders to play in the grocery price war directly. While Rite Aid is attempting to do this with Albertson's, Kroger is clearly the stronger partner that Rite Aid should attempt to merge or partner with. This option would be a far better risk/reward opportunity for Rite Aid shareholders than the current proposed deal.

Amazon are you in or you out?

Since the announcement that Amazon was looking into entering the prescription drug business, the pharmacy sector has repositioned itself to significantly reduce entry points for Amazon to quickly and cheaply participate. One of the remaining quick and cheap entry points would be an acquisition of Rite Aid for their PBM. Cowen analyst John Blackledge recommended Amazon acquire Rite Aid for immediate penetration into the market and estimated by their own survey that 67% of Amazon Prime members would likely shift to ordering prescriptions through Amazon. The Rite Aid front end could also be redone into small format Whole Foods Markets or carry popular consumer items to better utilize the storefront compared to pharmacy competitors. Amazon could do this at a cost not much higher than building from scratch.

Walmart is aggressively working to counter Amazon

Walmart is Amazon's largest rival and they have been aggressive at competing with Amazon for growth. Healthcare is a key segment of growth for Walmart. Bringing in the Envision PBM would further enhance this by allowing them to bring additional prescription lives into their national network. Additionally, urban drug stores in upscale areas would create opportunities where Walmart may not have a strong footprint. Walmart would also be well positioned to reimagine the front-of-store area to attract more foot traffic and increase profitability. An acquisition by Walmart would effectively slam the door shut for Amazon's entry into prescription sales, a key market segment.

Sale of Majority Ownership of the PBM

Multiple parties expressed an interest in the PBM. Rather than selling the PBM in total, sell a majority interest of 51% if the price is right and the deal comes with a sharing of prescriptions in areas that Rite Aid Pharmacies operate. The PBM would probably grow much faster with a partner with more resources and it seems like insurance companies and employers are tiring of black box PBMs.

https://www.managedcaremag.com/archives/2008/3/pbms%E2%80%99-rebate-income-threatened-lawsuits-and-move-generics

Sincerely,
Chris Komatinsky
Individual Rite Aid Stockholder