RAD Rite Aid Corp - 10-K/A

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, and such differences may be material. Additionally, the continuing impact of COVID-19 could further exacerbate many of the risks described below or described elsewhere herein. See the section entitled “Cautionary Statement Regarding Forward-Looking Statements.”

Summary

The following is a summary of the principal risks we face:

Risks Related to our Financial Condition

Widespread health developments, including the lingering global COVID-19 pandemic and the end of the associated public health emergency and other pandemic-related measures, could materially and adversely affect our business, financial condition and results of operations.

We are highly leveraged. Our substantial indebtedness and limited cash flow could adversely affect our ability to service debt or obtain additional financing if necessary. Additionally, the capital markets have experienced a high degree of volatility, which could make it difficult to obtain new financing or refinancing existing indebtedness.

Borrowings under our senior secured credit facilities are based upon variable rates of interest.

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

We have identified a material weakness in our internal control over financial reporting and determined that our internal control over financial reporting and our disclosure controls and procedures were not effective as of March 4, 2023. Failure to remediate the material weakness or any other material weaknesses that we identify in the future could result in material misstatements in our financial statements or cause us to fail to meet our periodic reporting obligations.

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.

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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.

Inflation could adversely impact our financial condition and results of operations.

We recently implemented a performance acceleration program, which we cannot guarantee will achieve its intended result.

Our ability to attract and motivate talented employees is uncertain and poses financial risks.

Failure or significant disruption to our information technology systems/infrastructure or a cyber-security breach could adversely affect our operations.

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.

Our operating results are affected by the health of the economy in general and in the communities we serve.

Any failure to protect the security of personal information about our customers and associates could result in significant business liability and reputational harm.

Any inability to keep existing store locations or open new locations in desirable places may have a negative impact on our operations.

A variety of business continuity hazards and risks could materially and adversely affect our and our vendors’ business operations and our quarterly results may fluctuate significantly.

Negative public perception of the industries in which we operate, or of our industries’ or our practices, can adversely affect our businesses, operating results, cash flows and prospects.

We may be unable to achieve our environmental, social and governance goals.

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.

New and emerging payment models for health care services reimbursement may hinder our retail pharmacies’ and PBMs’ ability to compete, and negatively impact our revenue.

A change in our pharmacy and payor mix could adversely affect our profit margins.

A sudden and material decrease in the number of Medicaid enrollees due to the “Medicaid Cliff” could have a sudden destabilizing impact on retail pharmacy revenue.

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

There are risks related to the availability, pricing, and safety profiles of the pharmacy drugs and products we purchase and sell.

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.

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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 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.

We are, and in the future may become, involved in legal proceedings that may adversely affect our financial position and our pursuit of refinancing opportunities, as well as our reputation and brand.

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

Government audits, investigations, and reviews could lead to liability and operational changes.

If our compliance or other systems and processes fail or are deemed inadequate, we may become subject to regulatory actions and/or litigation.

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

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

Risks of declining gross margins in the PBM industry could adversely impact our profitability, and could result in further impairment charges.

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

Regulatory or business changes relating to our participation in Medicare Part D, the medical loss ratio for our 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.

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 impact of extreme events, natural disasters, and climate change could create unpredictability for our business operations.

The seasonal nature of our business causes fluctuations in operations.

Changes in laws governing labor, employers, and union organizing may increase our labor costs.

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Risks Related to our Financial Condition

Widespread health developments, including the lingering global COVID-19 pandemic and the end of the associated public health emergency and other pandemic-related measures, could materially and adversely affect our business, financial condition and results of operations.

We continue to closely monitor lingering impacts relating to the COVID-19 pandemic. The approaching end of the public health emergency and the expiration of certain measures related to local, national and international responses to the pandemic could have uncertain impacts on the services that we offer to patients and our revenue stream and/or reimbursement.

The continuing nature and scope of COVID-19’s impacts to our business and operations, as well as the impact of the end of the public health emergency and other pandemic-related measures, will depend on a series of evolving factors and developments that are difficult to assess, predict, or control, which include, but are not limited to, the following:

additional outbreaks or spikes in the number of COVID-19 cases, future mutations or related variants of the virus, and the continuing efficacy and availability of vaccines;

the extent and duration of the effect on consumer confidence, economic well-being, spending, and drug utilization, customer demand, consumer behavior, buying patterns and shopping behaviors, including spending on discretionary categories, which often include higher margin products, and increased utilization of online sales channels after the COVID-19 pandemic;

the possible expiration, termination or reduction of governmental, business, or other measures implemented in response to the COVID-19 pandemic;

continuing impacts on our distribution channels and supply chain;

volatility or disruptions in the credit and financial markets;

increased cyber-security risks, including as a result of our associates, and employees of our business partners, vendors, suppliers and other third parties with which we do business, working remotely;

additional increased costs associated with operating during the COVID-19 pandemic;

evolving macroeconomic factors, including general economic uncertainty, product costs, unemployment rates, and recessionary and inflationary pressures;

economic activity as the COVID-19 pandemic subsides, which may vary materially over time and among the different regions and markets we serve;

the long-term impact of the COVID-19 pandemic on the global economy, trade relations, consumer behavior, our industry, our business operations, and the political environment; and

relaxation or lifting of government mandates and restrictions related to COVID-19, such as the mask mandate.

The above factors and risks, among others, are difficult to predict and could result in material adverse impacts to our business, operations, cash flows, and financial condition. In addition, it is difficult to predict the potentially adverse impacts that COVID-19 and the end of the public health emergency could continue to have on our customers, suppliers, vendors, and other business partners, which, in turn could materially and adversely impact our business. Additionally, the impact of COVID-19 and the end of the public health emergency could further exacerbate the impact of the other risk factors contained herein and in the other reports the Company files with the SEC.

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We are highly leveraged. Our substantial indebtedness and limited cash flow could adversely affect our ability to service debt or obtain additional financing if necessary. Additionally, the capital markets have experienced a high degree of volatility, which could make it difficult to obtain new financing or refinancing existing indebtedness.

