RITE AID CORP - Annual Report: 2020 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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Commission File Number 1-5742

RITE AID CORPORATION

(Exact name of registrant as specified in its charter)

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Registrant’s telephone number, including area code: (717) 761-2633

Securities registered pursuant to Section 12(b) of the Act:

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Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to section 13 or section 15(d) of the Exchange Act. Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “Large Accelerated Filer,” “Accelerated Filer,” “Smaller Reporting Company,” and “Emerging Growth Company” in Rule 12b-2 of the Exchange Act.

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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☒

The aggregate market value of the voting and non-voting common stock of the registrant held by non-affiliates of the registrant based on the closing price at which such stock was sold on the New York Stock Exchange on August 31, 2019 was approximately $349,426,555. For purposes of this calculation, only executive officers and directors are deemed to be affiliates of the registrant.

As of April 16, 2020 the registrant had outstanding 54,704,579 shares of common stock, par value $1.00 per share.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrant’s definitive proxy statement pursuant to Regulation 14A of the Securities Exchange Act of 1934 or an amendment to this Annual Report on Form 10-K, to be filed with the Securities and Exchange Commission, are incorporated by reference into Part III of this Annual Report on Form 10-K.

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report, as well as our other public filings or public statements, include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are often identified by terms and phrases such as “anticipate,” “believe,” “intend,” “estimate,” “expect,” “continue,” “should,” “could,” “may,” “plan,” “project,” “predict,” “will” and similar expressions and include references to assumptions and relate to our future prospects, developments and business strategies.

Factors that could cause actual results to differ materially from those expressed or implied in such forward-looking statements include, but are not limited to:

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We undertake no obligation to update or revise the forward-looking statements included in this report, whether as a result of new information, future events or otherwise, after the date of this report. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors that could cause or contribute to such differences are discussed in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Continuing Operations—Overview and Factors Affecting Our Future Prospects” included in this Annual Report on Form 10-K. Additionally, the continued impact of COVID-19 could heighten many of the risk factors described herein.

PART I

Item 1.   Business

Overview

Rite Aid Corporation (“Rite Aid” or the “Company”) is on the front lines of delivering health care services and retail products to over one million Americans daily. Our pharmacists are uniquely positioned to engage with customers and improve their health outcomes. We provide an array of whole being health products and services for the entire family through over 2,400 retail pharmacy locations across 18 states. Through EnvisionRxOptions, which is soon to be rebranded Elixir, we provide pharmacy benefits and services to approximately four million members nationwide.

Our headquarters are located at 30 Hunter Lane, Camp Hill, Pennsylvania 17011, and our telephone number is (717) 761-2633. Our common stock is listed on the New York Stock Exchange under the trading symbol of “RAD.” We were incorporated in 1968 and are a Delaware corporation.

Fiscal 2020 was a year of significant change for Rite Aid. During fiscal 2020, Rite Aid undertook various restructuring initiatives, appointed new members to its Board of Directors, and hired a new executive leadership team, in order to support our objective to continue to operate as an independent, stand-alone organization. Rite Aid has the ability to leverage the power of its assets and personnel, including its trusted pharmacists, to deliver a compelling, comprehensive offering through all channels. These offerings will not only help our current and future consumers to get healthy, it will help them to thrive. While our strategy will take some time to execute, we made significant progress during fiscal 2020 that provides us with a strong foundation on which to build. Our accomplishments include, but are not limited to, i) reduced our corporate expenses by approximately $55 million on an annualized basis, ii) extended 35% of our calendar 2023 bond maturities to calendar 2025, iii) reduced our debt and improved our leverage ratio, and iv) implemented LEAN initiatives, a method used by companies worldwide to build a culture of continuous improvement, to reduce working capital tied to inventory and improve our pharmacist’s productivity. While these accomplishments are important, they are simply the groundwork needed to allow Rite Aid to unlock its potential through the implementation of our long-term initiatives, our RxEvolution.

RxEvolution – On March 16, 2020, we announced our new strategic plan and initiatives, named “RxEvolution”, which include significant rebranding, merchandising, marketing, integration and operational initiatives, in both our Retail Pharmacy and Pharmacy Services segments. The execution of these overarching initiatives will result in the reintroduction of our trusted and iconic Rite Aid brand to a new generation of consumers, maintain relevance in an ever changing marketplace, and thrive as a significant health care services company with a retail footprint. Our initiatives are focused on three primary areas, i) to become the dominant mid-market pharmacy benefit manager (PBM), ii) to unlock the value of our pharmacists, and iii) to renew our retail and digital experience.

Becoming the dominant mid-market PBM: Rite Aid’s pharmacy benefits and services company, EnvisionRxOptions, includes multiple PBMs, technology and claims adjudication software, mail delivery and specialty pharmacy services, network and rebate administration, as well as prescription discount programs and Medicare Part D insurance for individuals and groups. With a stronger, integrated offering, this soon-to-be rebranded business will be well positioned with mid-market employer groups and regional health plans looking for an alternative to the large, health plan affiliated PBM’s. Additionally, given the affiliation with Rite Aid’s stores, EnvisionRxOptions has the opportunity to improve its competitive positioning, deliver exceptional retail and mail order pharmacy service, and contribute to positive clinical outcomes. EnvisionRxOptions is now the only payor agnostic PBM with a retail pharmacy footprint.

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We believe EnvisionRxOptions is poised for strong growth and improved profitability, and represents the largest potential growth opportunity for Rite Aid.

Unlocking the value of Rite Aid’s pharmacists: Rite Aid is innovating across all of its retail and mail order pharmacy channels, including its PBM and suite of pharmacy service solutions. These innovations go beyond just filling prescriptions to offering an array of over-the-counter, clinical and holistic health and wellness solutions, focused on helping customers thrive. Pharmacists are highly educated, knowledgeable, accessible, and one of the most trusted healthcare providers; however, their full potential is not always being utilized or valued. Rite Aid’s 6,400 pharmacists will be whole-being health advocates, allowing them to practice at the top of their license and education. Our pharmacists will go beyond their traditional role to an expanded role, in which they are encouraging a holistic approach to health. Rite Aid is leveraging our associates to engage with LEAN tools, developing new workflows and technologies to free up our pharmacists’ time, and we are also launching our new Pharmacy of the Future, which moves our pharmacists physically closer to the consumer. These new workflows, tools and new space will allow our pharmacists to engage more personally with our consumers.

Renewing Rite Aid’s retail and digital experience: As consumers increasingly focus on self-care, they seek to strike the perfect balance between traditional health and holistic wellness. Rite Aid’s goal is to be a whole-being health destination that treats mind, body and spirit. To introduce new generations to our iconic brand, Rite Aid is elevating its in-store experience, increasing personalized digital engagement, and refreshing merchandise to include a wide assortment of products with ingredients that are meaningful to Millennial and Gen X shoppers. Rite Aid is re-branding with a new logo to signal this bold change in pharmacy and retail. Later this year, Rite Aid is planning to introduce its Store of the Future, which will be a trusted household wellness destination that helps consumers on the journey of care for parents, children and pets.

We believe that the strategy inherent in our RxEvolution will enable us to unlock the incredible potential of our trusted and iconic brand. By reinvigorating our integrated PBM offerings, enhancing the role of our 6,400 pharmacists and revitalizing our retail and digital experience, Rite Aid will not only remain relevant to a new generation of consumers, but can thrive as an independent healthcare company with a retail footprint.

As described in the following paragraphs, under prior leadership, during the past several years, Rite Aid had been involved in certain activities designed to sell itself and portions of its business.

Termination of the Merger Agreement—On February 18, 2018, Rite Aid entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Albertsons Companies, Inc. (“Albertsons”), Ranch Acquisition II LLC, a Delaware limited liability company and a wholly-owned direct subsidiary of Albertsons (“Merger Sub II”) and Ranch Acquisition Corp., a Delaware corporation and a wholly-owned direct subsidiary of Merger Sub II (together with Merger Sub II, the “Merger Subs”). On August 8, 2018, Rite Aid, Albertsons and the Merger Subs entered into a Termination Agreement (the “Merger Termination Agreement”) under which the parties mutually agreed to terminate the Merger Agreement. Subject to limited customary exceptions, the Merger Termination Agreement mutually releases the parties from any claims of liability to one another relating to the contemplated merger. Under the terms of the Merger Agreement, neither Rite Aid nor Albertsons is responsible for any payments to the other party as a result of the termination of the Merger Agreement and Rite Aid is no longer subject to the interim operating covenants and restrictions contained in the Merger Agreement.

Asset Sale—On September 18, 2017, we entered into the Amended and Restated Asset Purchase Agreement (the “Amended and Restated Asset Purchase Agreement”) with WBA and Walgreen Co., an Illinois corporation and wholly-owned direct subsidiary of WBA (“Buyer”), which amended and restated in its entirety the previously disclosed Asset Purchase Agreement (the “Original Asset Purchase Agreement”), dated as of June 28, 2017, by and among Rite Aid, WBA and Buyer. Pursuant to the terms and subject to the conditions set forth in the Amended and Restated Asset Purchase Agreement, Buyer agreed to purchase from Rite Aid 1,932 Acquired Stores, three distribution centers, related inventory and other specified assets and liabilities related thereto for a purchase price of approximately $4.375 billion, on a cash-free, debt-free basis (the “Asset Sale” or “Sale”). As of February 29, 2020, we have completed the transfer of all 1,932 stores and related assets to WBA and received cash proceeds of $4.157 billion and two of the three distribution centers and related assets for proceeds of $124.0 million. On April 1, 2020, we completed the inventory transfer at our remaining distribution center to WBA for proceeds of $19.3 million.

The transfer of the remaining distribution center and related non-inventory assets remains subject to minimal customary closing conditions applicable only to the distribution center being transferred at such distribution center

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closing, as specified in the Amended and Restated Asset Purchase Agreement. The transfer of the remaining distribution center and related non-inventory assets is expected to occur in May 2020, and will constitute the final closing under the Amended and Restated Asset Purchase Agreement. The term of the TSA continues after the final closing until October 17, 2020, unless earlier terminated.

Based on its magnitude and because we are exiting certain markets, the Sale represents a significant strategic shift that has a material effect on our operations and financial results. Accordingly, we have applied discontinued operations treatment for the Sale, as required by generally accepted accounting principles (“GAAP”).

In fiscal 2020, we continued reporting our business in two distinct segments. Our Retail Pharmacy Segment consists of Rite Aid stores, RediClinic and Health Dialog. Our Pharmacy Services Segment consists of EnvisionRxOptions, our PBM, which is soon to be rebranded as Elixir (“EnvisionRx” or “EnvisionRxOptions”).

Retail Pharmacy Segment— In our Rite Aid retail stores, our highly trained pharmacists dispense prescription medication and educate our customers on non-prescription remedies that can supplement traditional options. We offer a wide range of healthcare counseling services, including administering immunizations against the flu and shingles, assisting our customers with high blood pressure, cholesterol and diabetes, providing guidance on combating obesity and tobacco addiction, and educating our customers on managing medications and potential side effects. In addition, we offer a wide assortment of other merchandise to complement our pharmaceutical services and to provide convenience of our customers, which we call “front-end” products. In fiscal 2020, prescription drug sales accounted for 67.0% of our total drugstore sales. We believe that our pharmacy operations will continue to represent a significant part of our business due to a combination of our efforts to expand the role of our 6,400 pharmacists as whole-being health advocates, to industry trends, such as an aging population, increased life expectancy, anticipated growth in the federally funded Medicare Part D prescription program as “baby boomers” continue to enroll and the discovery of new and better prescription drug and over-the-counter therapies. We carry a full assortment of front-end products, which accounted for the remaining 33.0% of our total drug store sales in fiscal 2020. Front-end products include over-the-counter medications, health and beauty aids, personal care items, cosmetics, household items, food and beverages, greeting cards, seasonal merchandise and numerous other everyday and convenience products.

We differentiate our stores from other national chain drugstores, in part, through our wellness+ Rewards loyalty program, our Wellness format stores, innovative merchandising, owned brands and our strategic partnership with GNC, a leading retailer of vitamin and mineral supplements. We offer a wide variety of products through our portfolio of owned brands, which contributed approximately 19% of our front-end sales in fiscal 2020.

The average size of each store in our chain is approximately 13,600 square feet, and average store size is larger for our locations in the western United States. As of February 29, 2020, 58% of our stores were freestanding; 54% of our stores included a drive-thru pharmacy; and 66% included a GNC store within a Rite Aid store.

RediClinic, based in Houston, is an operator of retail clinics. RediClinics are staffed by board-certified nurse practitioners and physician assistants, who are trained and licensed to treat common conditions and provide preventative services, in collaboration with local physicians who are affiliated with a leading health care system in each market. Patients can be treated for more than 30 common medical conditions and RediClinic’s clinicians are able to write prescriptions for these conditions when appropriate. Additionally, RediClinics provide a broad range of preventive services, including screenings, medical tests, immunizations and basic physical exams. We operated a total of 67 RediClinics at the end of fiscal 2020. We have owned 100% of RediClinic since 2014.

Health Dialog, based in Boston, is a provider of healthcare coaching and disease management services to health plans and employers. Health Dialog provides these services using a call in line staffed by nurse practitioners and through an on-line platform. We have owned 100% of Health Dialog since 2014.

Pharmacy Services Segment—EnvisionRxOptions, our mid-market national pharmacy benefits manager (“PBM”), provides a fully integrated suite of PBM offerings including technology solutions, mail delivery services, specialty pharmacy, network and rebate administration, claims adjudication and pharmacy discount programs. EnvisionRxOptions also provides prescription discount programs and Medicare Part D insurance offerings for individuals and groups. EnvisionRxOptions provide services to various clients across its different lines of business, including major health plans, commercial employers, labor groups and state and local governments, representing

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approximately 4 million covered lives. Additionally, our Medicare Part D insurance offerings represents 0.9 million covered lives.

EnvisionRxOptions will continue to focus its efforts and offerings to its target market of small to mid-market employers, labor unions and regional health plans, including provider led health plans, and government sponsored Medicaid and Medicare plans.

We believe that EnvisionRxOptions is an integral component of our future success. We believe EnvisionRxOptions has the opportunity to become a dominant mid-market PBM through its compelling healthcare services offerings and outstanding digital engagement, and its connection to the 2,461 Rite Aid retail stores. EnvisionRxOptions primary market differentiator is that it is the only payor-agnostic PBM with a retail pharmacy footprint. We have owned 100% of EnvisionRxOptions since 2015.

Restructuring activities—In March 2019, the Board of Directors initiated certain restructuring programs to realign Rite Aid’s executive management team to facilitate its goal of operating as a fully integrated stand-alone healthcare company with a retail footprint. During fiscal 2020, Rite Aid implemented restructuring activities to revitalize its turnaround efforts aimed at the continued streamlining of its operations, extending debt maturities, and reducing its leverage ratio, which will help provide Rite Aid with the ability to execute its long-term strategy. We expect to incur one-time restructuring charges of approximately $60 million during fiscal year 2021 as we continue to implement our restructuring initiatives. These initiatives will include rebranding efforts related to our Retail and PBM businesses and the transition of certain lines of merchandise.

Industry Trends

Despite an increase in prescription drug usage, the rate of pharmacy sales growth in the United States continues to be negatively impacted by a decline in new blockbuster drugs, a longer FDA approval process, drug safety concerns, higher copays and an increase in the use of generic (non-brand name) drugs, which are less expensive but generate higher gross margins. New drug development in the next few years is expected to be concentrated in specialty prescriptions, which are high cost drugs targeted toward complex or rare chronic conditions. We expect prescription usage to continue to grow in the coming years due to the aging U.S. population, increased life expectancy, “baby boomers” continuing to become eligible for the federally funded Medicare prescription program and new drug therapies. Additionally, rising U.S. healthcare costs and the shortage of primary care physicians are creating opportunities for pharmacists and drugstores to play a more active role in driving positive health outcomes for patients. Services such as immunizations, medication therapy management, chronic condition management, clinics, medication compliance and counseling. In the face of the current pandemic, pharmacists are on the front line of testing, and with RediClinic@Home, telehealth will extend our efforts well beyond filling prescriptions. We believe that offerings such as these will gain additional momentum in a rapidly changing healthcare environment.

