Troubled drugstore chain Rite Aid Corp. said yesterday that investor Leonard I. Green has stepped in as chairman of the board, replacing Martin L. Grass, who was ousted as chairman and chief executive last month.
The Camp Hill, Pa.-based retailer, reeling from financial and management turmoil, also announced that its auditor, KPMG International, resigned. Rite Aid, which has been forced to revise its financial statements and slash past profit by $500 million as well as sell off assets to pay down debt, decided to switch audit firms last week. KPMG gave its notice around the same time, a Rite Aid spokeswoman said.
Green, 66, founding partner of investment banking firm Leonard Green & Partners LP, which typically buys into troubled companies, joined Rite Aid's board of directors last month as a condition of a Green affiliate investing $300 million in Rite Aid convertible preferred stock.
Green had served on Rite Aid's board from January 1997 -- when his company sold Rite Aid the West Coast-based Thrifty Payless drugstore chain -- until June.
Timothy J. Noonan, 57, will stay on as interim chief executive officer of Rite Aid until a permanent CEO is found, most likely by the end of the year, the company said. Green, who was elected to the vacant chairman slot by the board late last week, was unavailable for comment yesterday.
"He's committed to developing and implementing a focused business strategy that will build on Rite Aid's competitive strengths as well as address the key challenges the company faces," said Karen Rugen, a company spokeswoman.
Besides heading the board's executive committee, Green will help make key management decisions, the company said. Green's familiarity with the West Coast Thrifty stores -- as well as his 9.7 percent stake in the company -- could be a plus, said Sheldon Grodsky of Grodsky Associates Inc.
"You could say he bought his seat as chairman, but he is a fairly knowledgeable guy and has a vested interest in Rite Aid's success," Grodsky said.
Rite Aid's stock -- which reached $51 per share in January, has lost 85 percent of its value this year, closing yesterday at $7.375, up 56.25 cents.
Rite Aid's current woes have stemmed, in part, from an ill-conceived purchase of Thrifty Payless from Green. The 1,000-store West Coast chain, viewed by analysts as dumpy and too big for Rite Aid to manage well, cost the company $1.4 billion in stock and $890 million in debt.
In mid-October, when it announced Grass' departure, the company had said it would restate its earnings for the past three years and shave pretax profits by about $500 million. Since then, the company has said it expects the U.S. Securities and Exchange Commission to launch an investigation into accounting practices. The company has not been notified of a formal probe.
And last week, shares fell 32 percent after company officials said investors should disregard financial projections Grass made shortly before his ouster. Grass said he expected the company's cash flow to be $1.01 billion for fiscal year 2000, which ends in February. He also predicted cash flow of $1.267 billion and $1.46 billion for the next two years.
Yesterday's KPMG resignation came as no surprise, Grodsky said.
"The auditors didn't do a good job, regardless of whether management was trying to hide things," Grodsky said. "It's the auditors' job to catch accounting irregularities."
In a statement, Green said previous management had been stretched too thin. "Issues arose from Rite Aid's attempting to do too much too quickly," including its aggressive acquisitions and store refurbishment. Green also criticized Rite Aid's marketing strategy as "not entirely appropriate" for the drugstore industry, focusing on image-building rather than on promotions.
That criticism came on the same day Rite Aid announced the resignation of Beth Kaplan, 41, senior executive vice president of marketing, who Grass hired away from Procter & Gamble Co. in 1996. She was replaced by James P. Mastrian, 57, who joined Rite Aid last year as executive vice president of category management and will assume overall marketing responsibilities.
Under Kaplan's direction, Rite Aid had launched a marketing strategy that included TV commercials with the tag line, "It's not just a store -- it's a solution." Kaplan also ushered in money-back guarantees for cosmetics, and the Rite Aid Vitamin Institute, a training program for pharmacists.
Yesterday's appointment of Green did little to restore analysts' confidence in the chain.
"It's more of the same; they're trying to fix things and plugging in somebody," said Philip J. Muldoon, an analyst with McDonald Investments. "There are so many things they can potentially do and so little we know. Numbers we thought were true not that long ago. I'm in the wait-and-see mode."