We had, as of March 4, 2023, approximately $2.9 billion of outstanding indebtedness and stockholders’ deficit of $594.2 million. We also had additional borrowing capacity under our $2.85 billion senior secured asset-based revolving credit facility (the “Existing Senior Secured Revolving Credit Facility” or “revolver”) of $1,404.0 million, net of outstanding letters of credit of approximately $208.7 million.

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

limit our flexibility in planning for, or reacting to, changes in the markets in which we compete;

place us at a competitive disadvantage relative to our competitors with less indebtedness;

limit our ability to reinvest in our business;

render us more vulnerable to general adverse economic, regulatory and industry conditions; and

require us to dedicate a substantial portion of our cash flow to service our debt.

Our ability to meet our cash requirements, including our debt service obligations, is dependent upon our ability to maintain and improve our operating performance, which is subject to general economic and competitive conditions and to financial, business and other factors, many of which are beyond our control, such as perceived reputation and ongoing litigation. In particular, in fiscal 2023, we were named as a defendant in numerous lawsuits relating to the distribution and dispensing of prescription opioids. Costs incurred in litigation can be substantial, regardless of the outcome, and could harm our reputation, even if we are successful. Although we believe we have adequate sources of liquidity to meet our anticipated requirements for working capital, debt service and capital expenditures through at least the next twelve months, the costs associated with these legal proceedings are impossible to estimate with certainty, could exceed any applicable insurance coverage, and could significantly impact such liquidity. See “Risks Related to the Retail Pharmacy and PBM Industries in which we Operate —We are, and in the future may become, involved in legal proceedings that may adversely affect our financial position and our pursuit of refinancing opportunities” and “Risks Related to our Operations— Negative public perception of the industries in which we operate, or of our industries’ or our practices, can adversely affect our businesses, our operating results, cash flows and prospects.”

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 2022 Medicare Part D final reconciliation payment. There can be no assurance that we will enter into a similar transaction for our calendar 2023 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, raise additional capital through short-term loans, selling or licensing intellectual property 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. 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.

We are currently exploring several refinancing opportunities and will continue to explore various options in the pursuit thereof. However, many of our existing debt agreements contain provisions that could require us to obtain unanimous consent for specified amendments or changes, including those needed for certain refinancings, or to waive an event of default if we are unable to service our debt. A default on any of our debt obligations could trigger certain acceleration clauses, causing those and our other debt obligations to become due and payable. Upon an acceleration of

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any of our debt, we may not be able to make payments under our other debt agreements. While we continue to work through a number of refinancing alternatives to address our upcoming debt maturities, which are no earlier than July 2025, we make no assurance regarding the likelihood or exact timing of any refinancing or the terms thereof. See “The covenants in the instruments that govern our current indebtedness may limit our operating and financial flexibility.” 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.

The ICE Benchmark Administration, the administrator for LIBOR, ceased the publication of one-week and two-month USD LIBOR after December 2021 and intends to cease publishing all remaining USD LIBOR tenors in mid-2023. The Alternative Reference Rates Committee, a group of market participants convened by the U.S. Federal Reserve Board and the Federal Reserve Bank of New York, has recommended the Secured Overnight Financing Rate (“SOFR”), a rate calculated based on repurchase agreements backed by treasury securities, as its recommended alternative benchmark rate to replace USD LIBOR. Any new benchmark rate will likely not replicate LIBOR exactly, which could impact our contracts that terminate after mid-2023.

As a result of the cessation of LIBOR, we have amended certain of our credit agreements and facilities to replace LIBOR with SOFR as the applicable reference rate. In particular, 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, as further amended by the Second Amendment to Credit Agreement, dated as of August 20, 2021, and as further amended by the Third Amendment to Credit Agreement, dated as of December 1, 2022, the “Credit Agreement”), consisting of a $2,850.0 million senior secured asset-based revolving credit facility (“Existing Senior Secured Revolving Credit Facility” or “revolver”) and a $400.0 million “first-in, last out” senior secured term loan facility (“Existing Senior Secured Term Loan”) (collectively, the “Existing Facilities”) bear interest at a rate that varies depending on SOFR. If SOFR rises (including as a result of recent actions by the U.S. Federal Reserve), the interest rates on borrowings under our Existing Facilities will increase. Therefore an increase in SOFR would increase our interest payment obligations under those borrowings and have a negative effect on our cash flow and financial condition.

There is uncertainty about how applicable law and the courts will address the replacement of LIBOR with alternative rates on variable rate retail loan contracts. In addition, changes to benchmark rates may have an uncertain impact on our cost of funds and our access to the capital markets, which could impact our results of operations and cash flows. Uncertainty as to the nature of such potential changes may also adversely affect the trading market for our securities, and at this time, it is not possible to predict how markets will respond to SOFR or other alternative reference rates. In addition, there are differences between how LIBOR and SOFR are calculated, which could result in increased borrowing costs. We cannot predict to what extent the withdrawal and replacement of LIBOR will impact us. However, the implementation of alternative underlying floating-rate indices and reference rates may have an adverse impact on our business, results of operations or financial condition.

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:

incur debt and liens;

pay dividends;

make redemptions and repurchases of capital stock;

make loans and investments;

prepay, redeem or repurchase debt;

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engage in acquisitions, consolidations, asset dispositions, sale-leaseback transactions and affiliate transactions;

change our business;

amend some of our debt and other material agreements;

issue and sell capital stock of subsidiaries;

restrict distributions from subsidiaries; and

grant negative pledges to other creditors.

The Existing 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 Existing Senior Secured Revolving Credit Facility is less than $206.0 million or (ii) on the third consecutive business day on which availability under the Existing Senior Secured Revolving Credit Facility is less than $257.5 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 $257.5 million. As of March 4, 2023, the availability under the Existing Senior Secured Revolving Credit Facility was at a level that did not trigger the Existing Credit Agreement’s financial covenant. The Existing Credit Agreement also limits our ability to maintain cash, without repaying a portion of our outstanding borrowings under the revolver, 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”.

The breach of certain covenants in our debt instruments could result in a default under our debt agreements, which could trigger certain acceleration clauses, causing those and other obligations to become due and payable. Upon an acceleration of any of our debt, we may not be able to make payments under our other outstanding debt agreements. If we are unable to make payments under our debt obligations, lenders of our secured debt obligations may be able to foreclose on the collateral that secures such debt and our assets may be insufficient to satisfy such secured debt and, to the extent of any remaining assets, any unsecured debt.