In terms of our traditional drug dispensing business, generic prescription drugs continue to help lower overall costs for customers and third party payors. We believe the utilization of existing generic pharmaceuticals will continue to increase, although the pace of introduction of new generic drugs is expected to slow. The gross profit from a generic drug prescription in the retail drugstore industry is generally greater than the gross profit from a brand drug prescription. However, the sale amount can be substantially less and has impacted our overall revenues and same store sales.

The retail drugstore industry is highly competitive and consolidation has accelerated. We believe that the competitive advantages from the increasing trend toward vertical integration resulting from the combination of retail pharmacy companies with PBMs, such as CVS Health, and aggressive generic pricing programs at competitors such as Wal-Mart and various supermarket chains will further increase competitive pressures in the industry. Front-end product pricing has continued to be highly promotional in the retail drugstore business, which contributes to additional competitive pressures.

The retail drugstore industry continues to rely significantly on third party payors. Over the past several years, third party payors, including the Medicare Part D plans and the state-sponsored Medicaid and related managed care Medicaid agencies, have changed the eligibility requirements of participants and have successfully reduced certain reimbursement rates. This trend is expected to continue, which puts added pressure on our and our competitors’ results.

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Medicare Part D plans have also introduced plans that have restricted network options, under which a patient can elect a plan with a lower copay in exchange for the choice to use a limited number of pharmacies to fill their prescriptions. In order to participate in these restricted networks, retail pharmacies generally have to accept lower reimbursement rates. We expect the usage of these restricted network plans to continue to increase. When third party payors, including the Medicare Part D program and state-sponsored Medicaid agencies, reduce the number of participants and/or reduce their reimbursement rates, sales and margins in the industry could be reduced, and profitability of the industry adversely affected. These possible adverse effects can be partially offset by lowering our product cost, controlling expenses, dispensing more higher margin generics, finding new revenue streams through pharmacy services and dispensing more prescriptions overall.

The PBM industry has been historically concentrated across the three largest PBMs, although niche PBMs and organizations seeking to carve-out specific PBM-related services continue to emerge.  Plan sponsor buyers are seeking new and innovative solutions to manage pharmacy benefit costs.  Certain market segments, such as regional health plans and union Taft-Hartley plans, are reacting to vertical consolidation by the big three PBMs and seeking viable alternative PBM providers.  Plan sponsors with covered populations in geographically concentrated areas, such as hospital/health system clients and small to mid-sized employers, are seeking to leverage geographic opportunities to negotiate more favorable pharmacy pricing and/or leverage community based clinical management resources.

Strategy

In fiscal 2020, we revitalized and redefined our long-term strategy aimed at operating as a fully integrated stand-alone healthcare company with a retail footprint. We have made significant progress on our turnaround efforts during fiscal 2020 toward our overall goals, which provides us with a strong foundation on which to build. Our accomplishments include, but are not limited to, i) reduced our corporate expenses by approximately $55 million on an annualized basis, ii) extended 35% of our calendar 2023 bond maturities to calendar 2025, iii) reduced our debt and improved our leverage ratio, and iv) implemented LEAN initiatives to reduce working capital tied to inventory and improve our pharmacist’s productivity. In addition to the significant milestones previously noted, we have been taking steps to grow membership at our PBM and to stabilize our retail operations. In our Retail Pharmacy segment, we engaged with our pharmaceutical suppliers to ensure that we have low drug acquisition costs for filling prescriptions and engaged with our payor partners to gain better reimbursement rate predictability and access. We continued to expand the clinical role of our pharmacists, including immunizations. In our Pharmacy Services segment, we focused on pharmacy network management and the expansion of our Medicare Part D enrollment.

Following are descriptions of some of our key initiatives for fiscal 2021. Our initiatives are focused on three primary areas, i) to become the dominant mid-market pharmacy benefit manager (PBM), ii) to unlock the value of our pharmacists, and iii) to renew our retail and digital experience. While we have certain goals and targets as described below, a prolonged impact of COVID-19 could result in certain delays in achieving such goals or require us to shift priorities on a temporary basis.

Expanded Healthcare Services—In fiscal 2020, we continued to expand the role of our Rite Aid pharmacists in delivering health and wellness services that go beyond filling prescriptions. We have accelerated these efforts over the past year by focusing on a clinical pharmacy services strategy known as AIM, which stands for Adherence, Immunizations and Medication Therapy Management (“MTM”). A key part of our AIM strategy is operating as efficiently as possible so that our pharmacists have additional time to perform these increasingly valuable clinical services.

Promoting medication adherence—or taking medications on time and as prescribed—is one of the best ways our pharmacists can help drive positive health outcomes for patients while also lowering healthcare costs by avoiding illnesses and hospital visits. In addition to patient counseling, we have a number of tools in place that make it easier for patients to comply with their medication therapy while also providing a better customer experience, including text, phone and email alerts when a prescription is ready for pick-up and our One Trip Refills program, which allows patients to refill all of their monthly maintenance medications in a single trip to the pharmacy.

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A key area of focus has been our immunizations program, which has grown significantly in recent years. In fiscal 2020, our pharmacists administered an all-time company record, based on historical performance of go-forward Rite Aid stores, of 4.1 million immunizations, including more than 2.7 million flu shots. Pharmacists also increased the number of non-flu or ancillary immunizations, which protect against conditions such as shingles, pneumonia and whooping cough, by nearly 60% for a total of more than 1.4 million. Both flu and ancillary immunizations will continue to be a key priority in fiscal 2021.

We continued to make progress in expanding our MTM services, in which pharmacists engage with patients and focus on managing their entire medication regimen to drive positive health outcomes. Our results exceeded both last year and our plan for fiscal 2020. We can also improve productivity by further increasing 90-day prescriptions and leveraging our workload balancing program that enables pharmacists at lower-volume stores and in our central fill facility to remotely support prescription dispensing at higher-volume stores.

For fiscal 2021, we will continue to focus on increasing pharmacy efficiencies, further empowering pharmacists with tools and resources they need to proactively engage with consumers and be whole health advocates. Our 6,400 pharmacists are our greatest resource and are being repositioned as whole health advocates by enhancing their traditional pharmacist role to encourage a holistic approach to health. Pharmacists are among the most trusted healthcare advisors, engaging with customers, on average, upwards of twenty-five times per year, which uniquely positions them as we continue to focus on bringing pharmacists front and center in the store and out from behind the counter, so that they can have more personal interactions and engagement with consumers to support their health and wellness goals. We believe our approach of repositioning our pharmacists will drive more growth by making our greatest resource more accessible to the consumer while allowing our pharmacists to operate at the top of their license. Today's pharmacist is spending about 70% to 80% of their time on non consumer-facing activities. Our goal is to reposition the pharmacist so that they're spending 70% to 80% of their time proactively engaging with consumers in not only the pharmacies, but in the aisles, in wellness rooms via telehealth and even connecting to consumers using our 24/7 chat. As our pharmacists increase their personal interaction with customers, they will enhance our value proposition through customer advisement on traditional therapeutics as well as natural and over-the-counter solutions included in our product offering.

Unique Healthcare Assets—An important part of our retail healthcare strategy continues to be finding ways to integrate our expanded suite of healthcare assets with our base of conveniently located retail pharmacies to deliver a higher level of care and service in our communities. This includes leveraging our store base, RediClinic and Health Dialog. RediClinic is an important component of our efforts to expand Rite Aid’s retail healthcare offering through its clinical services capabilities. As of February 29, 2020, we had 31 RediClinics operating in Rite Aid stores throughout the Philadelphia and New Jersey markets. Including our locations in Texas, we operated a total of 67 RediClinics at the end of fiscal 2020. Rite Aid also owns HealthDialog, a population management and analytics company that provides health care coaching and disease management services to health plans and employers. Health Dialog provides these services using a call center staffed by nurse practitioners and through an on-line platform. The capabilities of EnvisionRxOptions are also integral to our healthcare strategy. EnvisionRxOptions can assist in our efforts to create cost-effective solutions to employers and health plans; and drive growth.

Our Pharmacy Services Segment strategy centers on providing innovative pharmaceutical solutions and quality client service in order to help improve clinical outcomes for our clients’ plan members while assisting our clients and their plan members in better managing overall health care costs. Our clients are primarily employers, insurance companies, unions, government employee groups, regional health plans, Managed Medicaid plans, Medicare plans, other sponsors of health benefit plans, and individuals throughout the United States. Our goal is to produce superior results for our clients and their members/employees by leveraging our expertise in core PBM services, including: plan design offerings and administration, formulary management, Medicare Part D services, mail order, specialty pharmacy services, retail pharmacy network management services, clinical services, disease management services, and other spend management. We also plan to drive leading consumer engagement through digital and omni-channel tools. During fiscal 2020, EnvisionRxOptions made significant progress in continuing to grow its Medicare Part D business, with 39% year-over-year membership growth and a total enrollment of approximately 868,000 as of February 29, 2020.

Front-end Merchandising—Our front-end offering remains a critical part of Rite Aid’s business. We focus on providing outstanding customer experiences, leveraging our valuable brand, developing individualized and unique

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customer relationships and continuing to evolve the products and services we offer. In fiscal 2020, we continued to focus on strengthening our core categories of health, beauty, vitamins and consumables.

In fiscal 2021, we intend to expand or shift to better-for-you products with an emphasis on products that promote health and wellness, are better for the environment and create a point of differentiation and purpose in a way that we haven't in the recent past. Our merchandising refresh will show a product assortment that is relevant with a broad multigenerational consumer base, especially our growth target, clean and holistic skin care, healthy beverages, low in sugar, healthy snack alternatives, fresh refrigerated products, vitamins and supplements, including CBD, aroma therapy, natural bath brands, holistic sleep remedies and natural stress reducers. Rite Aid will continue reducing or eliminating items that aren't relevant to today's consumer and are unproductive products that do not turn enough to warrant placement on our shelves. Rite Aid is deemphasizing categories such as hardware, electronics and home entertainment, which are less relevant as we move from convenience to destination.

In addition, we intend to accelerate our focus on growing own brand sales, as these items offer tremendous value to customers while enhancing our profitability. We see a significant opportunity to drive margin with own brand products with key attributes such as natural, organic, clean, cruelty free, fair trade and chemical free. Rite Aid has set a goal to grow own brand percentage to 23% by the end of fiscal 2021. By investing in our expansion of a new assortment focused on health, beauty and better-for-you products and enhancing our assortment with a focus on healthier product attributes, we are building the foundation for executing our health and wellness strategy.

Omni-Channel Capabilities—In fiscal 2020, we signed an agreement to partner with Adobe to begin our omni-channel transformation. In fiscal 2021, backed by additional capital investments, we will continue these efforts while also aggressively testing new ways to engage with our customers in providing a seamlessly connected customer experience that attracts new customers while increasing trip frequency and basket size for existing customers.

wellness+ Rewards—Since the launch of wellness+ Rewards in April 2010, our loyalty program has provided customers with the opportunity to earn significant discounts and wellness rewards. Beyond exclusive sale pricing and weekly savings for all cardholders, members earn wellness+ Rewards points based on the purchase of certain front-end and pharmacy purchases. As an example, gold members receive a 20% discount off most non-pharmacy purchases for an entire year.

Store Remodels—In fiscal 2020, we continued to strengthen Rite Aid as a healthcare destination by completing additional store remodels. As a result, our total number of remodeled stores reached 1,826 by the end of the fiscal year, which means that 74% of our total store base. We also opened two new stores and relocated five stores.

In fiscal 2021, we plan to introduce 75 Stores of the Future, starting with a set of test pilots followed by a staged market approach. The Store of the Future is a completely remodeled store that allows us to reposition the brand while becoming the destination for enhanced mind, body, and spirit.

Prescription File Purchases—In fiscal 2020, we spent $42.7 million on the purchase of prescription files. We plan to increase our level of prescription file purchases in fiscal 2021 to approximately $50.0 million as they drive additional traffic to our stores and deliver a strong return on investment.

Drug Purchasing and Distribution Efficiencies—In fiscal 2019, after a careful and comprehensive review of our drug purchasing options, we agreed to key terms of an amendment to our drug purchasing agreement with McKesson Corporation (“McKesson”). Under these terms, McKesson will continue to source all of Rite Aid’s branded and generic pharmaceuticals and provide direct-to-store delivery to all of our pharmacies through March of 2029. In fiscal 2021, we expect to continue to benefit from the agreed upon terms of this agreement.

Cost Control—In fiscal 2021, we will continue to pursue opportunities to control our costs in order to help mitigate the impact of declining reimbursement rates and align our business with a new operational structure as the TSA with WBA winds down. In fiscal 2020 we announced a major organizational restructuring that reduced managerial layers and consolidated roles across the organization. As a result of this restructuring, we will achieve annual cost savings of approximately $55.0 million. In fiscal 2021, we will target further cost savings through multiple

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opportunities, including: the consolidation of supporting functions at Rite Aid and EnvisionRxOptions; renewed focus on driving down cost of indirect procurement, including using an outsourced vendor to help us better leverage scale and achieve a better line of sight into market cost; the expansion of our central fill capabilities, which will drive further labor efficiencies, which we can reinvest into freeing up pharmacists' time to engage with our customers; expansion of self-checkout to drive labor efficiencies and improve traffic in high front-end volume stores; rationalization of our call center facilities in both the retail and PBM business; and further reduction of high-cost circular advertising, which will reduce print and distribution costs.

Products and Services

Sales of prescription drugs for our Retail Pharmacy segment represented approximately 67.0%, 66.6% and 65.9% of our total drugstore sales in fiscal years 2020, 2019 and 2018, respectively. In fiscal years 2020, 2019 and 2018, prescription drug sales were $10.4 billion, $10.4 billion and $10.3 billion, respectively. See the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Continuing Operations” and our consolidated financial statements.

We carry a full assortment of non-prescription, or front-end, products. The types and number of front-end products in each store vary, and selections are based on customer needs and preferences and available space. No single front-end product category contributed significantly to our sales during fiscal 2020. Our Retail Pharmacy segment’s principal classes of products in fiscal 2020 were the following:

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We offer a wide variety of products under our private brands to meet the needs of our customers in virtually every non-pharmacy department. We intend to increase our private brand sales and penetration in fiscal 2021 by expanding our product lines, refreshing our package design, along with leveraging our marketing vehicles. We believe that our assortment is differentiated and a compelling value to our customers based on our emphasis on high quality standards and everyday/promotional pricing, while at the same time, improving our gross margin and reducing our working capital investment in inventory.

We have a strategic alliance with GNC under which we have opened over 1,623 GNC stores within Rite Aid stores as of February 29, 2020 and have a contractual commitment to open at least 99 additional GNC stores within Rite Aid stores by December 2021. We believe the GNC stores enhance our wellness offerings and help differentiate us from our competitors. GNC is a leading nationwide retailer of vitamin and mineral supplements, personal care, fitness and other health-related products.

Through our 100% owned subsidiary, EnvisionRxOptions, we offer a broad range of pharmacy-related services. In addition to its transparent and traditional PBM offerings through the EnvisionRx and MedTrak PBMs, EnvisionRx also offers fully integrated mail-order and specialty pharmacy services through EnvisionPharmacies. Through its Envision Insurance Company (“EIC”), EnvisionRx also serves one of the fastest-growing demographics in healthcare: seniors enrolled in Medicare Part D. In addition, EnvisionRx, through its state of the art Laker Software, performs prescription adjudication services for its own claims as well as claims for other PBM’s.

