1

Rite Aid’s “poor fundamentals and

momentum, weak competitive

position, and financial leverage…

remain large concerns.”

-- Credit Suisse research report on Rite Aid Corp.,

June 3, 2010

Navigating Rough Waters—Can New Management Steer Rite Aid Back

on Course?

Overview

Since Rite Aid (NYSE: RAD) acquired the Brooks and Eckerd retail pharmacy chains in June 2007, the

company has experienced serious financial difficulties, including a severe drop in share price and a massive

debt load. The $4-billion acquisition was intended to make Rite Aid more competitive with the top two retail

drug firms, CVS Caremark and Walgreens. However, Rite Aid executives found the integration of the

companies to be more challenging than expected.

Rite Aid has consistently lost money and underperformed its

rivals and, for the second time in two years, faces the prospect

of being delisted from the New York Stock Exchange. Despite

management’s poor performance – financial and otherwise –

Rite Aid executives continue to receive millions in

compensation, causing some shareholders to call for an advisory

“Say on (executive) Pay.” Further, unions representing Rite Aid

workers across the country contend that the company’s poor

labor relations policies are hurting employee morale, which

could affect customer service and the company’s bottom line.1

12 Quarters of Losses…and Counting

Rite Aid has not been in the black since the acquisition of the Brooks and Eckerd chains. The company has

reported losses for 12 straight quarters, ranging from about $70 million in the second quarter of FY 2008 to

$2.3 billion in the fourth quarter of FY 2009.2 The picture is not any more promising for FY 2011; Rite Aid

has said it expects to lose between $355 million and $570 million this year.3

Rite Aid Continues to Underperform Rivals

Over the past four years, the value of Rite Aid’s stock has dropped precipitously, from over $6.50 per share in

June 2007, when the company acquired the Brooks and Eckerd chains, to about $1.00 per share by mid-

September 2010.4 One analyst says the stock is overvalued even at this low price, estimating Rite Aid shares

to be worth only about $.30.5

Shareholder Return is Anemic

The company’s stock performance has trailed

that of both CVS and Walgreens, as well as the

Russell 1000 Index and the Russell 1000

Consumer Staples Index.6 Rite Aid had to hold a

special stockholder vote to approve a reverse

stock split in December 2008 when the company

was threatened with delisting on the NYSE due

to the consistently low stock price. In early

August 2010, the company again announced that

it was out of compliance with NYSE listing

standards because the price of its common stock

Rite Aid Investor Alert – September 21, 2010 International Longshore and Warehouse Union Contact: Rand Wilson, 617-803-0799

0%

50%

100%

150%

200%

Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

Rite Aid's Total Shareholder Return vs.

CVS and Walgreens

CVS

WAG

RAD

2

has fallen below the NYSE’s share price rule. On July 27, the company’s board had to approve a reverse stock

split.7 Thus far, Rite Aid has not had to implement a reverse split.

Weak Same-Store Sales Trail Competition

During the fiscal years 2007 through 2010, same-

store sales growth at Rite Aid fluctuated between

-.9% and 3.4% per year. By comparison, CVS had

same-store sales growth of between 4.5% and 8.1%

per year, while Walgreens reported growth of

between 2.0% and 8.1%.8 In its most recent sales

announcement, Rite Aid reported same-store sales

had decreased by 1% in August 2010. For the

quarter and half, ending August 28, 2010, the

company reported same-store sales were down

1.5% and 1.2%, respectively.9

Rite Aid’s EBITDA Margins are on the Decline

Unlike rivals CVS and Walgreens, which have

sustained their EBITDA margins, Rite Aid has

watched its margins slip. At CVS, EBITDA

margins increased from 7.2% in FY 2007 to 7.9%

in FY 2010. During the same period, Walgreens’

increased slightly from 6.9% to 7%. Rite Aid’s

margins, in contrast, dipped from 3.6% in FY 2007

to 2.9% in FY 2010.10 For the first quarter of FY

2011, Rite Aid reported EBITDA margins of

3.9%.11

There are a number of reasons why Rite Aid has not kept pace with CVS and Walgreens. One is that, in the

Brooks and Eckerd acquisition, Rite Aid “…brought together two underperforming companies which both

have had difficulties improving store-level performance independently.”12 Rite Aid also took much longer to

integrate the Brooks and Eckerd stores than it had expected.13 In addition, according to at least one analyst,

Rite Aid store locations are inferior to those of its rivals.14 Further, capital expenditures are “unsustainably

low” and have put the company at risk of “continued widening of the store standards between Rite Aid and its

better-capitalized competitors, Walgreen’s and CVS, and a subsequent acceleration in market share losses,”

according to analysts.15

Handsomely Rewarded Rite Aid Execs Fail as Managers

While shareholders have suffered heavy losses, top Rite Aid executives have been awarded millions in

compensation – even those exiting the company after abbreviated tenures. ISS Proxy Advisory Services,

which provides independent research and analysis on corporate governance issues, recently gave Rite Aid’s

compensation policy a “high concern” rating and advised shareholders to vote against the re-election of

members of the board serving on the compensation committee at the shareholder meeting in June 2010.16

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0%

FY2007 FY2008 FY2009 FY2010

RAD CVS WAG

Rite Aid's EBITDA Margins vs. CVS and Walgreens

Note: Rite Aid's fiscal year ends in February/early March. For comparison purposes, Rite Aid's fiscal year is compared to CVS's and Walgeen's previous fiscal year.