We have identified a material weakness in our internal control over financial reporting and determined that our internal control over financial reporting and our disclosure controls and procedures were not effective as of March 4, 2023. Failure to remediate the material weakness or any other material weaknesses that we identify in the future could result in material misstatements in our financial statements or cause us to fail to meet our periodic reporting obligations.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, our management is required to report on, and our independent registered public accounting firm is required to attest to, the effectiveness of our internal control over financial reporting. The rules governing the standards that must be met for management to determine the adequacy of our internal control over financial reporting are complex and require significant documentation and testing if a deficiency is identified. Annually, we perform activities that include reviewing, documenting, and testing our internal control over financial reporting. If we fail to maintain the adequacy of our internal control over financial reporting, we will not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. Any failure to achieve and maintain an effective internal control environment could result in materially misstated consolidated financial statements and a failure to meet our reporting obligations.

Subsequent to the issuance of the Company’s consolidated financial statements as of and for the fiscal year ended March 4, 2023, management evaluated the materiality of a misstatement related to the Company’s historical accounting for closed store liabilities in accordance with changes in ASC 420, Exit or Disposal Cost Obligations . Based on their evaluation, management concluded the misstatement is not material to the Company’s previously issued

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consolidated financial statements as of and for each of the three fiscal years ended March 4, 2023 and each of the interim and year-to-date periods then ended.

Due to the discovery of this error, we reevaluated the effectiveness of our disclosure controls and procedures and internal control over financial reporting and identified a material weakness in our internal control over financial reporting, and as a result, determined that our disclosure controls and procedures and internal control over financial reporting are not effective. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. For further discussion of the material weakness, see Part II, Item 9A, “Controls and Procedures.” In conjunction with filing this Amendment, we determined to revise our consolidated financial statements as of and for each of the three fiscal years ended March 4, 2023 and the related notes hereto to reflect the impact of the error in the periods impacted. For additional information and a detailed discussion of the revision, refer to Note 25 Revision of Previously Issued Consolidated Financial Statements.

Management is actively engaged in the planning for, and implementation of, remediation efforts to address our material weakness. However, we may not be successful in promptly remediating the material weaknesses identified by management or be able to identify and remediate additional control deficiencies, including material weaknesses, in the future. Our management may also be unable to conclude in future periods that our disclosure controls and procedures are effective due to the effects of various factors, which may, in part, include unremediated material weaknesses in internal control over financial reporting. Any failure to establish and maintain effective disclosure controls and procedures and internal control over financial reporting, including due to a failure to remediate the material weakness or the discovery or occurrence of any additional material weaknesses in our internal control over financial reporting in the future, could adversely affect our ability to prepare financial statements within required time periods and record, process and report financial information accurately, which could result in material misstatements in our financial statements and cause us to fail to meet our reporting and financial obligations, negatively impact the price of our common stock, limit our liquidity and access to capital markets, adversely affect our business, harm our reputation or subject us to litigation or investigations requiring management resources and payment of legal and other expenses.

In addition, our internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.

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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 achieved the sales productivity level of our major competitors. Improving our retail sales, prescription volumes and profitability and membership at our PBM are essential to enable us to cover our fixed staffing costs and to improve profitability and generate 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. 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, but not limited to, increased costs including higher wages, those resulting from supply chain disruptions, high energy costs, increasing production costs, and record inflation, has affected and could continue to affect consumer buying practices. These factors may 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. Given that McKesson acts as a wholesaler for drugs purchased from manufacturers worldwide, any disruption in the supply of a given drug, including disruptions related to a pandemic or to extreme weather or natural disasters, 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 71.2% of our total drugstore sales during fiscal 2023. While we believe that alternative sources of supply for most generic and brand name pharmaceuticals are 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. On February 28, 2019, we and McKesson entered into a contract 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. Material changes in our agreement with McKesson could result in disruptions in our business until we execute a replacement wholesaler agreement or develop and implement self-distribution processes.

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Inflation could adversely impact our financial condition and results of operations.

Inflation in the United States began to rise significantly in the second half of the calendar year of 2021 and continued to rise through the middle of 2022; the inflation rate remains high. This is primarily believed to be the result of the economic impacts from the COVID-19 pandemic, including the global supply chain disruptions, strong economic recovery and associated widespread demand for goods, and government stimulus packages, among other factors. For instance, global supply chain disruptions have resulted in shortages in materials and services. Such shortages have resulted in inflationary cost increases for labor, materials, and services, and could continue to cause costs to increase as well as scarcity of certain products. We are experiencing inflationary pressures in many areas of our business, including with respect to employee wages and the cost of prescription drugs, although, to date, we have been able to slightly offset such pressures through price increases and other measures. We cannot, however, predict any future trends in the rate of inflation or associated increases in our operating costs and how that may impact our business. To the extent we are unable to recover higher operating costs resulting from inflation or otherwise mitigate the impact of such costs on our business, our revenues and gross margins could decrease, and our financial condition and results of operations could be adversely affected. Acts by the U.S. Federal Reserve, or other governmental entities, intended to address inflation may also have a negative impact on us, such as increased borrowing costs.

We recently implemented a performance acceleration program, which we cannot guarantee will achieve its intended result.

In December 2022, we announced the implementation of a performance acceleration program designed to increase our strategic focus and operational efficiency. The program is intended to reallocate resources toward our strategic priorities and faster growth, drive efficiencies in our operations and reduce structural costs. For example, we are aiming to rebuild our indirect buying process and renegotiate vendor contracts, reduce our lease burden through lease renegotiations, and decrease prescription brand inventory by implementing new controls and deploying “just in time” ordering models. The successful implementation of the program may present organizational challenges and result in short term charges and other costs. As a result, we may not be able to fully realize all of the anticipated benefits from the program, and even if we do not realize its intended benefits, the program is accompanied by significant consulting and other costs. Events and circumstances, such as financial or strategic difficulties, delays and unexpected costs may occur that could result in our not realizing all of the anticipated benefits or our not realizing such benefits on our expected timetable. If we are unable to fully realize the anticipated savings from the performance acceleration program, our ability to fund other initiatives and enhance profitability may be adversely affected. Any failure to implement the performance acceleration program in accordance with our expectations could adversely affect our business, results of operations, cash flows and financial condition.