Technology

All of our stores are integrated into a common pharmacy system, which enables our customers to fill or refill prescriptions in any of our stores throughout the country, identifies adverse drug interactions, and enables our pharmacists to fill prescriptions more accurately and efficiently. Our customers may also order prescription refills over the Internet through our website, www.riteaid.com, our mobile app, or over the phone through our telephonic automated

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refill systems for pick up at a Rite Aid store or home delivery from a majority of our stores. We have automated pharmacy dispensing units in high volume stores, which are linked to our pharmacists’ computers that fill and label prescription drug orders. We utilize central fill technology to facilitate the automated picking, packaging, and labeling of prescriptions in a central filling location, which are sent to certain retail stores for delivery to the customer. We also utilize workload sharing technology within our stores, whereby stores within a close proximity can shift the fulfillment of prescriptions to stores with excess capacity. The efficiency of these processes allows our pharmacists to spend more time consulting with and answering our customers’ questions and concerns about their prescription medications and health conditions. Additionally, each of our stores employs point-of-sale technology that supports sales analysis and recognition of customer trends. This same point-of-sale technology facilitates the maintenance of perpetual inventory records which, together with our sales analysis, drives our automated inventory replenishment process.

In connection with our RxEvolution, we will greatly enhance and modernize the technology platforms that power our company, with a relentless focus on customer experience and design.  Our customers will visibly see a prompt and significant shift in how technology is utilized to provide a seamless and connected experience, in store, online and with mobile.  As an important step in our digital journey, we launched our new website, mobile application, and e-commerce solution in the first quarter of fiscal 2021.  This personalized user experience is built on a modern and scalable platform that will serve as the foundation for our digital and omni-channel solutions.

Currently, Envision and MedTrak run as separate PBMs, with unique systems and processes. We are in the process of bringing together the best systems and processes across each organization to create a single, consistent PBM platform focused on providing an optimized member, client, and partner experience.

We are also in the process of relaunching our EnvisionRxOptions mobile app with a focus on getting customers the information and services they need, in a manner that is completely personalized to them. It will not simply facilitate transactions, but rather provide customized, educational content, services and solutions that our customers need to get the most effective low cost prescriptions.

We intend to deliver these digital initiatives during the next two fiscal years. The digital experience initiatives we have outlined with our PBM, our pharmacies, our stores online, and through mobile, will revolutionize how we engage and service customers, members and partners.

Sources and Availability of Raw Materials

Since fiscal 2015, under our pharmaceutical purchasing and delivery agreement (“Purchasing and Delivery Agreement”) with limited exceptions, we purchased all of our branded pharmaceutical products and almost all of our generic (non-brand name) pharmaceutical products from McKesson. If our relationship with McKesson were disrupted, we could temporarily experience difficulties filling prescriptions for branded and generic drugs until we execute a replacement wholesaler agreement or develop and implement self-distribution processes.

We purchase our non-pharmaceutical merchandise from numerous manufacturers and wholesalers. We believe that competitive sources are readily available for substantially all of the non-pharmaceutical merchandise we carry and that the loss of any one supplier would not have a material effect on our business.

We sell private brand and co-branded products that generally are supplied by numerous sources. The GNC branded vitamin and mineral supplement products that we sell in our stores are developed by GNC, and along with our Rite Aid brand vitamin and mineral supplements, are manufactured by GNC.

Customers and Third Party Payors

During fiscal 2020, our stores filled approximately 169.2 million prescriptions and served over one million customers per day. The loss of any one customer would not have a material impact on our results of operations.

In fiscal 2020, substantially all of our pharmacy sales were to customers covered by third party payors (such as insurance companies, prescription benefit management companies, government agencies, private employers or other

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managed care providers) that agree to pay for all or a portion of a customer’s eligible prescription purchases based on negotiated and contracted reimbursement rates. During fiscal 2020, the top five third party payors accounted for approximately 79.9% of our pharmacy sales. The largest third party payor, Caremark, represented 28.8% of our pharmacy sales. The loss of, or a significant change to the prescription drug reimbursement rates by, a major third party payor could decrease our revenue and harm our business.

During fiscal 2020, Medicaid and related managed care Medicaid payors sales were approximately 19.0% of our pharmacy sales, of which the largest single Medicaid payor was approximately 1.4% of our pharmacy sales. During fiscal 2020, approximately 38.4% of our pharmacy sales were to customers covered by Medicare Part D.

Through our Pharmacy Services segment we provide innovative pharmaceutical solutions for our clients which are primarily employers, insurance companies, unions, government employee groups, health plans, Managed Medicaid plans, Medicare plans, and other sponsors of health benefit plans, and individuals throughout the United States.

During fiscal 2020, Medicare Part D payor revenue was approximately 42.8% of our Pharmacy Services Segment revenue, of which the largest single Medicare Part D payer was approximately 27.4% of our Pharmacy Services Segment revenue. During fiscal 2020, approximately 24.9% of our Pharmacy Services Segment revenue was to customers covered by Commercial payors.  During fiscal 2020, approximately 14.9% of our Pharmacy Services Segment revenue was to customers covered by Medicaid payors.

Competition

The retail drugstore and pharmacy benefit management industries are highly competitive. Our retail drugstore operations compete with, among others, retail drugstore chains, independently owned drugstores, supermarkets, mass merchandisers, discount stores, wellness offerings, dollar stores and mail order and internet pharmacies. We compete on the basis of store location, convenience, customer service, product selection, price, and payor access. Our pharmacy benefit management operations compete with other pharmacy benefit managers, such as Caremark and Express Scripts, OptumRx and emerging competitors. We will increasingly compete on the basis of our PBM service offerings flexibility, clinical offerings, network management, Rite Aid as an anchor (in Rite Aid markets), omni-channel consumer engagement, and the strength of client facing teams through both transparent and traditional PBM models.

We believe continued consolidation in the healthcare industry, and the aggressive discounting of generic drugs by supermarkets and mass merchandisers and other PBM service providers will further increase competitive pressures in our industries.

Marketing and Advertising

In fiscal 2020, we advanced efforts to provide a seamlessly connected omni-channel customer experience. We continue to take a holistic approach to managing our media mix while shifting towards a digital-first strategy. Marketing and advertising expense was approximately $142.1 million, which was spent on our weekly circular (print and digital), wellness+ rewards program/customer relationship marketing (CRM), digital/social marketing and focused pharmacy marketing initiatives including television, radio and direct mail. Our marketing and advertising activities are primarily focused on the following:

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Associates

As of February 29, 2020, we had approximately 48,000 Retail Pharmacy segment associates: 13% were pharmacists, 42% were part-time and 36% were represented by unions. Additionally, we have approximately 2,000 Pharmacy Services segment associates. Associate engagement is critical to our success. We annually survey our associates to obtain feedback on various employment-related topics, including job satisfaction and their understanding of our core values and mission. We believe that our relationships with our associates are good.

The number of graduates from U.S. Schools of Pharmacy is largely meeting our workforce demand. However, pharmacist employment opportunities still exist in certain areas.

Research and Development

We do not make significant expenditures for research and development.

Licenses, Trademarks and Patents

The Rite Aid name is our most significant trademark and the most important factor in marketing our stores and private brand products. We hold licenses to sell beer, wine and liquor, cigarettes and lottery tickets. As part of our strategic alliance with GNC, we have a license to operate GNC “stores-within-Rite Aid-stores.” We also hold licenses to operate our pharmacies and our distribution facilities. Through our 100% owned subsidiary EnvisionRx, we hold a license to conduct Medicare Part D business with CMS.

Collectively, these licenses are material to our operations.

Seasonality

We experience moderate seasonal fluctuations in our results of operations concentrated in the first and fourth fiscal quarters as the result of the concentration of the cough, cold and flu season and the holidays. We tailor certain front-end merchandise to capitalize on holidays and seasons. We increase our inventory levels during our third fiscal quarter in anticipation of the seasonal fluctuations described above. Our results of operations in the fourth and first fiscal

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quarters may fluctuate based upon the timing and severity of the cough, cold and flu season, both of which are unpredictable.

Regulation

Our business is subject to federal, state and local laws, regulations, and administrative practices concerning the provision of and payment for health care services, including, without limitation: federal, state and local licensure and registration requirements concerning the operation of pharmacies and the practice of pharmacy; Medicare, Medicaid and other publicly financed health benefit plan regulations prohibiting kickbacks, beneficiary inducement and the submission of false claims; the ACA; regulations of the U.S. Food and Drug Administration, the U.S Consumer Product Safety Commission, the U.S. Federal Trade Commission, and the U.S. Drug Enforcement Administration, including regulations governing the purchase, sale, storing and dispensing of controlled substances and other products, as well as regulations promulgated by state and other federal agencies concerning automated outbound contacts such as phone calls, text messages and emails and the sale, advertisement and promotion of the products we sell, including nicotine products and alcoholic beverages.

Our business is also subject to patient and consumer privacy obligations, including corporate, pharmacy and associate responsibility imposed by the Health Insurance Portability and Accountability Act (“HIPAA”). As a HIPAA covered entity, we are required to implement privacy standards, train our associates on the permitted uses and disclosures of protected health information (“PHI”), provide a notice of privacy practices to our pharmacy customers and permit pharmacy customers to access and amend their records and receive an accounting of disclosures of protected health information. We are also subject to federal and state privacy and data security laws with respect to our receipt, use and disclosure by us of personally identifiable information (“PII”), which laws require us to provide appropriate privacy and security safeguards for such information. In addition we are also subject to the recently enacted California Consumer Privacy Act (“CCPA”) which established numerous consumer rights including rights of access and deletion of consumer’s data upon request. We are also subject to the Payment Card Industry Data Security Standard promulgated by the payment card industry in connection with handling credit card data. This standard contains requirements devised to aid entities that process, store or transmit credit card information to maintain a secure environment.

We are also subject to laws governing our relationship with our associates, including health and safety, minimum wage requirements, overtime, sick leave, working conditions, equal employment opportunity and unionizing efforts.

In addition, in connection with the ownership and operations of our stores, distribution centers and other sites, we are subject to laws and regulations relating to the protection of the environment and health and safety matters, including those governing the management and disposal of hazardous substances and the cleanup of contaminated sites.

Regarding PBM and affiliate operations, we are subject to federal, state, and local regulations, including all rules, guidance, memoranda, and updates published by CMS. This includes the governance set forth by the Medicare Part D program, which makes prescription drug coverage available to eligible Medicare beneficiaries through private insurers. This program regulates all aspects of the provision of Medicare drug coverage, including enrollment, formularies, pharmacy networks, marketing, and claims processing. In addition, various quasi-regulatory organizations and credentialing organizations have issued (or may propose) model standards or other requirements concerning PBMs, specialty pharmacies, or health plans. Examples include the National Association of Boards of Pharmacy, the National Association of Insurance Commissioners (“NAIC”), the National Committee for Quality Assurance (“NCQA”), and the Utilization Review Accreditation Commission (“URAC”), among others.

Corporate Governance and Internet Address

We recognize that good corporate governance is an important means of protecting the interests of our stockholders, associates, customers and the community. We have closely monitored and implemented relevant legislative and regulatory corporate governance reforms, including provisions of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), the rules of the SEC interpreting and implementing Sarbanes-Oxley and the corporate governance listing standards of the NYSE.

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Our corporate governance information and materials, including our Certificate of Incorporation, Bylaws, Corporate Governance Guidelines, the charters of our Audit Committee, Compensation Committee and Nominating and Governance Committee, our Code of Ethics for the Chief Executive Officer and Senior Financial Officers, our Code of Ethics and Business Conduct and our Related Person Transaction Policy are posted on the corporate governance section of our website at www.riteaid.com and are available in print upon request to Rite Aid Corporation, 30 Hunter Lane, Camp Hill, Pennsylvania 17011, Attention: Corporate Secretary. Our Board of Directors will regularly review corporate governance developments and modify these materials and practices as warranted.

Our website also provides information on how to contact us and other items of interest to investors. We make available on our website, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, Extensible Business Reporting Language (“XBRL”) data files of our annual report and quarterly reports, current reports on Form 8-K and all amendments to these reports, as soon as reasonably practicable after we file these reports with, or furnish them to, the SEC. We do not intend for the information contained on our website to be part of this annual report on Form 10-K.

Item 1A.   Risk Factors

Factors Affecting our Future Prospects

Set forth below is a description of certain risk factors which we believe may be relevant to an understanding of us and our business. Security holders are cautioned that these and other factors may affect future performance and cause actual results to differ from those which may be anticipated. Additionally, the impact of COVID-19 could further exacerbate many of the risk described below or described elsewhere herein. See the section entitled “Cautionary Statement Regarding Forward-Looking Statements.”

Risks Related to our Financial Condition

Widespread health developments, including the global COVID-19 pandemic, could materially and adversely affect our business, financial condition and results of operations.

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We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business and the markets in which we have stores or otherwise operate. This pandemic, as well as the reality or fear of any other adverse public health developments, has impacted and could further adversely and materially affect, among other things, our workforce, operations, stores, and supply chain, and the operations of our customers, suppliers and business partners. The local, national and international response to the virus is quickly developing, fluid and uncertain. Responses have included voluntary and in some cases, mandatory quarantines as well as shut downs and other restrictions on travel and commercial, social, medical and other activities, and declarations of emergencies. Such measures have contributed to the sudden increase in the unemployment rate and changes in customer spending. Any such negative impact could result in a material adverse effect on our business, financial conditions and results of operations.

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In response to the spread of COVID-19, we have modified certain of our business practices (including store hours and access, employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences), and we may take further actions as may be required by government authorities or that we determine are in the best interests of our associates, customers, suppliers and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus, and our ability to perform critical functions could be negatively impacted. Further, the initiatives we have implemented to slow and/or reduce the impact of COVID-19 and the related support programs we have put in place for our associates and customers have in some instances, increased our operating expenses and reduced the efficiency of our operations. There can be no assurance that a continued effect of COVID-19 will not impact the measure we have taken to reduce costs.

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We have incurred additional costs to ensure we meet the safety and needs of our associates and customers, including the installation of Plexiglas shields at pharmacy and front-end counters to provide additional protection, providing additional cleaning materials for our stores and other facilities, and focusing on home delivery and digital services. In addition, we have enhanced certain employee benefits and compensation for those on the front-line. We

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expect to continue to incur additional costs, which may be significant, as we continue to implement operational changes in response to this pandemic.

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COVID-19 may also cause supply chain disruption which could result in higher supply chain costs to replenish inventory in our stores and distribution centers. In addition, we may experience shortages in our generic drug supplies due to replenishment delays resulting from COVID-19, which could result in the substitution of generic drugs with brand drugs, which generally have a lower profit margin. Furthermore, we have experienced and may continue to experience restricted stock availability in a number of categories, which may cause is to change our purchasing decisions across many categories, and we cannot assure you whether we these delays or difficulty sourcing certain products will continue, which could negatively impact us.

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Further, our management is focused on mitigating COVID-19, which has required and will continue to require, a large investment of time and resources across the company and may delay other value added services. COVID-19 or any other adverse public health developments could inhibit or delay our ability to execute our strategic initiatives, including, without limitation (i) improving our pharmacy benefit management business, (ii) redefining the role of our pharmacists, including bringing pharmacists front and center and out from behind the counter, (iii) updating our retail and digital experience; (iv) the roll-out of our future store concept, merchandising changes and rebranding efforts; and (v) our plan to increase the sales volume and profitability of our existing brands. Additionally, the impact of COVID-19 on our business may be impacted by the costs of treatment of COVID-19, unemployment, and the related effects on customer insurance coverage caused by governmental actions to mitigate the impact of COVID-19 or other adverse public health developments, including reduced demand for acute medication.