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

FY 2007 FY 2008 FY 2009 FY 2010

Rite Aid's Same-Store Sales Growth vs. CVS

and Walgreens

RAD

CVS

WAG

Note: Rite Aid's fiscal year ends in February/early March. For comparison purposes,

Rite Aid's fiscal year is compared to CVS's and Walgreen's previous fiscal year.

3

Sammons, Others Oversee a Dismal Financial Performance

Mary Sammons, who currently serves as Chairman and previously also served as President and CEO of Rite

Aid, received $6 million in FY 2008, $1.8 million in FY 2009, and $3.2 million in FY 2010.17 Her FY 2008

compensation included a $1.5-million bonus related to the Brooks and Eckerd transaction, from which

“positives have yet to emerge,” according to a 2010 industry research report.18 Sammons received $240,000 in

supplemental executive retirement plan contributions, as well as $700,000 in above-market deferred

compensation earnings as part of her FY 2010 compensation. In addition, she enjoyed perks including

personal use of Rite Aid’s company aircraft, an automobile allowance and personal financial services.19

Despite the end of her tenure as CEO as of the annual shareholders meeting in June 2010, Sammons will

continue to receive a base salary valued at least $750,000 and also is eligible for a bonus as company

Chairman in FY 2011. If Sammons had been let go at the end of FY 2010 her golden parachute would have

been worth more than $14 million.20

Current President and CEO John Standley received $4.5 million in compensation in FY 2010, including

$180,000 in Supplemental Executive Retirement Plan allocations, as well as personal use of the company’s

plane and a car allowance.21 Standley re-joined Rite Aid in late 2008 in a shake-up that included the departures

of the COO, CFO and CAO. Although these three executives worked only about seven months each in FY

2009, together they were paid more than $12 million that year.22

Mismanagement of Various Operations Proves Costly

Mismanagement at Rite Aid is hurting not only its bottom line, but also its reputation. For example, in July

2010, the company had to pay $1 million to the federal government to settle a case in which Rite Aid was

charged with violating the privacy rights of its customers under the Health Insurance Portability and

Accountability Act of 1996 (HIPAA).23

In Connecticut, the Attorney General is investigating Rite Aid’s recent prices increases in its Rx Savings

Program. According to the Attorney General, the company raised prices after a new state law was passed that

requires pharmacies to provide Medicaid and other state programs the same prescription drug discounts they

offer consumers. Rite Aid allegedly made changes to the plan in response to the new law and posted signs that

falsely blamed higher prices on the law.24 Rite Aid has been the subject of a number of other investigations by

state Attorneys General. In 2008, the company paid almost $1.8 million to settle charges filed by the Attorneys

General of New York25 and New Jersey26 that it had carried and/or sold expired products in stores there.

Labor Relations are in Shambles

At the June 2010 shareholder meeting, every union representing Rite Aid workers challenged top management

concerning the company’s backwards labor relations policies and their impact on employees. For example, at

Rite Aid’s giant distribution center in Lancaster, CA, a critical facility serving the west coast market, workers

report that work rates have been speeding up to “exhausting and unsafe levels.”27 Workers there have been

struggling to improve wages and working conditions at the distribution center for five years, but the company

has resisted their efforts, expending valuable resources on expensive union-busting consultants and legal

fees.28, 29

Shareholders Call for Accountability

Shareholders have expressed concerns about Rite Aid’s mismanagement. At the most recent annual meeting,

they brought up issues including poor customer service, under-stocked store shelves, confusing advertising

and marketing campaigns, and the Board of Directors’ lack of oversight of company executives.30 Concerns

about a seeming lack of alignment between Rite Aid management’s poor performance and their generous

4

compensation packages also have raised the ire of shareholders, leading them to bring “Say on Pay”

resolutions to the company’s two most recent annual meetings.31

Outlook for Rite Aid

It remains to be seen if Rite Aid’s new CEO, John Standley, can get Rite Aid back on course. While

analysts and Rite Aid management agree that the company is doing a good job of controlling costs, these

efforts have not been adequate to counteract relatively poor sales. 32,33

Continued cost-cutting could

backfire if the company fails to invest adequately in its stores. Further, although Rite Aid has been

successful in refinancing its significant debt,34

the company’s “leverage remains uncomfortably high,”

according to analysts.35

The challenges facing Rite Aid's management are complex. Solutions to the company's myriad problems

will not come quickly or easily. That's why it's so important that management change course and begin to

work cooperatively with employees and their unions. Doing so would be relatively easy and could set the

stage for long overdue improvements in operations, customer service and ultimately Rite Aid's bottom

line.