Our ability to attract and motivate talented employees is uncertain and poses financial risks.

We regularly compete with similar companies for talented employees and our success depends in part on attracting, retaining, and/or replacing key personnel with equally qualified employees. The unusually difficult challenge to find and retain talented employees and to reduce turnover, including, but not limited to, pharmacists and pharmacy technicians, in recent months and years continues due to macroeconomic conditions, societal issues, and other factors. In addition, job market dynamics have been impacted by the “great resignation,” with a significant number of people leaving the workforce, and future challenges related to workplace practices could lead to attrition and difficulty attracting high-quality employees. These factors may require our retail pharmacies to increase compensation to both hire and retain employees. We may also lose employees due to illness or other sudden occurrences, which makes succession planning difficult.

Loss and/or transition of Company personnel, including senior executives, creates uncertainty as there is no guarantee that new personnel or leadership will adequately perform or smoothly transition into their new roles. Moreover, our investors, business partners, and employees prefer stability and any high level of employee turnover could undermine stakeholder support.  Ultimately, the unpredictability regarding employee continuity and potential disruption stemming from employee losses pose a threat to our overall financial condition and operations. We are actively searching for a new chief executive officer and need to fill other senior positions. We cannot assure you when we will fill such positions, the success of the integration of such personnel and whether such hires will result in changes to our strategy or result in the need to fill other positions.

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Failure or significant disruption to our information technology systems/infrastructure or a cyber-security breach could adversely affect our operations.

Technology and computer systems are critical to many aspects of our pharmacy business, including, but not limited to, the drug supply chain, our dispensing of drugs, and our reimbursement. For instance, we rely extensively on computer systems used by Rite Aid, Elixir Insurance, Bartell, and Health Dialog, to manage our ordering, pricing, point-of-sale, inventory replenishment and other processes. Our computer systems are at risk for failures, security breaches, and natural disasters, and they have been subject to attack by perpetrators of random or targeted malicious technology-related events, such as cyberattacks, ransomware, computer malware, 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 malware, cyber-security breaches, vandalism, coordinated cyber-security attacks, severe weather conditions, catastrophic events and human error. Our disaster recovery planning considers many possible scenarios but cannot account for all eventualities. Collectively, we are building a security-aware culture across the organization by providing role-based security training, developing security champions across Technology and business areas, and partnering with industry experts. Our information security program is designed to protect confidential information, networks and systems against attacks through a multi-layered approach to address information security threats and vulnerabilities. However, 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, or security breaches of, the systems and technology of third-party suppliers or processors we interact with, including key payors and vendors with whom we share information. 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 know that the coverage limits under our insurance program will be adequate to protect us against future claims.

To effectively compete with our competitors and continue business partner relations, we must and are investing in and updating our technology and computer systems. 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, compliance with those requirements could also result in additional costs. While we seek to ensure that our security operations are current and that our technology can properly interface with our business partners, there are risks that our technology investments will not be successful, will not provide a return on investment, and/or may fail or never be deployed. Oftentimes, we are implementing multiple updates or technology changes at the same time. We are currently in the process of changing our omni-channel distribution and 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

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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.

Our operating results are affected by the health of the economy in general and in the communities we serve.

The United States financial markets have been experiencing, and may continue to experience, volatility and disruptions, including diminished liquidity and credit availability, inflation, declines in consumer confidence and economic growth and increases in unemployment rates, all of which have resulted in uncertainty about economic stability. Our business is affected by economic instability and declines in consumer confidence in general and in the communities we serve, and various other economic factors, including inflation and changes in consumer purchasing power, preferences and/or spending patterns. An unfavorable, uncertain or volatile economic environment, as we have experienced as a result of inflation, rising interest rates, supply chain disruptions and COVID-19, has caused and could cause a decline in drug utilization, a dampening demand for PBM services and retail products, and an increase in theft or other crime that could impact our retail locations. For example, in fiscal 2023, retail theft was significantly higher than predicted. Such theft has had a negative impact on our retail profit and continued high or unpredictable retail theft rates could continue to negatively impact our results of operations. In addition, adverse changes in the U.S. economy, consumer confidence and economic conditions could have an adverse effect on our results of operations.

Any failure to protect the security of personal information about our customers and associates, could result in significant business liability and reputational harm.

In the ordinary course of business, we collect, process and store certain personal information that our customers provide to purchase products or services, enroll in promotional programs, register on our website, or otherwise communicate and interact with us, including in connection with our administration of COVID-19 vaccines. We may collect, maintain, and store information about our associates in the normal course of business and contract with third-party business associates and vendors to accomplish these tasks. 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. Data breaches or violations of data protection laws may result in liability for the Company, even if caused, in whole or in part, by a business associate, vendor, or other third-party. The unlawful handling or disclosure of sensitive personal information could also pose a serious risk to our customers’ trust in the Company, including the unlawful handling or disclosure due to security breaches of the systems and technology of third-party suppliers or processors that we interact with, including key payors and vendors with whom we share information including PHI, PII , and personal credit card information. We are constantly working to enhance our defenses against Ransomware attacks, but there is always a risk of controls being defeated which could result in loss of customer or business information that could disrupt our operations, damage our reputation, and expose us to claims from customers, financial institutions, payment card companies and other persons, or result in governmental investigation and enforcement, sanctions, fines, and/or penalties, any of which could have an adverse effect on our business, financial condition and results of operations. Compliance with more rigorous privacy and information security laws and standards, including, without limitation, the 2010 FTC Consent Order to which we are subject regarding the protection of personal information, may result in significant expense due to increased investment in technology, the ongoing development and implementation of new operational and control processes, and other security protocols or efforts. Our brand, reputation, and customer loyalty may be negatively impacted, and we may become subject to enforcement actions, fines, penalties, and additional obligations under new or extended consent orders, in the event of any personal information-related privacy or security issues or the breach or violation of the FTC Consent Order. The occurrence or scope of any future data privacy or security failures are unpredictable, and it may prove difficult or impossible to fully mitigate or remediate

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their negative consequences. If we fail to comply or are alleged to have failed to comply with applicable data protection and privacy and security laws and regulations, we could be subject to government regulatory investigations and enforcement actions, as well as private individual or class action lawsuits.

