Back in the 90’s, Rite-Aid was considered by most to be the “bottom tier” of drug store chains.   Their stores were dirty, messy, and the company was thought to be going bankrupt.   Longs acquired some of their stores in 1999 and I ended up taking over one of their stores and not only was the store a mess, but their employees were openly trying to cheat Longs by taking products and equipment out of the stores before we took them over.

Last week I visited a new Rite-Aid in Irvine and I have to say it’s the nicest looking drug store I’ve ever been in.  Clean, exciting graphics, lighted displays everywhere, and fully stocked.  They have also turned around their financial results and the company was apparently doing well enough to be attractive to Walgreens, who bought them last October.   The deal has not yet been approved and it’s likely they will have to sell off some stores to pass antitrust review.

I always wondered how and why they crashed so badly and the story below from pennlive.com details how one man built it up from nothing and then his son destroyed it.   While the Longs family also passed the reins to one of their sons (Bob Long) the company remained strong under him as he retained the family values and things didn’t go south until he turned it over to others outside of the family.

All in all, a fascinating story of how one person’s greed could ruin so much that another had created.

 

    The company was started and built by the frugal father. It was mortally wounded by the free-spending son, who would end up in federal prison for his role in a sweeping accounting scandal, costing investors millions in vanished stock value.

And now, 53-year-old Rite Aid Corp. is poised to be swallowed up by its giant, pharmaceutical-selling rival, Walgreens.

All along the way, this has been a story of high drama, even higher debt and highly questionable management, with East Pennsboro-based Rite Aid desperately holding on for dear life. All amid a fast-growing, quickly consolidating retail pharmacy industry that is going global.

It began in 1962 with a single store in Scranton called the Thrift D Discount Center. The architect of the business was Alex Grass, a Scranton-born lawyer who entered the business world in the early 1950s after marrying into Harrisburg’s Lehrman family.

By 1972, after rapid expansion and a public stock offering, Grass’s “little drugstore” had become 267 Rite Aid locations in 10 states, according to Alex Grass’s 2009 obituary on PennLive. By the time Grass retired in 1995, there were 3,000 Rite Aid stores stretching from the East Coast to the Mississippi River.

Alex Grass was modest both about what he had built and how he had built it, favoring smaller, lower-cost strip-mall stores. On the day he retired, he observed simply, “The business agreed well with me.”

In the go-go 1990s, however, the retail pharmacy business was changing. Corporations across America were on a borrowing binge. Alex Grass may have believed he had built a solid and sustainable company. But his  son, Martin L. Grass, had much bigger ambitions.

Before he was through, Martin would effectively push both his father and his brother aside, hell-bent on a borrowing-fueled bid to achieve grand visions for the company his father so humbly founded and built.

Instead of strengthening Rite Aid, Martin Grass would bring the company to its knees, hamstrung by disastrous deals, high debt, and ultimately illegal accounting practices designed to fictionalize Rite Aid’s profits.

The accounting scandal and its related conspiracies would send Martin Grass to federal prison for seven years. The business fallout would send company stock on a tailspin, from the high-flying $50-range to a low of less than $2 per share in the years afterward.

In the process, Rite Aid investors, including many in the midstate, lost millions.

Reaching high, then the fall

Martin L. Grass was a midstate native and graduate of Susquehanna Township High School. But by the time he ascended to Rite Aid CEO, he and his family were living on an estate in northern Maryland, from which a private helicopter would ferry him to Rite Aid’s East Pennsboro Township headquarters each work day.

This was but one sign of the differences between the free-spending son and the frugal father. Indeed, the helicopter became such a potent symbol of Martin Grass’ over-spending that the roof-top helipad at the corporate headquarters was dismantled virtually the day after Martin Grass was ousted in 1999 amid disgrace and swirling legal investigations that led Martin Grass to plead guilty in 2003 to federal conspiracy charges.

PennLive’s attempts to reach Martin Grass for comment were unsuccessful.

The company was the nation’s No. 1 drugstore chain in store numbers and the No. 2 chain in sales when Alex handed off the reins to Martin, according to a 2003 Patriot-News special report entitled “Rite Aid, Wrong Move.”

