A New Dawn at Rite Aid? Part 1 of 3
Recent developments at Rite Aid Corporation (RAD) are worth noting and perhaps give some hope to its long-suffering shareholders that the era of seemingly interminable value destruction may perhaps be ending and a new dawn approaching (yes, we dare to dream). First, among other leadership changes, the company finally announced the hiring of a new chief executive in mid-August and a new COO just a few days ago. In addition, on September 26th the company announced earnings for its Q2 of FY 2020. We examine the first of these developments (leadership rotation) in detail in this blog post; in the next two parts, we will look more closely at the recent earnings report, and then provide our in depth recommendations regarding how new leadership at the company can successfully engineer a Rite Aid 2.0 that can compete in the marketplace over the long haul.
RITE AID'S DILATORY BOARD OF DIRECTORS LED BY FAILED CHAIRMAN
Regarding RAD's leadership changes, it should initially be noted that the company's highly compensated yet often inept board of directors [see full analysis here] waited far too long to replace its former failed executive leadership team. While it was obvious to any rational observer by mid-2018 that ex-CEO Standley and certain of his cronies in the C-suite needed to go (Kermit Crawford, we're looking at you), RAD's board (then and now headed by a shareholder-unfriendly chairman Bruce Bodaken) inexplicably endorsed Standley in September 2018 as the best possible option to continue to lead the company forward (at the time, RAD shares were trading at just a small fraction of where they were when Standley first became RAD's CFO approximately 20 years ago). It took a subsequent nearly 50% further destruction of the stock price before the Bodaken-led board finally bowed to the inevitable in mid-March of this year and announced Standley's termination as CEO, at the time rubbing more salt in shareholders' wounds by stating "[w]e thank John for his outstanding leadership [sic] in guiding the Company over the past several years". Yet, much like one of the ghouls in Michael Jackson's Thriller video, Standley would not die, as Bodaken & crew allowed him to remain in his CEO role an additional five months(!) until the appointment of his successor. Even when he was at long last replaced two months ago with the appointment of a new CEO, Heyward Donigan (at which point the stock had DECLINED ANOTHER 50%+ from March's already anemic level), Bodaken's board decided to give shareholders one final kick in the teeth by gifting the departing CEO with a six-month "consulting" deal at $7,500 per week on top of his already enormous severance payments (certainly good work if you can find it--the "consulting" agreement limits the ex-CEO's efforts to a maximum of ten hours per week--perhaps so as not to unduly interfere with whatever golf matches or other leisure activities he has scheduled). How Mr. Bodaken remains RAD's board chairman after all of the shareholder value destruction and terrible board-level decisions that have occurred on his watch (as of last Friday, October 4th, the stock price was down 86% since he joined the board and 64% since he became chairman) is truly a mystery wrapped in an enigma.
NEW BLOOD IN RAD'S BOARDROOM AND C-SUITE (FINALLY)
Fortunately, despite intense pushback and foot-dragging at every step of the way by certain (and, thankfully in many instances, now replaced) individuals in RAD's upper echelons, significant and desperately needed change in leadership has come to this troubled company as a result of relentless shareholder pressure. Including new CEO Donigan, 6 out of 9 of RAD's directors, each of whom has been appointed to the board over the past year, are not wholly implicated in the many failings of the Standley/Bodaken era. These six are Donigan, Elizabeth Burr, Robert Knowling, Louis Miramontes, Arun Nayar and Katherine Quinn (see bios for all here). Two of the new board members have significant relevant healthcare experience: (1) Burr most recently served as the chief innovation officer and vice president of healthcare trend and innovation at Humana, while (2) Quinn previously served as senior vice president and chief marketing officer at Anthem (and prior to that worked at CIGNA and PacifiCare Health Systems).Thus, only 1/3rd of RAD's board remains wholly "tainted" by past incompetence (directors Bodaken, Marcy Syms and Kevin Lofton). We can only hope that these three lingering directors, all of whom have been on the board far too long (since 2013, 2005 and 2013, respectively), will finally be shown the door by shareholders at the 2020 annual meeting.
On a more positive note, let's examine RAD's newly appointed CEO Heyward Donigan. She has the following resume [per her LinkedIn profile]:
CEO - RITE AID
Dates Employed: Aug 2019 – Present
Employment Duration: 3 mos
Location: Harrisburg, Pennsylvania Area
President and CEO
President and CEO- Sapphire Digital
Dates Employed: Mar 2015 – Aug 2019
Employment Duration: 4 yrs 8 mos
Location: Lyndhurst, NJ
Leading Consumer Transparency Company--providing Consumers, Health plans, National Accounts and Providers with a full suite of tools, including Provider Selection/Provider Reviews and Cost Calculators. Enabling consumers to make smart health decisions.