Any inability to keep existing store locations or open new locations in desirable places may have a negative impact on our operations.

We compete with other retailers and businesses to identify and develop desirable locations for retail store operations. Our ability to find suitable locations and our store construction, renovation, and operating costs can vary based on the specific state and locality and applicable zoning, environmental, and real estate laws. Additionally, construction delays, adverse modifications in lease terms, and changes in community demographics can negatively impact our store operations and revenues, and in some instances may cause us to close or relocate stores, or result in an impairment charge. The recent increase in costs, including as a result of inflation, associated with hiring and maintaining our retail pharmacy workforce may also negatively impact the profitability of some of our store locations to the extent that we may be forced to close some locations. These factors and charges may vary over time, which may make it more difficult to compare our operating results from period to period.

A variety of business continuity hazards and risks could materially and adversely affect our and our vendors’ business operations and our quarterly results may fluctuate significantly.

A variety of potential hazards, risks, and factors could adversely impact our and our vendors’ operations and performance, including, but not limited to, health epidemics or pandemics like COVID-19, supply chain disruptions and delays, energy shortages and inflationary energy costs, extreme weather, whether as a result of climate change or otherwise, natural disasters, acts of war, terrorism or violence, extended protests or periods of civil unrest, labor disputes, quality control issues, infrastructure failures, trade sanctions, inflation, changing market conditions, the introduction of new prescriptions drugs, the seasonal nature of our business, and changes in payor reimbursement rates and terms. These and other factors could lead to disruptions in and interfere with domestic and global supply chains, revenue flows, reimbursements, and our ability to source products and find qualified vendors to access appropriate products in a timely and efficient manner. We could also be liable for any resulting personal injury or property damage arising from these risks to the extent our existing insurance coverage is insufficient or unavailable to cover associated losses. Due to these often unavoidable risks, some of which are beyond our management and control, our businesses, operating results, cash flows, and financial condition could be adversely affected.

Historically, our operating results have varied on a quarterly basis, and one or more of the above or other factors or risks could cause our results to fluctuate significantly. Accordingly, quarter-to-quarter comparisons of our operating results are not necessarily meaningful and a single quarter’s results may not provide reliable insight into our anticipated future performance.

Negative public perception of the industries in which we operate, or of our industries’ or our practices, can adversely affect our businesses, operating results, cash flows and prospects.

Our brand and reputation are two of our most important assets, and the industries in which we operate have been and are negatively perceived by the public from time to time. Negative publicity may come as a result of adverse media and/or social media coverage, litigation against us and other industry participants, the ongoing public debates over drug pricing, PBMs, government involvement in drug pricing and purchasing, changes to the ACA, governmental hearings and/or investigations, including in connection with the distribution and dispensing of prescription opioids, actual or perceived shortfalls regarding our industries’ or our own products and/or business practices (including PBM operations, drug pricing and insurance coverage determinations) and social media and other media relations activities. Negative publicity also may come from a failure to meet customer expectations for consistent, high quality and accessible care. This risk may increase as we continue to offer products and services that make greater use of data and as our business model becomes more focused on delivering health care to consumers.

In addition, by working with the U.S. government in the distribution and administration of the COVID-19 vaccine, we may be subject to negative publicity related to the government’s actions in response to COVID-19 that are outside of our ability to control.

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Furthermore, the use of social media platforms, including blogs, social media websites and other forms of internet-based communication, which allow individuals access to a broad audience of consumers and other interested persons, has become commonplace. Negative commentary regarding us or the brands that we sell or our personnel may be posted on social media platforms or similar devices at any time and may harm our reputation or business. Consumers value readily available information concerning retailers and their goods and services and often act on such information without further investigation and without regard to its accuracy. The harm may be immediate without affording us an opportunity for redress or correction. In addition, social media platforms provide users with access to such a broad audience that collective action against our website and marketplace stores, such as boycotts, can be more easily organized. If such actions were organized, we could suffer reputational damage as well as physical damage to our stores and merchandise. Moreover, short sellers and others, some of whom post anonymously on social media, may be positioned to profit if our stock declines and their activities can negatively affect our stock price.

We also use social media platforms as marketing tools or as channels to disseminate information. For example, the Company and certain of its executive officers maintain Facebook, Instagram, Twitter, LinkedIn, and other social media accounts, where marketing and other information relevant to customers and investors is disseminated. As laws and regulations rapidly evolve to govern the use of these platforms and devices, the failure by us, our employees or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms and devices could adversely impact our business, financial condition and results of operations or subject us to fines or other penalties.

Negative public perception and/or publicity of our industries in general, or of us or our key suppliers and vendors in particular, can further increase our costs of doing business and adversely affect our operating results and our stock price by:

adversely affecting our brand and reputation;

adversely affecting our ability to market and sell our products and/or services and/or retain our existing customers and members;

requiring us to change our products and/or services;

reducing or restricting the revenue we can receive for our products and/or services; and/or

increasing or significantly changing the regulatory and legislative requirements with which we must comply.

We may be unable to achieve our environmental, social and governance goals.

We are dedicated to corporate social responsibility and sustainability and we established certain goals as part of our ESG strategy. We face pressure from our colleagues, customers, and stockholders to meet our goals and to make significant advancements in environmental, social and governance matters. Achievement of our goals is subject to risks and uncertainties, many of which are outside of our control, and it is possible that we may fail to achieve these goals or that our colleagues, customers, or stockholders may not be satisfied with the goals we set or our efforts to achieve them. These risks and uncertainties include, but are not limited to: our ability to set and execute on our operational strategies and achieve our goals within the currently projected costs and the expected timeframes; the availability and cost of technological advancements, renewable energy and other materials necessary to meet our goals and expectations; compliance with, and changes or additions to, global and regional regulations, taxes, charges, mandates or requirements relating to climate-related goals; labor-related regulations and requirements that restrict or prohibit our ability to impose requirements on third-party contractors; the actions of competitors and competitive pressures; an acquisition of or merger with another company that has not adopted similar goals or whose progress towards reaching its goals is not as advanced as ours; and the pace of regional and global recovery from the COVID-19 pandemic. A failure to meet our goals could adversely affect public perception of our business, employee morale or customer or stockholder support.