Note: The views expressed in this report are those of the International Longshore and Warehouse Union (ILWU). Nothing in this report

is intended as advice to investors regarding buying, holding or selling a security.

1 Stuhldreher, Tim, August 20, 2010. Expiration Date? Central Penn Business Journal. 2 Rite Aid 10-K Report, filed April 28, 2010, pp. 103-104; Rite Aid 10-K Report, filed April 1, 2009, p. 112. 3 Rite Aid Press Release, Rite Aid Reports First Quarter 2011 Results (June 23, 2010). 4Yahoo Finance; http://finance.yahoo.com 5 Stuhldreher, Tim, August 20, 2010. Expiration Date? Central Penn Business Journal. 6 Rite Aid Form 10-K, filed April 28, 2010, p. 24. 7 Rite Aid Press Release, Rite Aid Addresses Notice of Non-Compliance with NYSE Share Price Listing Rule (August 3, 2010). 8 Standard & Poor’s Capital IQ database. 9 Rite Aid Press Release, Rite Aid Reports 1.0 Percent Same Store Sales Decrease For August (September 2, 2010). 10 Standard & Poor’s Capital IQ database. 11 Rite Aid Press Release, Rite Aid Reports First Quarter 2011 Results (June 23, 2010). 12 Wiltamuth, Mark, June 23, 2010. Rite-Aid, 1Q Cost Cutting Strong, But Sales and Gross Margin Pressure Continues, Morgan Stanley, p. 2. 13 FD (Fair Disclosure) Wire, Q4 2008 Rite Aid Corporation Earnings Conference Call – Final (April 10, 2008). 14Wiltamuth, Mark, June 23, 2010. Rite-Aid, 1Q Cost Cutting Strong, But Sales and Gross Margin Pressure Continues, Morgan Stanley, p. 2. 15 Eltrich, Karen, April 27, 2010. Company Update Rite Aid Corp, Upgrading Guaranteed Notes to OP, Business Positioned to Stabilize, Goldman Sachs, p. 4. 16 ISS Proxy Advisory Services, Rite Aid Corporation, pp. 3, 9 (June 11, 2010). 17 Rite Aid Proxy Statement filed May 21, 2010, p. 60. 18 Wiltamuth, Mark, June 23, 2010. Rite-Aid, 1Q Cost Cutting Strong, But Sales and Gross Margin Pressure Continues, Morgan Stanley, p. 2. 19 Rite Aid Proxy Statement filed May 21, 2010, pp. 60-61. 20 Rite Aid Proxy Statement filed May 21, 2010, pp. 63, 69. 21 Rite Aid Proxy Statement filed May 21, 2010, pp. 60-61. 22 Rite Aid Proxy Statement filed May 14, 2009, p. 36. 23 U.S. Department of Health & Human Services Press Release, Rite Aid Agrees to Pay $1 Million to Settle HIPAA Privacy Case (July 27, 2010). 24 Connecticut Attorney General’s Office, Press Release, Attorney General, DCP Issue Subpoena Regarding Price Increases, Changes in Rite Aid Drug

Discount Program (August 25, 2010). 25 New York Attorney General’s Office, Press Release, Attorney General Cuomo Reaches $1.3 Million Settlement with Rite Aid Over the Sale of Expired Products Across New York State (December 4, 2008). 26 Office of the Attorney General, Division of Consumer Affairs Press Release, New Jersey Office of the Attorney General, Division of Consumer Affairs,

State Announces Settlement with Rite Aid (June 23, 2008). 27 Stuhldreher, Tim, August 20, 2010. Expiration Date? Central Penn Business Journal. 28 Rite Aid, Oliver J. Bell & Associates, and the Case for the Employee Free Choice Act, Jobs with Justice (July, 2009). 29 McDonnell, Patrick J., July 9, 2009. In Warehouse Battle, a Union Goal is the Focus, Los Angeles Times, p. B1. 30Stuhldreher, Tim, August 20, 2010. Expiration Date? Central Penn Business Journal. 31 Rite Aid Proxy Statement filed May 14, 2009, p. 23; Rite Aid Proxy Statement filed May 21, 2010, p. 47. 32 Eltrich, Karen, April 27, 2010. Company Update Rite Aid Corp.; Upgrading Guaranteed Notes to OP, Business Positioned to Stabilize, Goldman Sachs Credit Research, p. 1. 33 Kelly, Edward J., March 31, 2010. Rite Aid Corporation, Credit Suisse, p. 2. 34 Rite Aid Press Release, Rite Aid Completes Refinancing Transactions That Extend Debt Maturities and Lower Interest Expense (August 19, 2010). 35 Eltrich, Karen, April 27, 2010. Company Update Rite Aid Corp.; Upgrading Guaranteed Notes to OP, Business Positioned to Stabilize, Goldman Sachs

Credit Research, p. 1.