President and CEO - Value Options
Dates Employed: Sep 2010 – Jan 2015
Employment Duration: 4 yrs 5 mos
Behavioral Health Improvement
Executive Vice President, Chief Marketing Executive - Premera Blue Cross
Dates Employed: Apr 2003 – Sep 2010
Employment Duration: 7 yrs 6 mos
SVP, Operations - CIGNA Healthcare
Dates Employed: Sep 2001 – Oct 2002
Employment Duration: 1 yr 2 mos
President, Southeast Region - CIGNA Healthcare
Dates Employed: 1999 – 2000
Employment Duration: 1 yr
Senior Vice President - Empire Blue Cross Blue Shield
Dates Employed: 1994 – 1997
Employment Duration: 3 yrs
New York University
Degree Name: MPA
Field Of Study: Health Finance
Dates attended: 1987 – 1992
University of Virginia
Degree Name: BA
Field Of Study: English
Date of graduation: 1983
Although in perusing the above we note a few unexplained blank periods (was Donigan employed between 1997 and 1999, as well as from 2000 to September 2001?), on the whole she presents a compelling resume to be a CEO of Rite Aid (which generates over 2/3rds of its revenue directly from the healthcare system). Not only did Donigan receive a master's in health finance from NYU, she's has been in the health care field consistently over the past 25 years, including nine years (and counting) as a CEO. Her most recent company, Sapphire Digital (fka Vitals), is described as follows [source: February 2019 company PR]:
Sapphire Digital is a mission-driven company that drives competition in health care to lower cost and improve quality for all. The omni-channel engagement and shopping platform, available through health plans and employers, empowers members to shop with confidence for high-quality and lower cost medical services. Sapphire Digital’s platform achieves measurable and sustainable savings for consumers, employers and health plans and results in system-wide cost savings. Over 95 million people each year rely on Sapphire Digital to help them decide on their care with confidence.
One of the key business lines apparently developed under Donigan's leadership at Sapphire is a sort of healthcare comparison shopping service called SmartShopper where patients receive small cash bonuses from their employers or health insurers in return for choosing cheaper service providers, which is meant to reduce overall healthcare costs by encouraging competition. A Boston Globe article from April described it thusly:
[Note: The Globe adds that "[d]octors and hospital systems generally don’t like patients shopping around for tests and procedures based only on price" (color us shocked)]
So we find that RAD's new CEO Donigan's background includes encouraging evidence that she brings to the company fresh, "out-of-the-box" thinking and entrepreneurism regarding health care, which traits were unfortunately severely lacking (indeed, virtually non-existent) in the prior Standley regime. Donigan's prior stint was as CEO of Value Options, which acted as a vendor for administering behavioral health benefits on behalf of major health insurers. On a note of caution, we found that shortly after Donigan left Value Options in early 2015, the company was hit with a $900,000 fine by disgraced former New York AG Eric Schneiderman for "allegations of widespread violations of mental health parity laws by the company... An investigation by the Attorney General’s Health Care Bureau found that ValueOptions issued denials [of coverage] twice as often for behavioral health claims as insurers did for other medical or surgical claims and four times as often for addiction recovery services" [see full PR here]. Per the settlement agreement [available here], the allegations against Value Options concern the period during which Donigan was CEO, although the agreement states that Value Options "neither admits nor denies the Attorney General’s findings". One interesting side note: the settlement agreement states that "[i]n 2013, ValueOptions had revenues of approximately $1.3 billion nationally".
In addition, just days ago Donigan tapped a new Chief Operating Officer to be her right-hand man at RAD, namely Jim Peters [see PR here]. Peters has the following bio:
Jim Peters is a recognized leader with 25 years’ of broad healthcare and industry experience. Most recently, Peters served as chief executive officer of Skyward Health, a strategic healthcare advisory firm. Prior to Skyward, Peters was a 12-year senior executive at Geisinger Health System, helping establish Geisenger’s national reputation for healthcare innovation. At Geisinger, Peters held roles including chief executive officer of Geisinger Medical Management Corporation, managing partner of Geisinger Ventures and senior vice president, chief strategic partnerships officer. Prior to Geisinger, Peters served as principal at Updata Capital, a venture capital firm focused on software, data analytics and health IT.
Peters is a member of the American College of Corporate Directors and, until its recent acquisition, an independent director of NxStage Medical, Inc. (NASDAQ: NXTM). He is also an independent director of Special Olympics PA. Peters serves as an adjunct lecturer at Lehigh University and has been a guest lecturer for the Wharton School at the University of Pennsylvania. Peters holds an MBA in finance from the Wharton School at the University of Pennsylvania. He graduated with a Bachelor of Arts in architecture from Lehigh University.
Per its LinkedIn profile, Skyward Health is an extremely small company (11 to 50 employees, with no jobs or people listed on LinkedIn [other than Mr Peters]) which has a minimal footprint on the Internet (only a bare bones website). Frankly, we don't know what to make of it. Perhaps it was just a convenient resting spot for Peters after leaving Geisenger before moving on to bigger and better things. More encouragingly regarding his prior position: per Wikipedia, "Geisinger Health System (GHS) is a regional health care provider to central, south-central and northeastern Pennsylvania and southern New Jersey. Headquartered in Danville, Pennsylvania, Geisinger services over 3 million patients in 45 counties. It has been widely recognized for delivering high-quality care at low cost through an integrated delivery system model of healthcare."
RAD's executive leadership team therefore now consists of the following individuals:
Heyward Donigan, chief executive officer;
Jim Peters, chief operating officer;
Matt Schroeder, chief financial officer;
Jim Comitale, general counsel and secretary;
Jessica Kazmaier, chief human resources officer;
Jocelyn Konrad, chief pharmacy officer;
Justin Mennen, chief information officer; and
Ben Bulkley, chief executive officer, EnvisionRxOptions.
What investors need from the aforementioned management team is a presentation of their 30,000-foot long-term vision for the company (think something along the lines of Bezos's 1997 letter to Amazon shareholders here). Without such a vision, the stock price will likely continue to stagnate around current low levels. We would recommend that (1) the CEO puts out a "State of the Company" letter presenting her view on where RAD needs to go and how she plans to get it there, and (2) the new executive team organizes an Investor Day, so each senior team member can review their particular line of business, etc. In each case these action items need to occur in the near term (by the end of 2019 would be ideal). We will also have further thoughts on "Rite Aid 2.0" in a subsequent blog post...stay tuned.
DISCLOSURE: Long RAD.