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Further, an increasing percentage of colleagues, customers, and stockholders considers sustainability factors in making employment, consumer health care and investment decisions. If we are unable to meet our goals, we may lose colleagues, have difficulty recruiting new colleagues, and be unable to attract investors, customers, or partners, our stock price may be negatively impacted, our reputation may be negatively affected, and it may be more difficult for us to compete effectively, all of which would have an adverse effect on our business, operating results, and financial condition.

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.

In the retail pharmacy business, 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. Many of our competitors are larger, better capitalized, have access to greater financial and other resources, are diversified through other industries and have an international presence. Additionally, some of our competitors are vertically integrated, allowing them to leverage healthcare, health plan, and PBM operations together with their retail pharmacy footprint. Increasingly, these competitors are expanding in our existing markets. Greater competition exerts pressure on our pricing and promotional models and may force us to modify or reduce our prices. The ability of our stores to achieve profitability depends on their ability to achieve a critical mass of loyal, repeat customers.

Competition from grocers and online retailers has significantly increased during the past few years. Some of our competitors have or may merge with or acquire pharmacies, pharmaceutical services companies, PBMs, health insurance companies, specialty or mail order facilities and/or enter into strategic partnership alliances with Group Purchasing Organizations or wholesalers, which may further increase competition. We may not be able to effectively compete against them because our existing or potential competitors have financial and other resources that are superior to ours.

In the PBM business, we also face competition from other PBMs, including large, national PBMs, PBMs owned by national health plans and middle-market stand-alone 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 and scale. Further, we may be at a competitive disadvantage because we are more highly leveraged than our competitors.

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.

Our market dynamics are subject to fluctuation due to consumer behavior and technology changes, among other factors. We must adjust our operations and business model to meet these evolving market demands. If we fail to make proper adjustments to meet changing market conditions, we may lose customers, which would have a negative impact on our revenue.

Increasingly, a greater volume or proportion of dispensed prescriptions involve specialty drugs, which are often furnished through limited distribution channels. Because these channels are restricted, there is substantial competition among our competitors to be included in these networks. Furthermore, participation in these networks is challenging, as the higher costs and complexities of specialty drugs may be difficult to manage. If we are unable to effectively compete for specialty drug business and access this market, we face potential harm to our business operations and adverse impacts to our financial condition.

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New and emerging payment models for health care services reimbursement may hinder our retail pharmacies’ and PBMs’ ability to compete, and negatively impact our revenue.

Government and commercial payors are increasingly exploring alternatives to fee-for-service payment models. Such alternatives include risk sharing, value-based payment and bundled payment systems for health care services. Our retail pharmacies do not operate as part of integrated health care delivery models and, unlike some of our competitors, we have not invested in health care delivery models which integrate different health care services, such as pharmacy and primary care services. Additionally, our retail pharmacies are not active participants in any risk assumption payment models. Moreover, it is operationally difficult to apply value-based payment to prescription drug benefit services. To the extent that payors increasingly embrace these new payment delivery models and systems and our retail competitors are able to adapt to such changes, our retail pharmacies risk being excluded from such networks and the corresponding loss of reimbursement. Even though the COVID-19 pandemic and resulting government waivers have allowed pharmacists to embrace an expanded scope of services, the end of the COVID-19 pandemic could result in a rollback of those waivers and our pharmacists may no longer be authorized to offer such services as part of the various novel delivery and payment models.

With regard to our PBM business, given the major challenges involved in creating complex delivery networks to implement integrated delivery of health care services and/or nontraditional payment systems, our PBM business risks an inability to develop robust pharmacy networks capable of providing the level and scope of services necessary to sustain such models. Our PBM business may face a competitive disadvantage. Furthermore, our competitors with strong regional networks may threaten our ability to compete in certain regions. Ultimately, if we cannot develop thriving networks as part of new and emerging payment and delivery models our bottom line will suffer.

A change in our pharmacy and payor mix could adversely affect our profit margins.

Our Retail Pharmacy Segment is subject to changes in pharmacy and payor mix, including shifts in pharmacy prescription volume toward programs offering less favorable reimbursement terms, which could adversely affect the results of our operations. For instance, we anticipate that a growing number of prescription drug sales will involve government subsidized drug benefit programs, 90-day fill programs, and specialty drug sales, under which our business may receive lower margins. As our government-funded businesses grow, our exposure to changes in law and policy under those programs will increase. Also, the government could reduce funding for health care or other programs or cancel, decline to renew, or modify our contracts, which could adversely impact our business, operating results, and cash flows. Moreover, many Medicare Part D plans and commercial payors are adopting preferred pharmacy networks, in which participating pharmacies must accept lower reimbursement in exchange for access to the payors’ patient population. We could incur negative financial impacts should the terms and conditions of such preferred networks become less favorable or if we are unable to offset lower reimbursement with additional prescription volume, other business, or improved efficiencies. We could also be negatively impacted by changes in the relative distribution of drugs dispensed at our pharmacies between brands and generics or if we experience an increase in the amounts we pay to procure pharmaceutical products.

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A sudden and material decrease in the number of Medicaid enrollees due to the “Medicaid Cliff” could have a sudden destabilizing impact on retail pharmacy revenue.

During the COVID-19 related federal public health emergency, the federal government provided supplemental Medicaid funding to states as long as states agreed to provide for continuous Medicaid coverage for current enrollees. This continuous enrollment has ended as of March 31, 2023. States will once again be required to remove Medicaid ineligible individuals from the Medicaid rolls. Anywhere from 5 to 15 million Americans could lose coverage as a result. Each state will manage the unwinding differently so the impact will be different from state to state. These changes could have a sudden and material negative impact on the Company’s overall retail pharmacy revenue received from Medicaid and Medicaid MCOs.

