Rite Aid - The Road Behind and The Road Ahead
As a shareholder who has relentlessly (and, with a few other intrepid retail shareholders who took up the "Vote 'Em Out" standard along side us, nearly single-handedly) advocated for change at the upper echelons at Rite Aid (RAD) since October 2018--for example, see here and here--it is perhaps time to reflect on what has occurred at the company over the past 16+ months and look forward to the road ahead. First, the stock price (because it's usually, at the end of the day, "The Stock Price, Stupid!"):
At the time our initial RAD Seeking Alpha screed against the then-entrenched and atrociously-performing board and management appeared, RAD's share price had collapsed almost 90% from its early 2017 level to around $20/share (note that RAD effected an ill-advised 1-for-20 reverse split in 2019, which we strongly advocated against, as it sent a defeatist message to the market and was basically a green light for shorts to further attack the stock). Looking at the above chart, one might presume that not much has really changed at the company, as the share price is actually about 18.5% lower today than then, while the overall market is up. Just looking at the chart, in other words, one would presume that nothing material (in a positive sense) has changed at Rite Aid over the past year and a half.
SUCCESS OR FAILURE BEGINS AT THE TOP
The foregoing ("stock price, bro") view, however, misses certain tectonic shifts that have occurred recently at RAD, and which are the direct result of pressure put upon the board of directors and management by, principally, retail shareholders and people such as yours truly (in other words small time activists with big mouths/keyboards). This "soft activism" by non-13D filers has actually resulted in a substantial change in the trajectory of the company, we think for the better.
In our original RAD "Vote 'Em Out" SA article, we set forth the following three bullet points as the keys to our turnaround thesis for RAD:
Rite Aid's incumbent management and board of directors have failed shareholders repeatedly.
Insanity is keeping the same people in power and expecting a different result.
For Rite Aid's equity to ever have significant value, it needs to be entrusted to people who take stewardship seriously.
Given this thesis, it is quite inspiring to see how much progress has been made on this front since October 2018, when the article came out. At the time, the company was headed by (failed) CEO John Standley, (failed) COO Kermit Crawford and (meh) CFO Darren Karst, as well as a board composed of nine (failed) directors helmed by (failed) chairman Bruce Bodaken (the other incumbent directors were Joseph B. Anderson, Jr., David R. Jessick, Robert E. Knowling, Jr., Kevin E. Lofton, Myrtle Potter, Michael N. Regan, Frank A. Savage and Marcy Syms). Fast forward to today and the ENTIRE C-suite has been replaced with new leadership, while only 3 of the 9 legacy directors remain on the board.
RAD is now led by the following:
CEO - Heyward Donigan;
COO - Jim Peters; and
CFO - Matt Schroeder.
Six new directors, including a potential future board chairperson in Elizabeth "Busy" Burr.
Importantly, per the stock chart above, RAD's share price bottomed right around the time that new CEO Donigan came aboard in mid-August 2019 (see PR for the appointment here). This backs up the adage "Success or failure begins at the top." If the top of the organization (the CEO) is a loser and a failure, inevitably the entire organization will take on this aspect, simply because a person attracts around him or her exactly what he or she is. Winners want to work with winners, losers and failures seek places to hide while clocking their undeserved paychecks (and what better place to hide than directly under a loser and failure of a CEO, who holds nobody accountable for actual performance). Winners expect to be pushed and challenged, while losers and failures want to take it easy and make endless excuses for their endless failure to achieve results--making excuses is a lot easier than accomplishing difficult goals.
The foregoing dynamic is compounded when the CEO is elevated to the board chairmanship, because then this person has nearly absolute power over the organization. When the CEO chairs the board, they also control who else gets/stays on the board, if & when board meetings are called and what the board's agenda will be. Thus, terrible CEOs tend to stock their boards with sycophantic non-entities who will act as rubber stamps for the CEO's agenda (which often involves making operational targets as flimsy as possible, so as to maximize their compensation). These directors only care about earning their low to mid six-figure director fees annually while doing minimal work. Never will they challenge the failing CEO on any substantive matter; otherwise, they risk losing access to these easy paychecks (gotta pay the rent on that summer home in the Adirondacks--priorities!). If the failing CEO farts during a board meeting, his (and it's usually a man) paid lemming directors will probably tell him it smells like roses. And so it goes on down the chain of command.