But that wasn’t nearly good enough for Martin Grass.

Determined to out-do his dad by taking Rite Aid to a “higher level,” Martin Grass would very nearly wreck Rite Aid,  bringing his own career, along with his family’s reputation, down in the process. Here’s an excerpt from the newspaper 2003 account:

Martin had been groomed to replace his dad. In 1994, the company announced that Martin would become the CEO in 1995, and Alex would remain chairman.

But by the time the transition took place, Martin also assumed the chairman title in what some viewed as a boardroom coup against his father. It was the beginning of strained relations between father and son.

Upon his takeover, Martin pursued a strategy of building bigger, more expensive free-standing stores while completing a series of corporate acquisitions to grow Rite Aid and push it into new regions of the country.

At the time, most observers felt the strategy was the right thing to do in a retail world, where discounter Wal-Mart was completing its assault across America and the debt-free Walgreen drugstore chain was on a growth spurt.

The implementation of that strategy, however, was disastrous.

As the company grew, it took on more debt and troublesome operations. None proved more difficult than the Thrifty PayLess Holdings Inc. chain on the West Coast. Rite Aid paid $2.3 billion, including $900 million in assumed debt, for the 1,000-store chain in December 1996.

Thrifty PayLess was a new ballgame for Rite Aid. Not only was it in a geographic area far removed from Rite Aid’s East Pennsboro Twp. headquarters and east-of-the-Mississippi store base, but many of its stores were much larger than those of Rite Aid.

Then in 1998, Martin announced that Rite Aid would pay $1.5 billion in stock to acquire PCS Health Systems Inc., a pharmacy benefits management company. Shortly thereafter, Rite Aid filed a registration statement with the Securities and Exchange Commission that generated an intense review by the SEC staff.

All the while, Wall Street was beginning to turn on Rite Aid stock, sending it ever lower. Then the father turned on his son in a bid to save the company.

According to a January 2000 account in the Philadelphia Inquirer, Alex Grass went to New York on Sept. 7, 1999 to warn two members of the company’s board of directors that its debt was out of control and Rite Aid was “bleeding cash.”

Alex Grass’s dire message, according to the newspaper account: “Rite Aid was heading for bankruptcy if it kept spending more money than it was taking in.”

When Martin Grass learned what his father had done, he was so livid that he stripped the walls of Rite Aid’s headquarters of all his father’s memorabilia, the Inquirer writes.

Within months, Rite Aid would do the same with all traces of Martin Grass, most notably dismantling that ostentatious helipad. Today, the Grass name doesn’t appear on the company’s website; there’s no mention of father or son.

Staunching the Bleeding

Rite Aid sells all manner of bandages, but none proved big enough to bind up the wounds inflicted by Martin Grass. Rite Aid’s troubled history of big deals and high debt would continue for some time to come, seemingly digging an even bigger hole for the cash-strapped company.

Although analysts cited operational improvements in recent years, Rite Aid’s profits continued to be hampered by heavy debt and interest costs.

Bond analyst Kimberly Noland, who covers Rite Aid debt for the New York firm Gimme Credit, says the company’s bonds and credit have remained at “junk” status, despite all the company’s efforts. Rite Aid leases most of its stores and, Noland said, the company never built enough equity or free cash flow to pay down its debt enough to be seen as healthy on Wall Street.

Still, Noland credits some of the post-Grass Rite Aid leadership with stabilizing the situation enough to at least hold on in an increasingly competitive environment.

“I was always recommending their bonds,” Noland says of Rite Aid corporate debt, which paid investors high interest rates due to the company’s less-than-stellar credit rating.

“I thought there was always room for a third competitor,” Noland adds of Rite Aid’s ranking behind Walgreens and CVS. “I have to give management credit for handling things better in later years. They did improve operations.”

Problem was, the interest on Rite Aid debt was choking profits and holding down its stock price, which would never again reach double-digits.

Perhaps the best the company could do was hold on until it was attractive enough to be bought out, Noland indicated.

Walgreen’s $17.2 billion takeover, announced last month, isn’t a hostile bid. Noland said it’s clear the two companies have been discussing the deal for some time. Rite Aid declined comment on how the deal came together. But Noland notes there had been market rumors of a Walgreens takeover for as long as six months.

