Walgreens Boots Alliance Inc (NASDAQ:WBA) has announced that it will shutter close to 600 Rite Aid Corporation (NYSE:RAD) stores. In a cash deal worth $4.375 billion, Walgreens is acquiring 1932 stores of its smaller competitor Rite Aid. The deal is set to close next year in spring.
Two years ago Walgreens had indicated that it would be acquiring Rite Aid with all its 4,500 stores. However anti-trust regulators balked at the deal earlier in the year forcing Walgreens to settle for acquiring a part of Rite Aid a month ago. Walgreens will also be shuttering a few of its stores.
According to executives the locations which were being shuttered were chosen on the basis that they were overlapping with another Walgreens or Rite Aid location.
Location overlap
“The vast majority being closed are within one mile of another drugstore that we own going forward,” Walgreens co-chief operating officer, Alexander Gourlay, said in a conference call during the release of the latest quarterly results.
The shuttering of the outlets will start as soon as the closing of the deal but will take about 18 months before the process of closing them down is completed. Walgreens has indicated that it will spend approximately $500 million in extra capital spending in order to transform the outlets it is acquiring and has chosen to keep.
Part of the reason why Walgreens is keen on reducing overlap is because comparable retail sales declined by 2.1% in the firm’s most recent quarterly report. This means there is no need for more of its outlets competing against each other.
Comparable sales
Druggist, a rival of Walgreens, and which has close to 9,700 outlets is also suffering from declining comparable sales with regards to front-of-store merchandise. But in contrast the prescriptions businesses of both chains are growing. Once the deal has closed, the number of stores that Walgreens will possess will be roughly equal to that of CVS. Currently Walgreens has 8,000 outlets.
In its most recent quarterly financial report, the profits of Walgreens took a hit due to the termination fee of approximately $325 million that had to be paid to Rite Aid following the aborted merger.
On Wednesday shares of Walgreens Boots Alliance rose by 3.08% to close the day at $69.36.