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The extent to which COVID-19 may impact our business depends on numerous evolving factors, which are highly uncertain and cannot be predicted and are outside of our control, including new information which may quickly emerge concerning the severity of the virus, the scope of the outbreak and the actions to contain the virus or treat its impact and the disruption, volatility in the global capital markets, which may increase the cost of capital and adversely impact our access to capital and to what extent normal economic and operating conditions can resume, among others. As a result, the impact on our financial and operating results cannot be reasonably estimated at this time, but the impact could be material. Additionally, the impact of COVID-19 could further exacerbate the impact of the other risk factors contained in this and the other reports the Company files with the SEC.

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We are highly leveraged. Our substantial indebtedness could limit cash flow available for our operations and could adversely affect our ability to service debt or obtain additional financing if necessary.

We had, as of February 29, 2020, approximately $3.1 billion of outstanding indebtedness and stockholders’ equity of $674.5 million. We also had additional borrowing capacity under our $2.7 billion senior secured asset-based revolving credit facility (the “Senior Secured Revolving Credit Facility” or “revolver”) of $1,940.0 million, net of outstanding letters of credit of approximately $110.0 million. Subsequent to February 29, 2020, we drew additional amounts under our revolver to ensure that we have ample cash on hand. We continue to have remaining availability under our revolver.

Our high level of indebtedness will continue to restrict our operations. Among other things, our indebtedness will:

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Our ability to meet our cash requirements, including our debt service obligations, is dependent upon our ability to maintain our operating performance, which will be subject to general economic and competitive conditions and to financial, business and other factors, many of which are beyond our control. We cannot provide assurance that our business will generate sufficient cash flow from operations to fund our cash requirements and debt service obligations.

We believe we have adequate sources of liquidity to meet our anticipated requirements for working capital, debt service and capital expenditures through fiscal 2021 and have no significant debt maturities prior to April 2023. However, if our operating results, cash flow or capital resources prove inadequate, or if interest rates rise significantly, we could face liquidity constraints. Additionally, we improved our leverage and liquidity position this past year by selling our rights in our calendar 2019 Medicare Part D final reconciliation payment. There can be no assurance that we will enter into a similar transaction for our calendar 2020 payment, or that if we do so, that the terms of such transaction will differ, and such differences could be material. If we are unable to service our debt or experience a significant reduction in our liquidity, we could be forced to reduce or delay planned capital expenditures and other initiatives, sell assets, restructure or refinance our debt or seek additional equity capital, or need to change certain elements of our strategy, and we may be unable to take any of these actions on satisfactory terms or in a timely manner. Any of these actions may not be sufficient to allow us to service our debt obligations or may have an adverse impact on our business. Additionally, the impact of COVID-19 on the financial markets and the economy may make it more difficult to consummate any such transaction, or result in terms that are less favorable to us. Our existing debt agreements limit our ability to take certain of these actions. Our failure to generate sufficient operating cash flow to pay our debts or refinance our indebtedness could have a material adverse effect on us.

Borrowings under our senior secured credit facilities are based upon variable rates of interest, which could result in higher expense in the event of increases in interest rates.

Borrowings under our senior secured credit agreement, dated as of December 20, 2018 (as amended by the First Amendment to Credit Agreement, dated as of January 6, 2020, the “Credit Agreement”), consisting of a $2,700.0 million senior secured asset-based revolving credit facility (“Senior Secured Revolving Credit Facility”) and a $450.0 million “first-in, last out” senior secured term loan facility (“Senior Secured Term Loan”) (collectively, the “Existing Facilities”) bear interest at a rate that varies depending on the London Interbank Offered Rate (“LIBOR”). If LIBOR rises, the interest rates on borrowings under our Existing Facilities will increase. Therefore an increase in LIBOR, even after giving effect to our hedge activities, would increase our interest payment obligations under those borrowings and have a negative effect on our cash flow and financial condition.

Further, the U.K. Financial Conduct Authority, which regulates LIBOR, has announced that it intends to stop encouraging or requiring banks to submit LIBOR rates after 2021 and it is unclear if LIBOR will cease to exist or if new methods of calculating LIBOR will evolve. If LIBOR ceases to exist or if the methods of calculating LIBOR change from their current form, interest rates on future indebtedness may be adversely affected or we may need to renegotiate the terms of our Existing Facilities to replace LIBOR with the new standard that is established, if any, or to otherwise agree with the trustees or agents on a new means of calculating interest.

The covenants in the instruments that govern our current indebtedness may limit our operating and financial flexibility.

The covenants in the instruments that govern our current indebtedness limit our ability to:

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The Credit Agreement has a financial covenant that requires us to maintain a minimum fixed charge coverage ratio of 1.00 to 1.00 (i) on any date on which availability under the Senior Secured Revolving Credit Facility is less than $200.0 million, or (ii) on the third consecutive business day on which availability under the Senior Secured Revolving Credit Facility is less than $250.0 million and, in each case, ending on and excluding the first day thereafter, if any, which is the 30^th consecutive calendar day on which availability under the revolver is equal to or greater than $250 million. As of February 29, 2020, we had availability under our revolver of approximately $1,940.0 million, our fixed charge coverage ratio was greater than 1.00 to 1.00, and therefore, we were in compliance with the Credit Agreement’s financial covenant. The Credit Agreement also limits our ability to maintain cash, without repaying a portion of our outstanding borrowings under the Senior Secured Revolving Credit Facility, above a specified amount. For additional details, see the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Continuing Operations—Future Liquidity”.

Risks Related to our Operations

We need to improve our operations in order to improve our financial condition, but our operations will not improve if we cannot effectively implement our business strategy or if our strategy is negatively affected by worsening economic conditions.

We have not yet achieved the sales productivity level of our major competitors. We believe that improving the sales of existing stores is important to improving profitability and operating cash flow. If we are not successful in implementing our strategies, including our efforts to increase sales and further reduce costs, or if our strategies are not effective, we may not be able to improve our operations. A prolonged impact of COVID-19 may also make it more difficult to implement our strategies or cause a delay in such implementation. In addition, if we are unable to meet our obligations under the TSA, we would be exposed to significant financial penalties. Furthermore, any adverse change or weakness in general economic conditions or major industries can adversely affect drug benefit plans and reduce our pharmacy sales. Adverse changes in general economic conditions, including those resulting from COVID-19, such as increased unemployment, could affect consumer buying practices and consequently reduce our sales of front-end products, and cause a decrease in our profitability. Failure to improve operations or weakness in major industries or general economic conditions would adversely affect our results of operations, financial condition and cash flows and our ability to make principal or interest payments on our debt.

We purchase all of our brand and generic drugs from a single wholesaler. A disruption in this relationship may have a negative effect on us.

We purchase all of our brand drugs and, with limited exceptions, all of our generic drugs from a single wholesaler, McKesson. Because McKesson acts as a wholesaler for drugs purchased from manufacturers worldwide, any disruption in the supply of a given drug, including disruptions related to COVID-19b, including supply shortages of key ingredients, or regulatory actions by domestic or foreign governmental agencies, or specific actions taken by drug manufacturers, could adversely impact McKesson’s ability to fulfill our demands, which could adversely affect us. Pharmacy sales represented approximately 67.0% of our total drugstore sales during fiscal 2020. While we believe that

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alternative sources of supply for most generic and brand name pharmaceuticals are readily available, a significant disruption in our relationship with McKesson could result in disruptions to our business until we execute a replacement wholesaler agreement or develop and implement self-distribution processes. We believe we could obtain qualified alternative sources, including through self-distribution, for substantially all of the prescription drugs we sell on an acceptable basis, and accordingly that the impact of any disruption would be temporary, although the impact of COVID-19 could make it more challenging to find a suitable replacement on our then desired timeline. On December 19, 2018, we and McKesson entered into a binding letter of intent that will continue our pharmaceutical sourcing and distribution partnership for an additional ten years. Under the terms, McKesson will continue providing us with sourcing and direct-to-store delivery for brand and generic pharmaceutical products through March 2029.

Recent significant changes to our executive leadership team and any future loss of members of such team, and the resulting management transitions could materially adversely affect our financial performance.

Our success depends to a significant degree on the continued contributions of members of our senior management and other key operations, merchandising and administrative personnel, and the loss of any such persons could have a material effect on our business. We have recently experienced significant changes to our executive leadership team. In 2019, we named several new key leaders, including a new President and Chief Executive Officer, Executive Vice President and Chief Financial Officer, Chief Operating Officer, Executive Vice President and Human Resources Officer and Executive Vice President and Chief Pharmacy Officer, and in 2020, a new Executive Vice President of Retail. These types of management changes have the potential to disrupt our operations due to the operational and administrative inefficiencies, added costs, increased likelihood of turnover, and the loss of personnel with vital institutional knowledge, experience and expertise, which could result in significant disruptions to our operations. In addition, we must successfully integrate the new executive leadership team members within our organization in order to achieve our operating objectives, and changes in key leadership positions may temporarily affect our financial performance and results of operations as new leadership becomes familiar with our business. We are currently engaging in these activities primarily on a work from home basis as a result of COVID-19.

A significant disruption in our computer systems or a cyber security breach could adversely affect our operations.

We rely extensively on our computer systems, including those used by EnvisionRx, RediClinic, and Health Dialog, to manage our ordering, pricing, point-of-sale, inventory replenishment and other processes. Our systems have been subject to attack by perpetrators of random or targeted malicious technology-related events, such as cyberattacks, computer viruses, worms, bot attacks or other destructive or disruptive software and attempts to misappropriate customer information, including credit card information. These sorts of attacks could subject our systems to damage or interruption from power outages, computer and telecommunications failures, computer viruses, cyber security breaches, vandalism, coordinated cyber security attacks, severe weather conditions, catastrophic events and human error, and our disaster recovery planning cannot account for all eventualities. Although we deploy an information security program designed to protect confidential information against data security breaches through a multi-layered approach to address information security threats and vulnerabilities, including ones from a cyber security standpoint, a compromise of our information security controls or of those businesses with whom we interact, which results in confidential information being accessed, obtained, damaged or used by unauthorized or improper persons, could harm our reputation and expose us to regulatory actions and claims from customers and clients, financial institutions, payment card associations and other persons, any of which could adversely affect our business, financial position and results of operations. Moreover, a data security breach could require that we expend significant resources related to our information systems and infrastructure, and could distract management and other key personnel from performing their primary operational duties. We could also be adversely impacted by any significant disruptions in the systems of third parties we interact with, including key payors and vendors. If our systems are damaged, fail to function properly or otherwise become unavailable, we may incur substantial costs to repair or replace them, and may experience loss of critical data and interruptions or delays in our ability to perform critical functions, which could adversely affect our business and results of operations. Any compromise or breach of our data security, whether external or internal, or misuse of customer, associate, supplier or our data could also result in a violation of applicable privacy, information security, and other laws, significant legal and financial exposure, fines or lawsuits, damage to our reputation, loss or misuse of the information and a loss of confidence in our security measures, which could harm our business. Although we maintain cyber security insurance, we cannot assure you that the coverage limits under our insurance program will be adequate to protect us against future claims. In addition, as the regulatory environment related to information security, data collection and use, and privacy becomes increasingly rigorous, with new and constantly changing requirements applicable to our business,

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compliance with those requirements could also result in additional costs. Additionally, we are in the process of changing our omni-channel distribution. There can be no assurance that we will be able to implement this technology on its intended timeline or that it will achieve its intended benefits.

We are subject to payment-related risks that could increase our operating costs, expose us to fraud or theft, subject us to potential liability and potentially disrupt our business.

We accept payments using a variety of methods, including cash, checks, credit and debit cards, gift cards and mobile payment technology, and we may accept new forms of payment over time. Acceptance of these payment options subjects us to rules, regulations, contractual obligations and compliance requirements including payment network rules and operating guidelines, data security standards and certification requirements, and rules governing electronic funds transfers. These requirements may change over time or be reinterpreted, making compliance more difficult or costly. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs. We rely on third parties to provide payment processing services, including the processing of credit cards, debit cards, and other forms of electronic payment. If these companies become unable to provide these services to us, or if their systems are compromised, it could potentially disrupt our business. The payment methods that we offer also subject us to potential fraud and theft by criminals, who are becoming increasingly more sophisticated, seeking to obtain unauthorized access to or exploit weaknesses that may exist in the payment systems. If we fail to comply with applicable rules or requirements for the payment methods we accept, or if payment-related data is compromised due to a breach or misuse of data, we may be liable for costs incurred by payment card issuing banks and other third parties or subject to fines and higher transaction fees, or our ability to accept or facilitate certain types of payments may be impaired. In addition, our customers could lose confidence in certain payment types, which may result in a shift to other payment types or potential changes to our payment systems that may result in higher costs. As a result, our business and operating results could be adversely affected.

If we fail to protect the security of personal information about our customers and associates, we could be subject to costly government enforcement actions or private litigation.

Through our sales and marketing activities, we collect and store certain personal information that our customers provide to purchase products or services, enroll in promotional programs, register on our web site, or otherwise communicate and interact with us. We also gather and retain information about our associates in the normal course of business. We may share information about such persons with vendors that assist with certain aspects of our business. Despite instituted safeguards for the protection of such information, security could be compromised and confidential customer or business information misappropriated, for which we have paid related penalties in the past. Loss of customer or business information could disrupt our operations, damage our reputation, and expose us to claims from customers, financial institutions, payment card associations and other persons, any of which could have an adverse effect on our business, financial condition and results of operations. In addition, compliance with more rigorous privacy and information security laws and standards may result in significant expense due to increased investment in technology and the development of new operational processes.

Risks Related to the Retail Pharmacy and PBM Industries in which we Operate

The markets in which we operate are very competitive and further increases in competition could adversely affect us.

We face intense competition with local, regional and national companies, including other drugstore chains, independently owned drugstores, supermarkets, mass merchandisers, dollar stores and internet pharmacies. Competition from on-line retailers has significantly increased during the past few years. Some of our competitors have or may merge with or acquire pharmaceutical services companies, PBMs, health insurance companies, mail order facilities or enter into strategic partnership alliances with wholesalers or PBMs, which may further increase competition. We may not be able to effectively compete against them because our existing or potential competitors may have financial and other resources that are superior to ours. We also face competition from other PBMs, including large, national PBMs, PBMs owned by national health plans and smaller standalone PBMs. Certain of these competitors entered into the PBM industry before us, and there is no assurance that we will successfully compete with entities with more established PBM businesses. Further, we may be at a competitive disadvantage because we are more highly leveraged than our competitors. The

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ability of our stores to achieve profitability depends on their ability to achieve a critical mass of loyal, repeat customers. We cannot assure you that we will be able to continue to effectively compete in our markets or increase our sales volume in response to further increased competition, or that any of our competitors are not in a better position to absorb the impact of COVID-19.

Consolidation in the healthcare industry could adversely affect our business, financial condition and results of operations.

Many organizations in the healthcare industry, including PBMs, have consolidated to create larger healthcare enterprises with greater market power, which has contributed to continued pricing pressures. If this consolidation trend continues, it could give the resulting enterprises even greater bargaining power, which may lead to further pressure on the prices for our products and services and/or reduce our access to customers. If these pressures result in reductions in our prices and/or reduce our access to customers, our business will become less profitable unless we are able to achieve corresponding reductions in costs or develop profitable new revenue streams. We expect that market demand, government regulation, third-party reimbursement policies, government contracting requirements, and societal pressures will continue to cause the healthcare industry to evolve, potentially resulting in further business consolidations and alliances among the industry participants we engage with, which may adversely impact our business, financial condition and results of operations. In addition, our new strategy also includes selective acquisition opportunities and we cannot assure you that we will be able to consummate any such transactions on commercially reasonable terms, if at all.

The availability of pharmacy drugs is subject to governmental regulations.

The continued conversion of various prescription drugs, including potential conversions of a number of popular medications, to over-the-counter medications may reduce our pharmacy sales and customers may seek to purchase such medications at non-pharmacy stores. Also, if the rate at which new prescription drugs become available slows or if new prescription drugs that are introduced into the market fail to achieve popularity, our pharmacy sales may be adversely affected. Additionally, we cannot assure you that the historic approval time for new drugs will not be impacted by the FDA’s priorities in response to COVID-19. The withdrawal of certain drugs from the market or concerns about the safety or effectiveness of certain drugs or negative publicity surrounding certain categories of drugs may also have a negative effect on our pharmacy sales or may cause shifts in our pharmacy or front-end product mix.