“Rite Aid maintained enough scale to be attractive to a Walgreens, which is on an acquisition binge,” Noland said.

“In my view, they are kind of lucky to get this acquisition bid,” she added of Rite Aid. “They kinda got their act together. They were trundling along, after limping along.”

Ironically, Noland reported in a research note that some Rite Aid shareholders are now grumbling that management is selling the company on the cheap.

According to the Associated Press, Walgreens will pay $9 for each share of Rite Aid Corp. stock. That’s a 48 percent premium to Rite Aid’s recent closing of $6.08 before the takeover announcement. 

Sure, that $9 per share is a far cry from where Rite Aid shares were in the high-flying 1990s, when its stock soared past the $50 level. But the high share values turned out to be a mirage, inflated by a corporate accounting scandal under the leadership of then-CEO-turned-federal-prison-inmate, Martin Grass.

As the accounting scandal unfolded and gained steam in 1999, the air went out of Rite Aid stock. The stock price plunged from $37 to the low $20s before bottoming out in the early 2000s at a mere $1.75 a share.

From that vantage point, $9 looks pretty good.

“This was penny stock at one point,” Noland points out. Rite Aid shares plunged even further in the late 2000s, falling to as little as 25 cents.

“Rite aid was sitting there to be bought for a long time, at way lower prices,” she adds.

The reason it wasn’t acquired, she contends, is that Rite Aid’s debt was too high, leaving little to no actual equity in the company.

“They were able to significantly grow and reduce leverage over time,” Noland allowed. “But even in their most recent time, they were not generating from a creditor point of view enough free cash flow, which is money to pay down debt.”

In other words, perhaps a takeover had been Rite Aid’s best-case destiny ever since Martin Grass crashed and burned the company his father had built.

Separate Ways

The differing destinies of father and son were witnessed again in 2009. Late that summer, Alex Grass, 82, was dying of lung cancer. That autumn, his disgraced son was winding down a seven-year federal prison term.

When Alex Grass died on Aug. 27, 2009, he was lionized as Rite Aid’s founder and community philanthropist. By then his community service and generosity was legendary. High-profile causes included The Whitaker Center for Science and the Arts and The Alex & Louise Grass United Jewish Community Campus, named after Alex and wife, among others. All and more were touched by the Grass family’s willingness to give back to the community.

Late the following month, there was a far different ending for his son. Martin Grass, then 55, had just moved to a halfway house in Miami, where he was holding a job and working toward finishing his jail time for helping orchestrate one of the nation’s biggest corporate accounting scandals. He was paroled in December 2009.

Many midstate investors lost millions when Rite Aid stock plunged some 77 percent in 1999, after Grass’ scheme to overstate $1.6 billion in corporate earnings was finally, fully revealed. Many of them have never recovered, as the paper wealth born of Rite Aid stock simply vanished into thin air.

Now, Rite Aid, itself, is poised to vanish with the Walgreens takeover. Poetic justice? Perhaps.

But one vocal Rite Aid investor insists it need not have ended this way.

Emotionally Invested

One man’s misfortune is another’s opportunity. Amid the post-Martin-Grass-scandal lows of Rite Aid stock, self-described semi-retired private investor Steven Krol of Florida thought he found a diamond in the rough. He swooped in and scooped up what would become hundreds of thousands of Rite Aid shares, some at lows of $1.75 a share.

Over 15 years, Krol says he has amassed some 240,000 shares of Rite Aid stock at an average cost of $4 per share. He stands to more than double his money at the $9 Walgreens takeover price. And while he welcomes an end to what the activist investor describes as an emotionally draining 15 years of playing watchdog on Rite Aid management, Krol believes the company had the potential to achieve so much more.

Krol, who has been a constant and vocal presence at Rite Aid shareholder meetings, doesn’t blame Martin Grass for Rite Aid falling short of its potential over the past 15 years. Rather, he points to what he described as a far too cozy relationship between Rite Aid’s top management and its board of directors. As a result, he argues, the company’s corporate leadership largely continued down the same path of high-debt deals to grow Rite Aid, even while its existing stores were poorly run. This had the effect of ceding an untold number of customers to the competition over years of store mismanagement.