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

Many organizations in the healthcare industry, including PBMs and Part D plans, have consolidated to create larger healthcare enterprises with greater market power, which has contributed to continued pricing pressures and has weakened our retail pharmacies’ ability to obtain advantageous pharmacy network contracting terms. The effects of organizational consolidation are exacerbated by the growing market share of specialty pharmacies, compared to retail pharmacies, for limited-distribution high-cost therapies for rare diseases. Within the Part D plan market, approximately one-third of our PBM business is Part D business and it will be more difficult for our PBM to compete in and obtain competitive reimbursement terms in the consolidated Part D plan marketplace. Our PBM business also faces increased competitive threats from the consolidation among middle-market PBMs.

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.

There are risks related to the availability, pricing, and safety profiles of the pharmacy drugs and products we purchase and sell.

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. The withdrawal of certain drugs from the market, including COVID-19 vaccines, increased safety risk profiles or regulatory restrictions, 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. Additionally, as we offer new products and services, our litigation and regulatory risk profile may change and increase our exposure to new risks that we have not previously encountered or addressed.

The availability of brand versus generic drugs and changes in those markets may also negatively impact our financial condition. Brand name drugs may become subject to inflation. Moreover, as generic drug utilization has increased, and due to consolidation within the generic drug manufacturing industry, our pharmacy business has experienced decreasing profit margins on generic drug sales. Generic drug profit margins also suffer as a result of downward pricing pressure from discount card vendors, cash pay pharmacies and other competitors, which are growing as a share of the prescription drug marketplace. If our businesses are unable to accommodate shrinking profit margins and decreased sales on certain prescription drug products, our costs, revenue and overall profits could be adversely and materially impacted.

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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 plans, represented substantially all of our pharmacy sales in our Retail Pharmacy Segment in fiscal 2023.

The continued efforts of Congress and Federal agencies, 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. Consolidation within the Part D plan marketplace and fewer Part D plans may increase plans’ reimbursement leverage over our retail pharmacies. Additionally, on April 29, 2022, CMS issued a final rule that requires Part D plans to reflect all pharmacy price concessions (also known as “Direct and Indirect Remuneration” or “pharmacy DIR”) in a pharmacy’s negotiated price at the point of sale starting for contract year 2024. With respect to retail pharmacies, the final rule could result in unpredictable results, including changes to reimbursement terms in contracts with Part D payors for contract year 2024 as well as temporary cash flow issues in the first few months of implementation of the final rule. Our PBM business could also experience challenges related to utilizing pharmacy price concessions in Part D bids and subsequent contracts.

The competitive success of our pharmacy business is largely dependent on our ability to establish and maintain contractual relationships with PBMs and other payors on acceptable terms as they may adopt narrow or restricted retail or specialty pharmacy networks. 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. 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.

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. Likewise, Congress or the federal agencies could take actions that reduce or eliminate drug rebates obtained through negotiation with pharmaceutical manufacturers. 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, legislative proposals have been made that could have a material adverse effect on our business include, but are not limited to, revisions to certain ACA provisions 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.

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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. We cannot predict the effect, if any, that such legislative or regulatory changes may have on our retail 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 83.4%, 77.4% and 77.9% of our pharmacy revenue during fiscal 2023, 2022 and 2021, respectively. The largest third-party payor, CVS/Caremark, represented 33.4%, 32.1% and 30.4% of pharmacy sales during fiscal 2023, 2022 and 2021, 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. Revenue could further be impacted through changes in third-party payor behavior responding to the implementation of CMS’ final rule on the assessment of pharmacy price concessions, specifically through the Part D bid process and subsequent contracts.

In 2020, CMS adopted the Transparency in Coverage Final Rule, which requires non-grandfathered group health plans and health insurance issuers offering non-grandfathered coverage in the group and individual markets to disclose on a public website certain price information, including negotiated rates and historical net prices for covered prescription drugs. Enforcement began on July 1, 2022. CMS’ enforcement of the rule could inhibit the ability of pharmacy stakeholders, including our PBM and retail pharmacy business segments, respectively, from negotiating favorable reimbursement contracts for our Company.

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 65.9%, which includes 6.9% related to a client which termed on January 1, 2023, 60.7% and 59.7% of our Pharmacy Services Segment revenue during fiscal 2023, 2022 and 2021, respectively. The largest payor, CMS, represented 43.1%, 41.1% and 36.6% of Pharmacy Services Segment revenue during fiscal 2023, 2022 and 2021, 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, and in the future may become, involved in legal proceedings that may adversely affect our financial position and our pursuit of refinancing opportunities, as well as our reputation and brand.

We operate in a highly regulated and litigious environment. We and/or one or more of our subsidiaries are regularly involved in a variety of legal proceedings arising in the ordinary course of our business, including arbitration, litigation (and related settlement discussions), and other claims, and are subject to regulatory proceedings including audits, inspections, inquiries, investigations, and similar actions by health care, insurance, pharmacy, 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, and may exceed any applicable insurance coverage. 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.

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For example, we, along with certain of our chain pharmacy competitors, have been named as a defendant in numerous lawsuits relating to the distribution and dispensing of prescription opioids, including in the consolidated federal multi-district litigation entitled In re National Prescription Opiate Litigation (MDL No. 2804), currently pending in the United States District Court for the Northern District of Ohio. Similar cases that name us as a defendant also have been filed in numerous state court proceedings by any array of plaintiffs, including state Attorneys General, counties, cities, municipalities, Native American tribes, hospitals, third-party payors, and individuals. A qui tam complaint has also been filed in the federal District Court for the Northern District of Ohio in which qui tam relators and the United States DOJ allege violations of the federal False Claims Act and Controlled Substances Act related to the dispensing of controlled substances, primarily opioids and seek damages under the False Claims Act, civil penalties under the Controlled Substances Act, damages in connection with alleged payment by mistake (on behalf of Federal Healthcare Programs), and damages in connection with alleged unjust enrichment. The Company has also received subpoenas, civil investigative demands, and other requests relating to opioid matters from the DOJ and several state Attorneys General. Certain “usual and customary” actions are pending (or may be brought) against the Company which seek large and/or indeterminate damages. Generally, these matters allege that the Company’s retail stores overcharged for prescription drugs by not submitting the price available to members of the Rite Aid’s Rx Savings Program as the pharmacy’s usual and customary price, and related theories. These claims typically are alleged to arise under the Company’s agreements with insurers, as tort claims, or under the False Claims Act and similar theories for governmental programs, but may be alleged to arise otherwise. Also, the Company is defending putative stockholder class actions which name the Company and certain former and current executives individually as defendants.

