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Executive Summary

[NYSE & AMEX LISTED ISSUES] Rite Aid's ability to absorb and find cost-savings in the SupeRx acquisitions in Florida and the Gray/Drug Fair businesses in 1987 impressed the financial community and earned for Rite Aid the position as the top gainer among the NYSE and AMEX-listed chains. Up 6-1/2 to 36, Rite Aid was one of only two net gainers among the major exchange-listed chains in 1987 trading and the only chain to show more than a one-point gain for the year. Morgan Stanley analyst W. Loeb issued a buy report on Rite Aid late in November pointing out that the chain had been able to incorporate the big acquisitions (over 570 stores) during the year "more smoothly" than expected. The same report also noted Rite Aid's emergence as a "true convenience store" and the importance of the video rental business. Loeb called Rite Aid the leading video rental and sales business in the U.S. with video units in 980 of its drugstores. The Morgan Stanley analyst also gave Rite Aid an advantage in the chain field vis-a-vis its largest competitors because of the recent leveraged buyouts. Those deals, Loeb said, could strap some of the competition's efforts. In the five weeks following the favorable analyst report, Rite Aid gained four points. While Rite Aid got points from the investment community for the traditional strength of the chain business as a recession-resistant hedge, that didn't spread over to the industry group as a whole. In late October, the ValueLine investment survey rated only one of the issues, Genovese, as a timely buy, and that was due to takeover speculation based on the chain's geographic position in New York. Genovese (off 1-1/8 for the year) split 3-for-2 several weeks before Black Monday (on Oct. 6). It lost all of its positive momentum in the overall market decline and could not maintain early gains. Walgreen, which has been one of the steady performers in the chain group in recent years with Rite Aid, slipped in 1987, losing 5% of its stock value on a 1-5/8 drop. With 61.5 mil. shares outstanding, Walgreen still carries the top valuation among the publicly traded chains at $1.9 bil. Although Walgreen sales were up 16% for the final (Aug. 31) quarter of its fiscal year, earnings were flat. For the full year, net earnings were level at $103 mil. on sales up 17%. ValueLine, however, wasn't concerned about the fiscal 1987 profits, forecasting a rebound in 1988. The chain has attributed the flat earnings to the cost of renovating the 1986-acquired Medi-Mart subsidiary in New England. Walgreen spent in excess of $100,000 on each renovation. With 269 total renovation projects last year, the chain spent at least $27 mil. The biggest decline suffered by one of the chain issues in 1987 hit the Michigan-based Perry chain. Down 6-3/4 points, the chain lost over half of its value on top of a 28% trading decline in 1986. The issue ended 1987 at 5-1/2, compared to 17-1/4 two years before.

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