Conversely, a qualitatively great CEO not only tolerates strong directors around him or her, he or she actually embraces them with open arms. This type of CEO will not be afraid to put somebody on the board who is more knowledgeable regarding a particular topic that is germane to the company's business or more skilled at (for example) capital allocation (most CEOs are good at operations, but are not necessarily experts on how to effectively allocate capital). This species of CEO enjoys the thrust and parry of intelligent debate and pushback, because they know that, much like working out at the gym makes the body stronger, this debate makes them a much stronger, more competent executive. The result is corporate nirvana: an organization headed by a highly skilled CEO who can make correct decisions on important issues quickly (as both precision and speed are vital in business). In addition, those under the CEO similarly fall into the "A" Player category. Such an organization (think Apple under Steve Jobs and Amazon under Jeff Bezos) will inevitably dominate the competition in the marketplace and its stock will thus inevitably skyrocket (shareholder nirvana). Of course, the jury is still out on whether RAD's new CEO will meet the foregoing criteria, however early signs are promising and investors appear to be slowly catching on that she could be the real deal.
HOW CHANGE HAPPENS
So, how does a company like RAD (or any other failing public company, for that matter) go from being captured by an entrenched, failing management and board to becoming (potentially) the next AAPL or AMZN? It's certainly not easy! There needs to be some outside influence that forces a comprehensive leadership overhaul, because one thing that never changes is that failing leaders at public companies almost always cling desperately to power to their last breath. In addition, failing organizations tend to reject change the way the human body naturally rejects transplanted organs.
The solution? The activist investor. This person is naturally free from the bias and groupthink that afflicts the failing organization. Because they are not complicit therein, they are free to point out exactly why and how things should change for the better. In addition, since they have actually skin in the game (their own money, which they exchanged for their shares), they have the incentive to fight for necessary regime change and their incentives are aligned with their fellow shareholders (usually the hapless incumbents have minimal skin in the game, resulting in misaligned incentives).
In RAD's case, there was no typical large activist investor involved, for example an Elliott or a Third Point, although they certainly would have been welcomed by shareholders with open arms. Rather, a (very) small group of shareholders holding relatively modest amounts of stock put constant pressure on the company to effect change. Even then it took eight long months to replace the CEO--but it happened.
Among the tools used by this group were the following:
Public pressure via Seeking Alpha and investment blog posts advocating for shareholder revolt at RAD and pointing out in excruciating detail the myriad ways the prior failed management and board had betrayed the owners of the company over and over (see our articles and posts linked above);
Public commentary via Twitter, tagging the new CEO and certain other board members on posts (don't think they don't read these, although if pressed they would inevitably deny this) (see our RAD tweets here);
Private communications between aggrieved yet defiant shareholders, coordinating strategy and sharing facts, as well as lobbying large activists to get involved so as to ramp up the pressure on the incumbent company insiders; and
The insertion of shareholder proposals in the company's proxy statement via the Rule 14a-8 route. This rule allows any shareholder who has held at least $2,000 worth of stock in a company for at least one year to make certain proposals (usually non-binding, advisory proposals) to be voted on at said company's annual meeting (see fuller explanation of the process here). In RAD's case, shareholders, by voting in favor of a 14a-8 proposal for an independent board chairman at the 2018 annual meeting (see here and here), were able to force the company to amend its bylaws to permanently separate the roles of CEO and board chairman. Stripping then-CEO Standley of his board chairmanship in late 2018/early 2019 was a key milestone in unlocking the floodgates of change, as Standley was the main person blocking executive and board turnover at the company (he held onto his power with a death grip until the last, even securing a ridiculous 6-month "consulting" gig as he was finally shown the door as CEO). Once he lost the board chairmanship, his days were inevitably numbered.
By employing the foregoing "soft activism" tools, even small-fry retail investors holding just a few hundred shares have the power to effect substantive change at a company--they just need to summon the energy to fight for it and master the techniques described above. Of course, at RAD things never went smoothly or perfectly during the process (for example, the new board members granted CEO Donigan a far too generous pay package; also, the board has yet to implement a Rule 14a-8 proposal that passed at last year's annual meeting which requested that the company grant shareholders holding at least 10% of the stock the right to call a special meeting). Overall, however, quite a bit has been accomplished, with more to come...
THE ROAD AHEAD
Which leads us to "The Road Ahead" for RAD. The future is always murky, as investors have recently discovered with the coronavirus panic. It is even more unclear at any individual company undergoing significant change, such as RAD. So much depends on the decision-making of the new leadership, yet we really haven't received the full roadmap the new leaders intend to use to chart the future for our company. Luckily, we will find out much more in just two weeks, when RAD holds its long-awaited Analyst Day on March 16th:
Speaking of the road ahead, one is reminded of the poem below, called "The Road Ahead or The Road Behind" by George Moriarty, which was often recited in public talks given by legendary UCLA basketball coach John Wooden, who won 10 NCAA basketball championships (by far a record) at the school, earning him the moniker "The Wizard of Westwood". Will CEO Donigan and her Rite Aid team denounce the Fates as the reason RAD can't win; or will they instead give all and save none until the game is really won? Shareholders will need to tune in on March 16th to find out!
DISCLOSURE: Long RAD.