Changes in third party reimbursement levels for prescription drugs and changes in industry pricing benchmarks could reduce our margins and have a material adverse effect on our business.

Sales of prescription drugs reimbursed by third party payors, including the Medicare Part D plans and state sponsored Medicaid and related managed care Medicaid agencies, represented substantially all of our pharmacy sales in our Retail Pharmacy segment in fiscal 2020.

The continued efforts of the Federal government, health maintenance organizations, managed care organizations, PBM companies, other State and local government entities, and other third-party payors to reduce prescription drug costs and pharmacy reimbursement rates, as well as litigation relating to how drugs are priced, may impact our profitability. These efforts may be increased as a result of increased deficits or sudden losses as a result of the impact of COVID-19. In addition, some of these entities may offer pricing terms that we may not be willing to accept or otherwise restrict or exclude our participation in their networks of pharmacy providers. Any significant loss of third-party business could have a material adverse effect on our business and results of operations. In particular, there has been a growth in the number of preferred Medicare Part D networks, many of which we are excluded from participating in. Decreased reimbursement payments to retail and mail order pharmacies for brand and generic drugs has caused a reduction in our profit. Historically, the effect of this trend has been mitigated by our efforts to negotiate reduced acquisition costs of generic pharmaceuticals with manufacturers. Additionally, it has resulted in us providing contractual financial performance guarantees to certain of our PBM clients with respect to minimum drug price discounts for our retail pharmacy network and mail order pharmacy. Any inability to achieve guaranteed minimum drug price discounts provided to our PBM clients could have an adverse effect on our results of operations.

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In addition, it is possible that the pharmaceutical industry or regulators may evaluate and/or develop an alternative pricing reference to replace Average Wholesale Price (“AWP”), which is the pricing reference used for many of our PBM client contracts, pharmaceutical manufacturer rebate agreements, retail pharmacy network contracts, specialty payor agreements and other contracts with third party payors in connection with the reimbursement of drug payments. Future changes to the use of AWP or to other published pricing benchmarks used to establish pharmaceutical pricing, including changes in the basis for calculating reimbursement by federal and state health programs and/or other payors, could impact the reimbursement we receive from Medicare programs and Medicaid health plans, the reimbursement we receive from PBM clients and other payors and/or our ability to negotiate rebates with pharmaceutical manufacturers, acquisition discounts with wholesalers and retail discounts with network pharmacies. The effect of these possible changes on our business cannot be predicted at this time.

During the past several years, the United States health care industry has been subject to an increase in governmental regulation, licensing and audits at both the federal and state levels. Efforts to control health care costs, including prescription drug costs, are continuing at the federal and state government levels. Changing political, economic and regulatory influences may significantly affect health care financing and reimbursement practices. A change in the composition of pharmacy prescription volume toward programs offering lower reimbursement rates could negatively impact our profitability. Additionally, significant changes in legislation, regulation and government policy could significantly impact our business and the health care and retail industries. While it is not possible to predict whether and when any such changes will occur or what form any such changes may take, specific proposals discussed during and after the election that could have a material adverse effect on our business include, but are not limited to, the repeal of all or part of the ACA and other significant changes to health care system legislation as well as changes with respect to tax and trade policies, tariffs and other government regulations affecting trade between the United States and other countries.

The repeal of all or part of the ACA, significant changes to Medicaid funding or even significant destabilization of the Health Insurance Marketplaces could impact the number of Americans with health insurance and, consequently, prescription drug coverage. Even if the ACA remains, significant provisions of the ACA have not yet been finalized (e.g., nondiscrimination in health programs and activities, excise tax on high-cost employer-sponsored health coverage) and it is uncertain whether or in what form these provisions will be finalized. We cannot predict the effect, if any, a repeal of all or part of the ACA, the implementation or failure to implement the outstanding provisions of the ACA, or the enactment of new health care system legislation to replace current legislation may have on our retail pharmacy, LTC pharmacy and pharmacy services operations.

A substantial portion of our pharmacy revenue is currently generated from a limited number of third party payors, and, if there is a loss of, or significant change to prescription drug reimbursement rates by, a major third party payor, our revenue will decrease and our business and prospects could be adversely impacted.

A substantial portion of our pharmacy revenue is currently generated from a limited number of third party payors. While we are not limited in the number of third party payors with which we can do business and results may vary over time, our top five third party payors accounted for 79.9%, 80.4% and 78.6% of our pharmacy revenue during fiscal 2020, 2019 and 2018, respectively. The largest third party payor, Caremark, represented 28.8%, 28.3% and 27.2% of pharmacy sales during fiscal 2020, 2019 and 2018, respectively. We expect that a limited number of third party payors will continue to account for a significant percentage of our pharmacy revenue, and the loss of all or a portion of, or a significant change to customer access or prescription drug reimbursement rates by, a major third party payor could decrease our revenue and harm our business.

A substantial portion of our Pharmacy Services segment revenue is currently generated from a limited number of customers, and, if there is a loss of a major customer, our revenue will decrease and our business and prospects could be adversely impacted.

A substantial portion of our Pharmacy Services segment revenue is currently generated from a limited number of customers. While we are not limited in the number of customers with which we can do business and results may vary over time, our top five customers accounted for 53.2%, 49.3% and 40.7% of our Pharmacy Services segment revenue during fiscal 2020, 2019 and 2018, respectively. The largest payor, CMS, represented 27.4%, 23.0% and 17.3% of

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Pharmacy Services segment revenue during fiscal 2020, 2019 and 2018, respectively. We expect that a limited number of customers will continue to account for a significant percentage of our Pharmacy Services segment revenue, and the loss of all or a portion of a major customer could decrease our revenue and harm our business.

We are exposed to risks related to litigation and other legal proceedings.

We operate in a highly regulated and litigious environment. We are involved in legal proceedings, including litigation, arbitration and other claims, and investigations, inspections, audits, claims, inquiries and similar actions by pharmacy, healthcare, tax and other governmental authorities. Legal proceedings, in general, and securities, derivative action and class action and multi-district litigation, in particular, can be expensive and disruptive. Additionally, defending against these lawsuits and proceedings may involve significant expense and diversion of management’s attention and resources. Some of these suits may purport or may be determined to be class actions and/or involve parties seeking large and/or indeterminate amounts, including punitive or exemplary damages, and may remain unresolved for several years. For example, we are a defendant in numerous litigation proceedings relating to opioids.

We cannot predict with certainty the outcomes of these legal proceedings and other contingencies, and the costs incurred in litigation can be substantial, regardless of the outcome. As a result, we could from time to time incur judgments, enter into settlements or revise our expectations regarding the outcome of certain matters, and such developments could harm our reputation and have a material adverse effect on our results of operations in the period in which the amounts are accrued and/or our cash flows in the period in which the amounts are paid.

We are subject to governmental regulations, procedures and requirements; our noncompliance or a significant regulatory change could adversely affect our business, the results of our operations or our financial condition.

Our business is subject to numerous federal, state and local laws and regulations. Changes in these regulations may require extensive system and operating changes that may be difficult to implement. Untimely compliance or noncompliance with applicable regulations could result in the imposition of civil and criminal penalties that could adversely affect the continued operation of our business, including: (i) suspension of payments from government programs; (ii) loss of required government certifications; (iii) loss of authorizations or changes in requirements for participating in, or exclusion from government reimbursement programs, such as the Medicare and Medicaid programs; (iv) loss of licenses; or (v) significant fines or monetary penalties. The regulations to which we are subject include, but are not limited to, federal, state and local registration and regulation of pharmacies; dispensing and sale of controlled substances and products containing pseudoephedrine; applicable Medicare and Medicaid Regulations; the HIPAA; regulations relating to the protection of the environment and health and safety matters, including those governing exposure to and the management and disposal of hazardous substances; regulations enforced by the U. S. Federal Trade Commission, the U. S. Department of Health and Human Services and the Drug Enforcement Administration as well as state regulatory authorities, governing the sale, advertisement and promotion of products we sell; anti-kickback laws; false claims laws and federal and state laws governing the practice of the profession of pharmacy. We are also governed by federal and state laws of general applicability, including laws regulating matters of wage and hour laws, working conditions, health and safety and equal employment opportunity.

Additionally, Congress passed the ACA in 2010, which resulted in significant structural changes to the health insurance system. However, in December 2017, the individual mandate was repealed. If the individual mandate repeal or a rollback of other aspects of the ACA, such as Medicaid expansion, actually leads to a significant reduction in demand for the healthcare services, the demand for our pharmacy services businesses may decline and could have a material impact on our business. Therefore, we cannot predict what effect, if any, the repeal of all or part of the ACA or any subsequent replacement legislation may have on our retail pharmacy and pharmacy services businesses.

Certain risks are inherent in providing pharmacy services; our insurance may not be adequate to cover any claims against us.

Pharmacies are exposed to risks inherent in the packaging and distribution of pharmaceuticals and other healthcare products, such as with respect to improper filling of prescriptions, labeling of prescriptions, adequacy of warnings, unintentional distribution of counterfeit drugs and expiration of drugs. In addition, federal and state laws that

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require our pharmacists to offer counseling, without additional charge, to customers about medication, dosage, delivery systems, common side effects and other information the pharmacists deem significant can impact our business. Our pharmacists may also have a duty to warn customers regarding any potential negative effects of a prescription drug if the warning could reduce or negate these effects. Although we maintain professional liability and errors and omissions liability insurance, from time to time, claims result in the payment of significant amounts, some portions of which are not funded by insurance. We cannot assure you that the coverage limits under our insurance programs will be adequate to protect us against future claims, or that we will be able to maintain this insurance on acceptable terms in the future. Our results of operations, financial condition or cash flows may be adversely affected if in the future our insurance coverage proves to be inadequate or unavailable or there is an increase in liability for which we self-insure or we suffer reputational harm as a result of an error or omission.

We may be subject to significant liability should the consumption of any of our products cause injury, illness or death.

Products that we sell could become subject to contamination, product tampering, mislabeling or other damage requiring us to recall our products. In addition, errors in the dispensing and packaging of pharmaceuticals could lead to serious injury or death. Product liability claims may be asserted against us with respect to any of the products or pharmaceuticals we sell and we may be obligated to recall our products. A product liability judgment against us or a product recall could have a material, adverse effect on our business, financial condition or results of operations.

Risks of declining gross margins in the PBM industry could adversely impact our profitability.

The PBM industry has been experiencing margin pressure as a result of competitive pressures and increased client demands for lower prices, performance guarantees, enhanced service offerings and higher rebate yields. With respect to rebate yields, we maintain contractual relationships with brand name pharmaceutical manufacturers that provide for rebates on drugs dispensed by pharmacies in our retail network and by our mail order pharmacy (all or a portion of which may be passed on to clients). Manufacturer rebates often depend on a PBM’s ability to meet contractual market share or other requirements, including in some cases the placement of a manufacturer’s products on the PBM’s formularies. If we lose our relationship with one or more pharmaceutical manufacturers, or if the rebates provided by pharmaceutical manufacturers decline, our business and financial results could be adversely affected. Further, changes in existing federal or state laws or regulations or the adoption of new laws or regulations relating to patent term extensions, rebate arrangements with pharmaceutical manufacturers, or to formulary management or other PBM services could also reduce the manufacturer rebates we receive.

We also maintain contractual relationships with participating pharmacies that provide for discounts on retail transactions for generic drugs and brand drugs dispensed by pharmacies in our retail network. If we lose our relationship with one or more of the larger pharmacies in our network, or if the retail discounts provided by network pharmacies decline, our business and financial results could be adversely affected. In addition, changes in federal or state laws or regulations or the adoption of new laws or regulations relating to claims processing and billing, including our ability to collect network administration and technology fees, could adversely impact our profitability.

The possibility of PBM client loss and/or the failure to win new PBM business could impact our ability to secure new business.

Our PBM business generates net revenues primarily by contracting with clients to provide prescription drugs and related health care services to plan members. PBM client contracts often have terms of approximately three years in duration, so approximately one third of a PBM’s client base typically is subject to renewal each year. In some cases, however, PBM clients may negotiate a shorter or longer contract term or may require early or periodic renegotiation of pricing prior to expiration of a contract. In addition, the reputational impact of a service-related incident could negatively affect our ability to grow and retain our client base. Further, the PBM industry has been impacted by consolidation activity that may continue in the future. In the event one or more of our PBM clients is acquired by an entity that obtains PBM services from a competitor, we may be unable to retain all or a portion of our clients’ business. Because of the competitive nature of the business, we continually face challenges in competing for new PBM business and retaining or renewing our existing PBM business. There can be no assurance that we will be able to win new business or secure

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renewal business on terms as favorable to us as the present terms. These circumstances, either individually or in the aggregate, could result in an adverse effect on our business and financial results.

Regulatory or business changes relating to our participation in Medicare Part D, the loss of Medicare Part D eligible members, or our failure to otherwise execute on our strategies related to Medicare Part D, may adversely impact our business and our financial results.

One of our subsidiaries, EIC, is an insurer domiciled in Ohio (with Ohio as its primary insurance regulator) and licensed in all 50 states, and is approved to function as a Medicare Part D Prescription Drug Plan (“PDP”) plan sponsor for purposes of individual insurance products offered to Medicare-eligible beneficiaries and for purposes of making employer/union-only group waiver plans available for eligible clients. We also provide other products and services in support of our clients’ Medicare Part D plans or the Federal Retiree Drug Subsidy program. We are working to minimize the working capital tied to the business by reducing and/or selling the receivable as we did for calendar 2019, however there are no assurances that we can reduce or sell the receivable for calendar 2020. There are many uncertainties about the financial and regulatory risks of participating in the Medicare Part D program and we can give no assurance that these risks will not materially adversely impact our business and financial results in future periods.

EIC is subject to various contractual and regulatory compliance requirements associated with participating in Medicare Part D. EIC is subject to certain aspects of state laws regulating the business of insurance in all jurisdictions in which EIC offers its PDP plans. As a PDP sponsor, EIC is required to comply with Federal Medicare Part D laws and regulations applicable to PDP sponsors. Additionally, the receipt of Federal funds made available through the Part D program by us, our affiliates, or clients is subject to compliance with the Part D regulations and established laws and regulations governing the Federal government’s payment for healthcare goods and services, including the Anti-Kickback Statute and the False Claims Act. Similar to our requirements with other clients, our policies and practices associated with operating our PDP are subject to audit. If material contractual or regulatory non-compliance was to be identified, monetary penalties and/or applicable sanctions, including suspension of enrollment and marketing or debarment from participation in Medicare programs, could be imposed. Further, the adoption or promulgation of new or more complex regulatory requirements associated with Medicare may require us to incur significant costs which could adversely impact our business and our financial results.

In addition, due to the availability of Medicare Part D, some of our employer clients may decide to stop providing pharmacy benefit coverage to retirees, instead allowing the retirees to choose their own Part D plans, which could cause a reduction in demand for our Medicare Part D group insurance products. Extensive competition among Medicare Part D plans could also result in the loss of Medicare Part D members by our managed care customers, which would also result in a decline in our membership base. For example, if we were to lose our current Star rating with the CMS, fewer customers may select our plans, which could have an adverse effect on our financial results. Like many aspects of our business, the administration of the Medicare Part D program is complex. Any failure to execute the provisions of the Medicare Part D program may have an adverse effect on our financial position, results of operations or cash flows. As discussed above, in March 2010, comprehensive healthcare reform was enacted into federal law through the passage of the ACA. Additionally, as described above, the ACA contains various changes to the Part D program and could have a financial impact on our PDP and our clients’ demand for our other Part D products and services. Further, it is unclear what effect, if any, the repeal of all or part of the ACA may have on the Part D program.