“It is not the Grass board that was in there after 2000,” Krol said in a phone interview. “The stock price had a lot of room to go up, independent of Martin Grass. How much business did you lose that you never saw?”

Krol said Rite Aid management was especially bad through 2007. For years, he visited hundreds of stores across the country, even going so far as to interview employees and customers about their experiences. Krol paints a chaotic picture of in-store ineptitude – details he related to top management at every opportunity. Improvements were painfully slow in coming, he said.

“The stores were grossly mismanaged,” Krol recalled. “It was a mess. It was not professionally run.”

Instead of fixing existing stores, Rite Aid management continued to pursue deals to add still more locations that it couldn’t adequately manage, he said.

All this served to punish Rite Aid stock again and again.

In a single day in early 2009, a nervous Krol watched as the stock plunged from 50 cents a share down to 30 cents a share in less than one hour.

Krol says he was so upset, he wrecked his car. Eventually, the stock bottomed at a palm-sweating 25 cents a share as Rite Aid appeared to flirt with bankruptcy.

Krol is far kinder to Rite Aid’s current management. But while he admits that his preferred end-game for the company has always been a takeover, Krol remains skeptical that Rite Aid is maximizing its value with Walgreen’s $9 a share offer.

He points to the fact that Rite Aid’s stock topped $9.40 a share as recently as September, although this was fueled by rumors of a Walgreens deal. Still, Rite Aid shares were tracking solidly in the $8 share range before the company turned in another disappointing quarter in mid-September, with earnings again hampered by the same old story of too much debt and high interest costs.

“I had given up on things getting much better than what I’ve seen,” Krol said. “(CEO) John Standley has done a bang-up job putting lipstick on a pig, financially. I credit him for keeping it out of bankruptcy. I’ll take $9 over $0 any day.”

“$10 would have kept the natives quiet,” Krol said. But he adds that Rite Aid shareholders likely will approve the $9 offer. Surely, he is content to take the money and walk away.

“I’m very passionate, and Rite Aid has been my baby for 15 years,” Krol said. “The stores had so much potential. They didn’t make it the company that I believe it should have been. But no one should get this emotional over a stock. It’s not necessarily good for my health to be this emotionally invested.”

So what will he do with the money?

Krol, 62, who is single, says he recently signed an agreement to leave his Rite Aid-fueled fortune to benefit animal rescue.

“The timing is wonderful for me,” he concluded.

But what of Rite Aid, itself, and the fate of its corporate headquarters and employees in East Pennsboro?

Can they be rescued?

From home-grown to swallowed whole

There are few things better for a region’s economy than a local company that grows into a national powerhouse. For decades in Central Pennsylvania, Rite Aid Corp. was a major source of good jobs, local taxes, community donations and support, and even business development marketing and pride.

“Any home-grown company that is a national name adds to our persona as a region,” explained David E. Black, president and CEO of the Harrisburg Regional Chamber & CREDC.

“It adds to who we are, and you go out and tell people these stories,” he added. “One of the first questions businesses looking at a region ask is, ‘what other companies do you have?'”

For decades, David Black and other local economic development officials pointed to Rite Aid with pride, ranking it right along central Pennsylvania corporate flagships such as Hershey, Harsco, Ollie’s and others.

But the midstate’s long-held pride in Rite Aid became pain when fortunes turned, Rite Aid’s stock swooned, and the company’s earnings statements were revealed as a fraud.

“A lot of people were invested,” Black recalled. “And when you have a stock that plummeted from the high 40s to the single digits in a very brief period of time, that’s painful. There was a lot of individual financial pain in this region.”

Now the pain could come from Walgreens slowly draining Rite Aid’s corporate offices of its executive role and its jobs. This, as the home-grown company is systematically dismantled and swallowed up.

At long last, Rite Aid’s run of high-drama – from its humble beginnings to debt-fueled growth to fabricated, ultimately illegal, accounting – may finally be coming to an end.

UPDATE: Alex Grass was not affiliated with The Rose Lehrman Arts Center, named after the mother of Lois Grass, Alex’s ex-wife. The story has been updated to reflect this.