Failure to timely identify or effectively respond to changing consumer preferences and spending patterns, an inability to expand the products being purchased by our clients and customers, or the failure or inability to obtain or offer particular categories of products could negatively affect our relationship with our clients and customers and the demand for our products and services.

The success of our business depends in part on customer loyalty, superior customer service and our ability to persuade customers to purchase products in additional categories and our private label brands. Failure to timely identify or effectively respond to changing consumer preferences and spending patterns, an inability to expand the products being purchased by our clients and customers, or the failure or inability to obtain or offer particular categories of products could negatively affect our relationship with our clients and customers and the demand for our products and services.

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We offer our customers private label brand products that are available exclusively at our stores and through our online retail site. The sale of private label products subjects us to unique risks including potential product liability risks and mandatory or voluntary product recalls, our ability to successfully protect our intellectual property rights and the rights of applicable third parties, and other risks generally encountered by entities that source, market and sell private-label products. Any failure to adequately address some or all of these risks could have an adverse effect on our business, results of operations and financial condition. Additionally, an increase in the sales of our private label brands may negatively affect our sales of national-branded products which consequently, could adversely impact certain of our supplier relationships. Our ability to locate qualified, economically stable suppliers who satisfy our requirements, and to acquire sufficient products in a timely and effective manner, is critical to ensuring, among other things, that customer confidence is not diminished. Any failure to develop sourcing relationships with a broad and deep supplier base could adversely affect our financial performance and erode customer loyalty.

Moreover, customer expectations and new technology advances from our competitors have required that our business evolve so that we are able to interface with our retail customers not only face-to-face in our stores but also online and via mobile and social media. Our customers are using computers, tablets, mobile phones and other electronic devices to shop in our stores and online, as well as to provide public reactions concerning each facet of our operation. If we fail to keep pace with dynamic customer expectations and new technology developments, our ability to compete and maintain customer loyalty could be adversely affected.

Finally, EnvisionRx’s specialty pharmacy business focuses on complex and high-cost medications that serve a relatively limited universe of patients. As a result, the future growth of our specialty pharmacy business is dependent largely upon expanding our base of drugs or penetration in certain treatment categories. Any contraction of our base of patients or reduction in demand for the prescriptions we currently dispense could have an adverse effect on our business, financial condition and results of operations.

Item 1B.   Unresolved SEC Staff Comments

None

Item 2.    Properties

As of February 29, 2020, we operated 2,461 retail drugstores. The average selling square feet of each store in our chain is approximately 10,500 square feet. The average total square feet of each store in our chain is approximately 13,600. The stores in the eastern part of the U.S. average 8,800 selling square feet per store (11,200 average total square feet per store). The stores in the western part of the U.S. average 14,300 selling square feet per store (19,000 average total square feet per store).

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The table below identifies the number of stores by state as of February 29, 2020:

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Our stores have the following attributes at February 29, 2020:

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We lease 2,331 of our operating drugstore facilities under non-cancelable leases, many of which have original terms of 10 to 22 years. In addition to minimum rental payments, which are set at competitive market rates, certain leases require additional payments based on sales volume, as well as reimbursement for taxes, maintenance and insurance. Most of our leases contain renewal options, some of which involve rent increases. The remaining 130 drugstore facilities are owned.

We own our corporate headquarters, which is located in a 213,000 square foot building at 30 Hunter Lane, Camp Hill, Pennsylvania 17011. We lease 279,000 square feet of space in various buildings near Harrisburg, Pennsylvania for document warehousing use and additional administrative personnel. We own additional buildings near Harrisburg, Pennsylvania which total 100,000 square feet and house our model store and additional administrative personnel.

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We operate the following distribution centers and satellite distribution locations, which we own or lease as indicated(1):

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The original terms of the leases for our distribution centers and satellite distribution locations range from 5 to 20 years. In addition to minimum rental payments, certain distribution centers require tax reimbursement, maintenance and insurance. Most leases contain renewal options, some of which involve rent increases. Although from time to time, we may be near capacity at some of our distribution facilities, particularly at our older facilities, we believe that the capacity of our facilities is adequate.

We also own a 55,600 square foot ice cream manufacturing facility and lease a 32,000 square foot storage facility located in El Monte, California.

We lease approximately 19,800 square feet in 36 HEB grocery stores in Texas under a master lease agreement that contains various renewal options through 2024.

Our Pharmacy Services segment leases approximately 253,000 square feet of space in various buildings primarily in Twinsburg, Ohio for additional administrative personnel. In addition, we own approximately 52,000 square feet of space in North Canton, Ohio for our mail order and specialty drug facilities.

On a regular basis and as part of our normal business, we evaluate store performance and may reduce in size, close or relocate a store if the store is redundant, underperforming or otherwise deemed unsuitable. We also evaluate strategic dispositions and acquisitions of facilities and prescription files. When we reduce in size, close or relocate a store or close distribution center facilities, we often continue to have leasing obligations or own the property. We attempt to sublease this space. As of February 29, 2020, we had 3,009,575 square feet of excess space, 1,509,334 square feet of which was subleased.

Item 3.   Legal Proceedings

The information in response to this item is incorporated herein by reference to Note 21, Commitments, Contingencies and Guarantees of the Consolidated Financial Statements of this Annual Report.

Item 4.   Mine Safety Disclosures

Not applicable

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PART II

Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

On April 10, 2019, our Board of Directors approved a one-for-twenty reverse stock split of our outstanding shares of common stock. The reverse stock split was effected on April 18, 2019 at 5:00 p.m. Eastern time. At the effective time, every twenty issued and outstanding shares of our common stock were converted into one share of common stock. No fractional shares were issued in connection with the reverse stock split, and in lieu thereof, each stockholder holding fractional shares was entitled to receive a cash payment (without interest or deduction) from the Company’s transfer agent in an amount equal to such stockholder’s respective pro rata shares of the total net proceeds from the Company’s transfer agent sale of all fractional shares at the then-prevailing prices on the open market. In connection with the reverse stock split, the number of authorized shares of our common stock was also reduced on a one-for-twenty basis, from 1.5 billion to 75 million. The par value of each share of common stock remained unchanged. A proportionate adjustment was also made to the maximum number of shares issuable under the Company’s 2014 Equity Incentive Plan.

Our common stock is listed on the NYSE under the symbol “RAD.” On April 16, 2020, we had approximately 9,590 stockholders of record. The following table shows the quarterly high and low sales prices for our common stock, adjusted on a retroactive basis to reflect the reverse stock split:

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We have not declared or paid any cash dividends on our common stock since the third quarter of fiscal 2000 and we do not anticipate paying cash dividends on our common stock in the foreseeable future. Our senior secured credit facility and some of the indentures that govern our other outstanding indebtedness restrict our ability to pay dividends.

We have not sold any unregistered equity securities during the period covered by this report, nor have we repurchased any of our common stock, during the period covered by this report.

STOCK PERFORMANCE GRAPH

The graph below compares the yearly percentage change in the cumulative total stockholder return on our common stock for the last five fiscal years with the cumulative total return on (i) the Russell 2000 Consumer Staples Index, (ii) the Russell 3000 Consumer Staples Index, (iii) the Russell 2000 Index, and (iv) the Russell 3000 Index, over the same period (assuming the investment of $100.00 in our common stock and such indexes on February 28, 2015 and reinvestment of dividends).

For comparison of cumulative total return, we have elected to use the Russell 2000 Consumer Staples Index, consisting of 55 companies, and the Russell 2000 Index. In the past we used the Russell 1000 Consumer Staples Index and the Russell 1000 Index but we feel this is a better comparison of the Company to a peer group of similar sized companies. The Russell 2000 Consumer Staples Index is a capitalization-weighted index of companies that provide products directly to consumers that are typically considered nondiscretionary items based on consumer purchasing habits. The Russell 2000 Index consists of the smallest 2000 companies in the Russell 3000 Index and represents the universe of small capitalization stocks from which many active money managers typically select.

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STOCK PERFORMANCE GRAPH

Comparison of 5 Year Cumulative Total Return

Assumes Initial Investment of $100 on February 28, 2015

February 29, 2020

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Item 6.   Selected Financial Data—Continuing Operations

The following selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Continuing Operations” and the audited consolidated financial statements and related notes.

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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Continuing Operations

Overview

We are a healthcare company with a retail footprint, providing our customers and communities with a high level of care and service through various programs we offer through our two reportable business segments, our Retail Pharmacy segment and our Pharmacy Services segment. We accomplish our goal of delivering comprehensive care to our customers through our retail drugstores, RediClinic walk-in retail health clinics and our transparent and traditional PBMs EnvisionRxOptions and MedTrak. We also offer fully integrated mail-order and specialty pharmacy services through EnvisionPharmacies. Additionally through EIC, EnvisionRxOptions also serves one of the fastest-growing demographics in healthcare: seniors enrolled in Medicare Part D. When combined with our retail platform, this comprehensive suite of services allows us to provide value and choice to customers, patients and payors and allows us to compete in today’s evolving healthcare marketplace.

Retail Pharmacy Segment

Our Retail Pharmacy segment sells brand and generic prescription drugs, as well as an assortment of front-end products including health and beauty aids, personal care products, seasonal merchandise, and a large private brand product line. Our Retail Pharmacy segment generates the majority of its revenue through the sale of prescription drugs and front-end products at our 2,461 retail stores. We replenish our retail stores through a combination of direct store delivery of pharmaceutical products facilitated through our pharmaceutical Purchasing and Delivery Agreement with McKesson, and the majority of our front-end products through our network of distribution centers. In addition, as of February 29, 2020, the Retail Pharmacy segment includes 67 RediClinic walk-in retail clinics, of which, 31 were located within Rite Aid retail stores in the Philadelphia and New Jersey markets.

Pharmacy Services Segment

Our Pharmacy Services segment provides a full range of pharmacy benefit services through EnvisionRxOptions. The Pharmacy Services segment provides both transparent and traditional PBM options through its EnvisionRxOptions and MedTrak PBMs. EnvisionRxOptions also offers fully integrated mail-order and specialty pharmacy services through EnvisionPharmacies; an innovative claims adjudication software platform in Laker Software; and a national Medicare Part D prescription drug plan through EIC’s EnvisionRx Plus product offering. The segment’s clients are primarily employers, insurance companies, unions, government employee groups, health plans, Managed Medicaid plans, Medicare plans, other sponsors of health benefit plans and individuals throughout the United States.

Restructuring

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Beginning in Fiscal 2019, we initiated a series of restructuring plans designed to reorganize our executive management team, reduce managerial layers, and consolidate roles. We also initiated restructuring plans with regard to our future strategy and brand identification, which includes building tools to work with regional health plans to improve patient health outcomes, rationalizing SKU’s in our front-end offering to free up working capital, assessing our pricing and promotional strategy, rebranding our retail pharmacy and EnvisionRxOptions business, implementing executive team enhancements, further reducing SG&A and headcount, separating the front-end and retail pharmacy teams into separate units, integrating the Pharmacy Services segment both within the segment and across Rite Aid, including a detailed review of our EnvisionRxOptions cost structure and action plans to streamline.

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As a result of the restructuring that we announced in March 2019, we achieved annual cost savings of approximately $55.0 million. These savings offset the reduction in TSA fees that we experienced in fiscal 2020. We have also incurred restructuring costs to support our transformation initiatives, which we expect to provide future growth and expense efficiency benefits. We anticipate our total fiscal 2021 restructuring-related costs to be approximately $60.0 million and expect to realize the full benefit of this investment over the next two years, although a prolonged impact of COVID-19 could result in us realizing an amount different than anticipated.

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Asset Sale to WBA

On September 18, 2017, we entered into the Amended and Restated Asset Purchase Agreement with WBA and Buyer, which amended and restated in its entirety the previously disclosed Original Asset Purchase Agreement. Pursuant to the terms and subject to the conditions set forth in the Amended and Restated Asset Purchase Agreement, Buyer agreed to purchase from Rite Aid 1,932 Acquired Stores, three distribution centers, related inventory and other specified assets and liabilities related thereto for a purchase price of approximately $4.375 billion, on a cash-free, debt-free basis, in the Sale. We completed the store transfer process in March of 2018, which resulted in the transfer of all 1,932 stores and related assets to WBA and received cash proceeds of $4.157 billion.

During fiscal 2019, we completed the sale of one of our distribution centers and related assets to WBA for proceeds of $61.2 million. The impact of the sale of the distribution center and related assets resulted in a pre-tax gain of $14.2 million, which has been included in the results of operations and cash flows of discontinued operations during the fifty-two week period ended March 2, 2019. During fiscal 2020, we completed the sale of the second distribution center and related assets to WBA for proceeds of $62.8 million. The impact of the sale of the distribution center and related assets resulted in a pre-tax gain of $19.3 million, which has been included in the results of operations and cash flows of discontinued operations during the fifty-two week period ended February 29, 2020. On April 1, 2020, we completed the inventory transfer at our remaining distribution center to WBA for proceeds of $19.3 million.

The transfer of the remaining distribution center and related non-inventory assets remains subject to minimal customary closing conditions applicable only to the distribution center being transferred at such distribution center closing, as specified in the Amended and Restated Asset Purchase Agreement. The transfer of the remaining distribution center and related non-inventory assets is expected to occur in May 2020, and will constitute the final closing under the Amended and Restated Asset Purchase Agreement. The term of the TSA continues after the final closing until October 17, 2020, unless earlier terminated.

The parties to the Amended and Restated Asset Purchase Agreement have each made customary representations and warranties. We have agreed to various covenants and agreements, including, among others, our agreement to conduct our business at the distribution centers being sold to WBA in the ordinary course during the period between the execution of the Amended and Restated Asset Purchase Agreement and the distribution center closing. We have also agreed to provide transition services to Buyer for up to three years after the initial closing of the Sale. Under the terms of the TSA, we provide various services on behalf of WBA, including but not limited to the purchase and distribution of inventory and virtually all selling, general and administrative activities. The term of the TSA has been extended to October 17, 2020. In connection with these services, we purchase the related inventory and incur cash payments for the selling, general and administrative activities, which, we bill on a cash neutral basis to WBA in accordance with terms as outlined in the TSA. Total billings for these items during the fifty-two week periods ended February 29, 2020 and March 2, 2019 were $3.0 billion and $6.9 billion, respectively, of which $38.7 million and $293.7 million is included in Accounts receivable, net. We charged WBA TSA fees of $37.9 million during the fifty-two week period ended February 29, 2020 and $80.2 million in the fifty-two week period ended March 2, 2019, which are reflected as a reduction to selling, general and administrative expenses.

Based on its magnitude and because we exited certain markets, the Sale represented a significant strategic shift that has a material effect on our operations and financial results. Accordingly, we have applied discontinued operations treatment for the Sale as required by GAAP.

Impact of COVID-19

In March 2020, the outbreak of COVID-19 caused by a novel strain of the coronavirus was recognized as a pandemic by the World Health Organization, and the outbreak has become increasingly widespread in the United States, including in the markets in which we operate. In an effort to limit the spread of COVID-19, governmental entities have taken various regulatory actions including, but not limited to “shelter in place” orders and the temporary closures of many non-life sustaining businesses. Entities that provide life-sustaining services, such as healthcare providers, retail pharmacy, grocery stores and gas stations have generally been permitted to remain open, which has allowed us to continue to serve our customers during the pandemic.

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Rite Aid is on the front lines of providing communities with essential care, services and products during the COVID-19 pandemic. We have taken numerous steps to ensure that Rite Aid can continue providing these vital services during this time of great need, including:

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In response to the COVID-19 pandemic, we have implemented our business continuity plans in an effort to continue normal operations based on the work from home and social distancing requirements of various governmental entities. During the month of March, we saw increases in front-end same store sales, excluding cigarettes and tobacco products, of 33.6 percent compared to the prior year period, due to demand for personal care, paper products and OTC medications, and increases in 30-day comparable adjusted prescription count of 8.3 percent due to increased fills of maintenance medications.

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We expect these initial favorable results to be tempered by a decline in front-end sales during at least the remainder of the first quarter of Fiscal 2021, due to social distancing measures that are in effect in our markets and a moderation in prescription count, the timing of maintenance medication refills and a potential near-term decline in acute prescriptions. Also, we have incurred incremental costs related to the Hero Pay and Bonus programs for front-line associates, as well as incremental expenses (i.e. Plexiglas protective barriers, cleaning crews and additional staffing) to ensure our stores stay open and to minimize the risk to our associates and customers. An extended impact of COVID-19 could result in us having to delay some of our strategic initiatives, such as bringing our pharmacists front and center in the store and out from behind the counter, and the anticipated roll-out of our Stores of the Future.

We have also noted an increase in mail order prescriptions and drug utilization at our Pharmacy Services segment during March 2020, which has been offset by higher utilization within the PDP plan offered by Envision Insurance Company.

We currently have liquidity of approximately $1.9 billion, which consists of availability to borrow under our secured revolving credit facility of $1.7 billion and cash on hand of $180 million. We will continue to assess this development to determine if any material negative impacts are identified and will work to minimize the risk to our financial position if material negative developments occur. However, the extent to which the COVID-19 outbreak will impact our operations or financial results is uncertain, but such impact could be material.

Overview of Financial Results from Continuing Operations

The following information summarizes our financial results from continuing operations for fiscal 2020 compared to fiscal 2019. For discussion of our financial results from continuing operations for fiscal 2019 to fiscal 2018, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Continuing Operations”

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included in our Annual Report on Form 10-K for the fiscal year ended March 2, 2019, which we filed with the SEC on April 25, 2019.

Net Loss: Our net loss from continuing operations for fiscal 2020 was $469.2 million or $8.82 per basic and diluted share compared to net loss from continuing operations for fiscal 2019 of $667.0 million or $12.62 per basic and diluted share. The reduction in net loss is due to lower goodwill and intangible asset charges, lower LIFO expense, lower lease termination and impairment charges, and a gain on debt retirements in the current year compared to a loss on debt retirements in the prior year. These items were partially offset by higher income tax expense and higher restructuring-related costs.

Adjusted EBITDA: Our Adjusted EBITDA from continuing operations for fiscal 2020 was $538.2 million or 2.5 percent of revenues, compared to $563.4 million or 2.6 percent of revenues for fiscal year 2019. The decrease in Adjusted EBITDA from continuing operations was due primarily to a decrease of $34.8 million in the Retail Pharmacy segment, partially offset by an increase of $9.5 million in the Pharmacy Services segment. The decrease in the Retail Pharmacy Segment Adjusted EBITDA was driven by a $42.4 million reduction in TSA fee income from WBA. Also contributing to the reduction in Adjusted EBITDA was a decrease in Adjusted EBITDA gross profit resulting from reimbursement rate pressures that were not fully offset by generic drug purchasing efficiencies, a reduction in vendor promotional income and a decline in front-end same store sales. These negative variances were partially offset by same-store prescription count growth and lower selling, general and administrative expenses due to strong labor and benefits expense control. The improvement in the Pharmacy Services Segment EBITDA was due to increased revenue and improvements in pharmacy network management. Please see the sections entitled “Segment Analysis” and Adjusted EBITDA, Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures” below for additional details.

Consolidated Results of Operations—Continuing Operations

Revenue and Other Operating Data

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Revenues

Fiscal 2020 compared to Fiscal 2019: The 1.3% increase in revenues was due primarily to a $465.9 million increase in Pharmacy Services segment revenues, partially offset by a $141.0 million decrease in Retail Pharmacy segment revenues. Same store sales trends for fiscal 2020 and fiscal 2019 are described in the “Segment Analysis” section below.

Please see the section entitled “Segment Analysis” below for additional details regarding revenues.

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Costs and Expenses

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Gross Profit and Cost of Revenues

Gross profit increased by $50.4 million in fiscal 2020 compared to fiscal 2019. Gross profit for fiscal 2020 includes an increase of $16.1 million in our Retail Pharmacy segment and an increase in gross profit of $34.3 million relating to our Pharmacy Services segment. Gross margin was 21.6% for fiscal 2020 compared to 21.6% in fiscal 2019. Please see the section entitled “Segment Analysis” for a more detailed description of gross profit and gross margin results by segment.

Selling, General and Administrative Expenses

SG&A decreased by $5.0 million in fiscal 2020 compared to fiscal 2019. The decrease in SG&A includes a decrease of $30.5 million relating to our Retail Pharmacy segment, partially offset by an increase of $25.5 million relating to our Pharmacy Services segment. Please see the section entitled “Segment Analysis” below for additional details regarding SG&A.

Lease Termination and Impairment Charges

Impairment Charges:

We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that an asset group has a carrying value that may not be recoverable. The individual operating store is the lowest level for which cash flows are identifiable. As such, we evaluate individual stores for recoverability of assets. To determine if a store needs to be tested for recoverability, we consider items such as decreases in market prices, changes in the manner in which the store is being used or physical condition, changes in legal factors or business climate, an accumulation of losses significantly in excess of budget, a current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection of continuing losses, or an expectation that the store will be closed or sold.

We monitor new and recently relocated stores against operational projections and other strategic factors such as regional economics, new competitive entries and other local market considerations to determine if an impairment

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evaluation is required. For other stores, we perform a recoverability analysis if they have experienced current-period and historical cash flow losses.

In performing the recoverability test, we compare the expected future cash flows of a store to the carrying amount of its assets. Significant judgment is used to estimate future cash flows. Major assumptions that contribute to our future cash flow projections include expected sales, gross profit and distribution expenses; expected costs such as payroll, occupancy costs and advertising expenses; and estimates for other significant selling, and general and administrative expenses. Additionally, we take into consideration that certain operating stores are executing specific improvement plans which are monitored quarterly to recoup recent capital investments, such as an acquisition of an independent pharmacy, which we have made to respond to specific competitive or local market conditions, or have specific programs tailored towards a specific geography or market.

We recorded impairment charges of $39.9 million in fiscal 2020, $63.5 million in fiscal 2019 and $37.9 million in fiscal 2018. Our methodology for recording impairment charges has been consistently applied in the periods presented.

At February 29, 2020, approximately $965.5 million of our long-lived assets, including intangible assets, were associated with 2,461 active operating stores. Additionally, in connection with the adoption of ASU 2016-02, Leases (Topic 842), we have approximately $2.8 billion of operating lease right-of-use assets associated with the active stores.

If an operating store’s estimated future undiscounted cash flows are not sufficient to cover its carrying value, its carrying value is reduced to fair value which is its estimated future discounted cash flows. The discount rate is commensurate with the risks associated with the recovery of a similar asset. Beginning in fiscal year 2020, operating lease right-of-use assets are included within the stores’ asset groups. We obtain fair values of these right-of-use assets based on real estate market data.

An impairment charge is recorded in the period that the store does not meet its original return on investment and/or has an operating loss for the last two years and its projected cash flows do not exceed its current asset carrying value. The amount of the impairment charge is the entire difference between the current carrying asset value and the estimated fair value of the assets using discounted future cash flows.

We recorded impairment charges for active stores of $34.8 million in fiscal 2020, $46.4 million in fiscal 2019 and $34.8 million in fiscal 2018.

We review key performance results for active stores on a quarterly basis and approve certain stores for closure. Impairment for closed stores, if any (many stores are closed on lease expiration), are recorded in the quarter the closure decision is approved. Closure decisions are made on an individual store or regional basis considering all of the macro-economic, industry and other factors, in addition to, the operating store’s individual operating results. We currently have no plans to close a significant number of active stores in future periods. We recorded impairment charges for closed facilities of $5.1 million in fiscal 2020, $2.8 million in fiscal 2019 and $3.1 million in fiscal 2018.

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The following table summarizes the impairment charges and number of locations, segregated by closed facilities and active stores that have been recorded in fiscal 2020, 2019 and 2018:

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The primary drivers of our impairment charges are each store’s current and historical operating performance and the assumptions that we make about each store’s operating performance in future periods. Projected cash flows are updated based on the next year’s operating budget which includes the qualitative factors noted above. We are unable to predict with any degree of certainty which individual stores will fall short or exceed future operating plans. Accordingly, we are unable to describe future trends that would affect our impairment charges, including the likely stores and their related asset values that may fail their recoverability test in future periods.

To the extent that actual future cash flows may differ from our projections materially certain stores that are either not impaired or partially impaired in the current period may be further impaired in future periods. A 50 and 100 basis point decrease in our future sales assumptions as of February 29, 2020 would have resulted in 15 and 27, respectively, additional stores being subjected to our impairment analysis.

Lease Termination Charges: Upon adoption of ASU 2016-02, Leases (Topic 842), we recorded a future lease liability for every real estate lease and therefore, we no longer record a lease termination charge. Post adoption, we record ancillary costs in connection with store closings. Prior to the adoption of ASU 2016-02, charges to close a store, which principally consist of continuing lease obligations associated with ancillary costs, are recorded at the time the store is closed and all inventory is liquidated, pursuant to the guidance set forth in ASC 420, “Exit or Disposal Cost

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Obligations.” We calculate our liability for closed stores on a store-by-store basis. The calculation for stores where remaining lease term exceeds one year includes the ancillary costs from the date of closure to the end of the remaining lease term. We evaluate these assumptions each quarter and adjust the liability accordingly. As part of our ongoing business activities, we assess stores and distribution centers for potential closure and relocation. Decisions to close or relocate stores or distribution centers in future periods would result in lease termination charges for lease exit costs and liquidation of inventory, as well as impairment of assets at these locations.

In fiscal 2020, 2019 and 2018, we recorded lease termination charges of $2.9 million, $44.5 million, and $20.9 million, respectively. We have no plans to close a significant number of stores in future periods.

Goodwill and intangible asset impairment charges

In the fiscal fourth quarter of fiscal 2020 we completed a quantitative goodwill impairment assessment and determined after evaluating the results, events and circumstances, that sufficient evidence existed to assert that it is more likely than not that the fair values of the reporting units exceeded their carrying values. Therefore, no goodwill impairment charge was assessed for the fiscal year ended February 29, 2020.

In the fiscal second quarter of fiscal 2019 we completed a qualitative goodwill impairment assessment, at which time it was determined after evaluating results, events and circumstances that a quantitative assessment was necessary for the Pharmacy Services segment. The quantitative assessment concluded that the carrying amount of the Pharmacy Services segment exceeded its fair value principally due to a decrease in Adjusted EBITDA that was driven by commercial business compression and an increase in SG&A expenses. This resulted in a goodwill impairment charge of $313.0 million ($235.7 million net of the related income tax benefit) for the fiscal year ended March 2, 2019.

In the fiscal second quarter of fiscal 2019, due to the loss of access to a fertility drug for a direct to consumer program that the Pharmacy Services segment administered, we recorded an impairment charge to reduce the book value of customer relationships by $48.2 million (gross carrying amount of $77.0 million less accumulated amortization of $28.8 million), and indefinite lived trademarks by $14.0 million both of which charges are included within Goodwill and intangible asset impairment charges within the consolidated statement of operations.

Interest Expense

In fiscal 2020, 2019 and 2018, interest expense was $229.7 million, $227.7 million and $202.8 million, respectively.

The annual weighted average interest rates on our indebtedness in fiscal 2020, 2019 and 2018 were 5.7%, 5.6% and 7.1%, respectively.

Income Taxes—Continuing Operations

Income tax expense of $387.6 million, $77.5 million and $305.9 million, has been recorded for fiscal 2020, 2019 and 2018, respectively. Net loss for fiscal 2020 included a provision for income tax based on an overall tax rate of (476.2)%, which included a (427.0)% impact related to establishing a full valuation allowance for federal deferred tax assets and an increase to the valuation allowance for state net deferred tax assets that may not be realized based on our most recent assessment that it is more likely than not that sufficient taxable income may not be generated to realize the tax benefits of the majority of our net deferred tax assets.

Net loss for fiscal 2019 included a provision for income tax based on an overall tax rate of (13.1)% which included a (36.0)% impact for an increase to the valuation allowance based on our assessment that it is more likely than not that sufficient taxable income may not be generated to realize the tax benefits of some of our net deferred tax assets.

We recognized tax expense of $7.0 million, $91.1 million and $749.7 million within Net loss (income) from discontinued operations, net of tax, in the Statement of Operations in fiscal 2020, fiscal 2019 and fiscal 2018, respectively. Our effective income tax rate from discontinued operations included adjustments to the valuation allowance of $0.0 million, $(2.4) million and $(22.3) million for fiscal 2020, fiscal 2019 and fiscal 2018, respectively.

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ASC 740, “Income Taxes” requires a company to evaluate its deferred tax assets on a regular basis to determine if a valuation allowance against the net deferred tax assets is required. We take into account all available positive and negative evidence with regard to the recognition of a deferred tax asset including our past earnings history, expected future earnings, the character and jurisdiction of such earnings, unsettled circumstances that, if unfavorably resolved, would adversely affect recognition of a deferred tax asset, carryback and carryforward periods and tax planning strategies that could potentially enhance the likelihood of realization of a deferred tax asset. The ultimate realization of deferred tax assets is dependent upon the existence of sufficient taxable income generated in the carryforward periods. Accordingly, changes in the valuation allowance from period to period are included in the tax provision in the period of change.

We maintained a valuation allowance of $1,673.1 million, $1,091.4 million and $896.8 million against remaining net deferred tax assets at fiscal year-end 2020, 2019 and 2018, respectively.

Our ability to utilize the losses and credits to offset future taxable income may be deferred or limited significantly if we were to experience an “ownership change” as defined in section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). In general, an ownership change will occur if there is a cumulative change in ownership of the Company’s stock by “5-percent shareholders” (as defined in the Code) that exceeds 50 percentage points over a rolling three-year period. The Company determined that no ownership change has occurred for purposes of Section 382 for the period ended February 29, 2020. It is important to note, that the limitation that would be created upon an ownership change would only apply to income earned after the event that caused the ownership change.

Dilutive Equity Issuances

On February 29, 2020, 54.7 million shares of common stock, which includes unvested restricted shares, were outstanding and an additional 1.3 million shares of common stock were issuable related to outstanding stock options.

On February 29, 2020, our 1.3 million shares of potentially issuable common stock consisted of the following (shares in thousands):

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Segment Analysis

We evaluate the Retail Pharmacy and Pharmacy Services segments’ performance based on revenue, gross profit, and Adjusted EBITDA. The following is a reconciliation of our segments to the consolidated financial statements:

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Retail Pharmacy Segment Results of Continuing Operations

Revenues and Other Operating Data

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Revenues

Fiscal 2020 compared to Fiscal 2019: The 0.9% decrease in revenue was primarily the result of store closures, partially offset by a 1.1% increase in same store sales. Same store sales trends for fiscal 2020 and fiscal 2019 are described in the following paragraphs. We include in same store sales all stores that have been open at least one year except stores in liquidation, which are not included. Relocation stores are not included in same store sales until they have been open for one year.

Pharmacy same store sales increased 1.4%. Pharmacy same store sales were positively impacted by an increase of 3.5% in same store prescription count compared to the prior year, partially offset by an approximate 2.9% negative impact from generic drug introductions. Same store prescription sales continued to benefit from strong execution and focus on medication adherence through personalized interventions, prescription file buys, immunizations and gaining access to new networks in markets where we have strong market presence.

Front-end same store sales decreased 0.6%. Front-end same stores sales, excluding cigarettes and tobacco products, increased 0.6% driven by positive results in core categories such as upper respiratory, pain care, over-the-counter medications and personal care.

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Costs and Expenses

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Gross Profit and Cost of Revenues

Gross profit increased by $16.1 million in fiscal 2020 compared to fiscal 2019. Gross profit was positively impacted by a LIFO credit in the current year compared to a LIFO charge in the prior year, partially offset by lower Pharmacy gross profit resulting from lower reimbursement rates that were partially offset by generic cost savings and same store prescription count growth. Front-end gross profit declined from the prior year due to a decline in front-end sales and lower vendor promotional income.

Overall gross margin was 27.4% for fiscal 2020 compared to 27.0% in fiscal 2019. Gross margin was higher due primarily to a LIFO credit in the current year compared to a LIFO charge in the prior year. The LIFO credit was partially offset by the decline in reimbursement rates that was partially offset by generic cost savings.

We use the LIFO method of inventory valuation, which is determined annually when inflation rates and inventory levels are finalized. Therefore, LIFO costs for interim period financial statements are estimated. The LIFO credit for fiscal 2020 was $64.8 million compared to a LIFO charge of $23.4 million in fiscal 2019. The LIFO credit for fiscal 2020 is due primarily to deflation in generic prescription drug costs, partially offset by brand prescription drug cost inflation.

Selling, General and Administrative Expenses

SG&A as a percentage of revenue was 27.0% in fiscal 2020 compared to 27.0% in fiscal 2019, and decreased $30.5 million. The decrease in SG&A dollars was due primarily to strong labor and benefits expense control, partially offset by a reduction in the TSA fee income from WBA. SG&A expenses as a percentage of revenues is flat to the prior year.

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Pharmacy Services Segment Results of Operations

Revenues and Other Operating Data

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Revenues

Pharmacy Services segment revenue was $6,559.6 million and $6,093.7 million, respectively, for fiscal 2020 and 2019. The increase in the fiscal 2020 revenue for the segment is due to the increase in covered lives in our Medicare Part D membership.

Costs and Expenses

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Gross Profit and Cost of Revenues

Gross profit increased by $34.3 million in fiscal 2020 compared to fiscal 2019. The increase in gross profit is due primarily to improved pharmacy network management.

Selling, General and Administrative Expenses

Pharmacy Services segment selling, general and administrative expenses for fiscal 2020 was $366.5 million or 5.6% of revenues as compared to $341.0 million or 5.6% of revenues for fiscal 2019. The increase in SG&A is primarily the result of increased commissions due to growth in Medicare Part D membership and growth in consumer pharmacy programs.

Liquidity and Capital Resources

General

We have disclosed debt and interest expense on a continuing operations and discontinued operations basis on our consolidated balance sheets and consolidated statements of operations. However, the following discussion regarding liquidity and capital resources is at the total enterprise level, as we are contractually obligated for the payment of all

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outstanding debt instruments and related interest under our various indentures, including borrowings under the Existing Facilities.

We have two primary sources of liquidity: (i) cash provided by operating activities and (ii) borrowings under our Existing Facilities. Our principal uses of cash are to provide working capital for operations, to service our obligations to pay interest and principal on debt and to fund capital expenditures. Total liquidity as of February 29, 2020 was $2,041.9 million, which consisted of revolver borrowing capacity of $1,940.0 million and invested cash of $101.9 million.

Credit Facilities

On December 20, 2018, we entered into a senior secured credit agreement (as amended by the First Amendment to Credit Agreement, dated as of January 6, 2020, the “Credit Agreement”), consisting of a $2.7 billion senior secured asset-based revolving credit facility (“Senior Secured Revolving Credit Facility”) and a $450.0 million “first-in, last out” senior secured term loan facility (“Senior Secured Term Loan,” and together with the Senior Secured Revolving Credit Facility, collectively, the “Existing Facilities”). We used proceeds from the Existing Facilities to refinance our prior $2.7 billion existing credit agreement (the “Old Facility”). The Existing Facilities extend our debt maturity profile and provide additional liquidity. Borrowings under the Senior Secured Revolving Credit Facility bear interest at a rate per annum between LIBOR plus 1.25% and LIBOR plus 1.75% based upon the Average ABL Availability (as defined in the Credit Agreement).  Borrowings under the Senior Secured Term Loan bear interest at a rate per annum of LIBOR plus 3.00%.  We are required to pay fees between 0.250% and 0.375% per annum on the daily unused amount of the commitments under the Senior Secured Revolving Credit Facility, depending on Average ABL Availability.  The Existing Facilities mature on December 20, 2023, subject to an earlier maturity on December 31, 2022 if we have not repaid or refinanced our existing 6.125% Notes due 2023 prior to such date.  It is our intention to repay or refinance our existing 6.125% Notes due 2023 prior to the early maturity becoming effective, although we cannot assure you what impact the recent disruption in the financial markets will have on any such efforts.

Our ability to borrow under the Senior Secured Revolving Credit Facility is based upon a specified borrowing base consisting of accounts receivable, inventory and prescription files. At February 29, 2020, we had approximately $1,100.0 million of borrowings outstanding under the Existing Facilities and had letters of credit outstanding against the Senior Secured Revolving Credit Facility of approximately $110.0 million, which resulted in additional borrowing capacity under the Senior Secured Revolving Credit Facility of $1,940.0 million. If at any time the total credit exposure outstanding under our Existing Facilities and the principal amount of our other senior obligations exceed the borrowing base, we will be required to make certain other mandatory prepayments to eliminate such shortfall.

The Credit Agreement restricts us and all of our subsidiaries that guarantee our obligations under the Existing Facilities, the secured guaranteed notes and unsecured guaranteed notes (collectively, the “Subsidiary Guarantors”) from accumulating cash on hand in excess of $200.0 million at any time when revolving loans are outstanding (not including cash located in our store and lockbox deposit accounts and cash necessary to cover our current liabilities). This could impact our ability to draw additional amounts on the revolver in response to COVID-19. The Credit Agreement also states that if at any time (other than following the exercise of remedies or acceleration of any senior obligations or second priority debt and receipt of a triggering notice by the senior collateral agent from a representative of the senior obligations or the second priority debt) either (i) an event of default exists under our Existing Facilities or (ii) the sum of our borrowing capacity under our Senior Secured Revolving Credit Facility and certain amounts held on deposit with the senior collateral agent in a concentration account is less than $275.0 million for three consecutive business days or less than or equal to $200.0 million on any day (a “cash sweep period”), the funds in our deposit accounts will be swept to a concentration account with the senior collateral agent and will be applied first to repay outstanding revolving loans under the Existing Facilities, and then held as collateral for the senior obligations until such cash sweep period is rescinded pursuant to the terms of our Existing Facilities.

Our obligations under the Existing Facilities and the Subsidiary Guarantors’ obligations under the related guarantees are secured by (i) a first-priority lien on all of the Subsidiary Guarantors’ cash and cash equivalents, accounts receivable, inventory, prescription files (including eligible script lists), intellectual property (prior to the repayment of the Senior Secured Term Loan) and certain other assets arising therefrom or related thereto (including substantially all of

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their deposit accounts, collectively, the “ABL priority collateral”) and (ii) a second-priority lien on all of the Subsidiary Guarantors’ equipment, fixtures, investment property (other than equity interests in subsidiaries), intellectual property (following the repayment of the Senior Secured Term Loan) and all other assets that do not constitute ABL priority collateral, in each case, subject to customary exceptions and limitations.

The Credit Agreement allows us to have outstanding, at any time, up to an aggregate principal amount of $1.5 billion in secured second priority debt, split-priority debt, unsecured debt and disqualified preferred stock in addition to borrowings under the Existing Facilities and other existing indebtedness, provided that not in excess of $750.0 million of such secured second priority debt, split-priority debt, unsecured debt and disqualified preferred stock shall mature or require scheduled payments of principal prior to 90 days after the latest of (i) the fifth anniversary of the effectiveness of the Existing Facilities and (ii) the latest maturity date of any Term Loan or Other Revolving Commitment (each as defined in the Credit Agreement) (excluding bridge facilities allowing extensions on customary terms to at least the date that is 90 days after such date). Subject to the limitations described in clauses (i) and (ii) of the immediately preceding sentence, the Credit Agreement additionally allows us to issue or incur an unlimited amount of unsecured debt and disqualified preferred stock so long as a Financial Covenant Effectiveness Period (as defined in the Credit Agreement) is not in effect; provided, however, that certain of our other outstanding indebtedness limits the amount of unsecured debt that can be incurred if certain interest coverage levels are not met at the time of incurrence or other exemptions are not available. The Credit Agreement also contains certain restrictions on the amount of secured first priority debt we are able to incur. The Credit Agreement also allows for the voluntary repurchase of any debt or other convertible debt, so long as the Existing Facilities are not in default and we maintain availability under our revolver of more than $365.0 million.

The Credit Agreement has a financial covenant that requires us to maintain a minimum fixed charge coverage ratio of 1.00 to 1.00 (i) on any date on which availability under the Senior Secured Revolving Credit Facility is less than $200.0 million, or (ii) on the third consecutive business day on which availability under the Senior Secured Revolving Credit Facility is less than $250.0 million and, in each case, ending on and excluding the first day thereafter, if any, which is the 30th consecutive calendar day on which availability under the revolver is equal to or greater than $250.0 million. As of February 29, 2020, our fixed charge coverage ratio was greater than 1.00 to 1.00 and we were in compliance with the Credit Agreement’s financial covenant. The Credit Agreement also contains covenants which place restrictions on the incurrence of debt, the payments of dividends, the making of investments, sale of assets, mergers and acquisitions and the granting of liens.

The Credit Agreement provides for customary events of default including nonpayment, misrepresentation, breach of covenants and bankruptcy. It is also an event of default if we fail to make any required payment on debt having a principal amount in excess of $50.0 million or any event occurs that enables, or which with the giving of notice or the lapse of time would enable, the holder of such debt to accelerate the maturity or require the repayment repurchase, redemption or defeasance of such debt.

The indentures that govern our guaranteed unsecured notes and our guaranteed secured notes contain restrictions on the amount of additional secured and unsecured debt that we may incur. As of February 29, 2020, we had the ability to (i) draw the full amount under our revolving credit facility, (ii) incur additional secured debt, and (iii) enter into certain sale and leaseback transactions.  The ability to issue additional unsecured debt under the indenture is generally governed by an interest coverage ratio test. As of February 29, 2020, we had the ability to issue additional secured and unsecured debt under the indentures governing our unguaranteed unsecured notes.

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Fiscal 2019 and 2020 Transactions

On March 13, 2018, we issued a notice of redemption for all of the 9.25% Notes that were outstanding on April 12, 2018, pursuant to the terms of the indenture of the 9.25% Notes. On April 12, 2018, we redeemed 100% of the remaining outstanding 9.25% Notes. In connection therewith, we recorded a loss on debt retirement of $3.4 million which included unamortized debt issuance costs, partially offset by unamortized discount. The debt repayment and related loss on debt retirement is included in the results of operations and cash flows of discontinued operations.

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On April 19, 2018, we announced that we had commenced an offer to purchase up to $700.0 million of the outstanding 6.75% Notes and the 6.125% Notes pursuant to the asset sale provisions of such indentures. On May 21, 2018, we accepted for payment, pursuant to the offer to purchase, $1.4 million aggregate principal amount of the 6.75% Notes and $4.8 million aggregate principal amount of the 6.125% Notes. The debt repayment and related loss on debt retirement of $0.01 million for the 6.75% Notes is included in the results of operations and cash flows of discontinued operations. The debt repayment and related loss on debt retirement of $0.06 million for the 6.125% Notes is included in the results of operations and cash flows of continuing operations.

On April 29, 2018, we further reduced the borrowing capacity on our Old Facility from $3.0 billion to $2.7 billion. In connection therewith, we recorded a loss on debt retirement of $1.1 million, which included unamortized debt issuance costs. The loss on debt retirement is included in the results of operations and cash flows of discontinued operations.

On June 25, 2018, we redeemed the remaining $805.2 million of the 6.75% Notes, which resulted in a loss on debt retirement of $18.1 million. The loss on debt retirement is included in the results of operations and cash flows of discontinued operations.

On March 15, 2019, we entered into a Cap, which has been assigned to the variable interest rate payments on the first $650.0 million notional amount of variable rate indebtedness. The Cap has an effective date of March 21, 2019 and expires on March 21, 2021. The Cap provides us with interest rate protection in the event that LIBOR increases above 2.75%.

On October 11, 2019, we completed a privately negotiated purchase from a noteholder and its affiliated funds of $84.1 million aggregate principal amount of the 7.70% Notes and 6.875% Notes for $51.3 million. In connection therewith, we recorded a gain on debt retirement of $32.4 million, which included unamortized debt issuance costs. The debt repayment and related gain on debt retirement is included in the results of operations and cash flows of continuing operations.

On October 15, 2019, we commenced an offer to purchase up to $100.0 million of the outstanding 7.70% Notes and the 6.875% Notes. In November 2019, we accepted for payment $18.1 million aggregate principal amount of the 7.70% Notes and $39.4 million aggregate principal amount of the 6.875% Notes for $38.4 million. In connection therewith, we recorded a gain on debt retirement of $18.5 million, which included unamortized debt issuance costs. The debt repayment and related gain on debt retirement is included in the results of operations and cash flows of continuing operations.

During November 2019, we made additional purchases of $15.0 million aggregate principal amount of the 7.70% Notes for $10.0 million. In connection therewith, we recorded a gain on debt retirement of $4.8 million, which included unamortized debt issuance costs. The debt repayment and related gain on debt retirement is included in the results of operations and cash flows of continuing operations.

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On January 6, 2020, we commenced an offer to exchange up to $600.0 million aggregate principal amount of the outstanding 6.125% Senior Notes due 2023 for newly issued 7.500% Senior Secured Notes due 2025. On February 5, 2020, we announced that the exchange offer was oversubscribed and accepted for payment $600.0 million aggregate principal amount of the 6.125% Senior Notes due 2023 in exchange for newly issued 7.500% Senior Secured Notes due 2025. We accounted for the exchange as a debt modification and accordingly did not record a loss on debt retirement.

The 7.500% Senior Secured Notes due 2025 mature on July 1, 2025, and are guaranteed on a senior secured basis by the same Subsidiary Guarantors that guarantee the Existing Facilities and the 6.125% Senior Notes due 2023. The 7.500% Senior Secured Notes due 2025 and the obligations under the related guarantees are secured by (i) a first-priority lien on all of the Subsidiary Guarantors’ equipment, fixtures, investment property (other than equity interests in subsidiaries), intellectual property (following the repayment of the Senior Secured Term Loan) and other collateral to the extent it does not constitute ABL priority collateral (as defined below), and (ii) a second-priority lien on all of the Subsidiary Guarantors’ cash and cash equivalents, accounts receivables, payment intangibles, inventory, prescription

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files (including eligible script lists) and, intellectual property (prior to the repayment of the Senior Secured Term Loan) (collectively, the “ABL priority collateral”), which, in each case, also secure the Existing Facilities.

On February 19, 2020, our wholly-owned subsidiary, Envision Insurance Company, entered into a receivable purchase agreement with Bank of America, N.A. and Bank of America, N.A. purchased from Envision Insurance Company its right, title and interest in the 2019 Medicare Part D final reconciliation payment in the amount of $501.4 million anticipated to be paid by the Centers for Medicare & Medicaid Services, an agency within CMS, to Envision Insurance Company or about October 30, 2020. On the closing date, we realized net cash proceeds of $449.9 million and recognized a related loss of $16.9 million, which is included as a component of loss on sale of assets, net. We expect to collect the remaining $34.6 million during the third quarter of fiscal 2021. Proceeds from this sale were used to reduce our leverage and there can be no assurance that we will enter into similar transactions in the future or that any such transaction will be on similar terms.

Off-Balance Sheet Arrangements

As of February 29, 2020, we had no material off balance sheet arrangements.

Contractual Obligations and Commitments

The following table details the maturities of our indebtedness and lease financing obligations as of February 29, 2020, as well as other contractual cash obligations and commitments.

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