We cannot predict with certainty the outcomes of these and other legal proceedings and other contingencies, and the costs incurred in litigation can be substantial, regardless of the outcome. Proceedings that we believe are insignificant may develop into material proceedings and subject us to unforeseen outcomes or expenses. Additionally, the actions of certain participants in our industry may encourage legal proceedings against us or cause us to reconsider our litigation strategies. 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, financial condition and business practices. Moreover, negative postings or comments on social media or networking websites about us or these legal proceedings and the on-demand news cycle, even if inaccurate or malicious, have in the past, and could in the future, generate adverse publicity that could damage our reputation. See “Risks Related to our Operations—Negative public perception of the industries in which we operate, or of our industries’ or our practices, can adversely affect our businesses, operating results, cash flows and prospects.”

Furthermore, the uncertainty relating to any legal proceedings may also impair our ability to raise capital or the cost of such capital, as well as our credit ratings. Significant liabilities resulting from legal proceedings could force us to implement further cost reduction and other cash-focused measures to manage liquidity any of which could adversely affect our businesses, operating results, cash flows and/or financial condition.

We are subject to governmental regulations, procedures and requirements; our non-compliance or a significant legislative, regulatory, or public policy 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 laws, regulations, or in related public policy may require extensive system and operating changes that may be difficult to implement, increase our operating costs and require significant capital expenditures. Untimely compliance or non-compliance 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 regulations of pharmacies; dispensing and sale of controlled substances and products containing pseudoephedrine, among others; applicable Medicare and Medicaid Regulations; 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 CPSC, the HHS and the DEA as well as state regulatory authorities, governing the sale, advertisement and promotion of

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products we sell; anti-kickback laws; false claims laws and federal and state laws governing the practice of the profession of pharmacy and medicine. For example, in the U.S., the DEA, FDA and various other regulatory authorities regulate the distribution and dispensing of pharmaceuticals, controlled substances and listed chemicals. We are required to hold valid DEA and state-level licenses, meet various security and operating standards and comply with the federal and various state-controlled substance acts and related regulations governing the sale, dispensing, disposal, holding and distribution of controlled substances and listed chemicals. Regulatory authorities have broad enforcement powers, including the ability to seize or recall products and impose significant criminal, civil and administrative sanctions for violations of these laws and regulations. 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.

Our dealings with customers face scrutiny from the federal and state government agencies, including the Federal Trade Commission, which are charged with enforcing consumer protection laws and deterring alleged unfair or deceptive trade practices. Under these laws, regulated entities may be subject to legal action and government investigations in regard to a wide array of customer-facing matters, including product pricing and expiration, disability access, and member loyalty and other financial incentive programs. A failure to keep our customers adequately informed of our practices could result in government investigations or regulatory action which may result in potential fines and penalties.

Government audits, investigations, and reviews could lead to liability and operational changes.

Our pharmacy, PBM, and PDP businesses are subject to periodic audits, investigations, and reviews from state and federal regulators and agencies. Health care laws and regulations, particularly within the pharmacy sector, are complex and subject to frequent change. Moreover, federal and state regulators are highly focused on and engage in vigorous enforcement efforts with regard to fraud, waste and abuse within the health care and pharmacy industry. Accordingly, we invest significant resources in our compliance efforts and must constantly re-evaluate our efforts, as the laws, regulations, and enforcement trends may change.

Because our business is subject to varied audits, investigations, and reviews, we face risks including financial penalties, civil and/or criminal liability, suspension or exclusion from government programs, and possible licensure sanction. For example, because our PDP is governed by CMS’ audit authority, it could be subject to financial recoupment, penalties, beneficiary enrollment restrictions, and other forms of sanction. In addition, our PBM’s operations could be indirectly and adversely impacted if any of its Medicare plan clients are subjected to adverse government audits or enforcement actions. The outcome of any given audit, investigation, and/or review could require significant changes to our business practices, revenue flow, and overall financial condition, with a resulting adverse impact on the Company as a whole.

If our compliance or other systems and processes fail or are deemed inadequate, we may become subject to regulatory actions and/or litigation.

In addition to Rite Aid being subject to extensive and complex regulations, many contracts that Elixir Insurance has with its customers impose compliance obligations on it. These compliance obligations frequently are reviewed and audited by Elixir Insurance’s customers and regulators. More generally, if the Company’s systems and processes designed to maintain compliance with applicable legal and contractual requirements, and to prevent and detect instances of, or the potential for, noncompliance fail or are deemed inadequate, we may be subject to regulatory actions, litigation and other proceedings which may result in damages, fines, suspension or loss of licensure, suspension or exclusion from participation in government programs and/or other penalties, any of which could adversely affect our businesses, operating results, cash flows and/or financial condition.

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 require our pharmacists to offer counseling, without additional charge, to customers about medication, dosage, delivery

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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. We could be adversely impacted by the supply of defective or expired products, including the infiltration of counterfeit products into the supply chain, errors in re-labeling of products, product tampering, product recall and contamination or product mishandling issues. The federal Drug Supply Chain Security Act (“DSCSA”), which has the purpose of preventing counterfeit drugs from entering the United States supply chain, is scheduled to be fully implemented in November of 2023. There is uncertainty regarding whether the drug supply chain is fully ready for the transition to a track and trace model based on the electronic interoperable exchange of data at the product level. Moreover, with final implementation of the DSCSA, there is a potential for increased FDA DSCSA enforcement, which could increase pharmacy costs to comply with the DSCSA and pharmacy costs for identifying and investigating potentially counterfeit drugs.

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. Moreover, while we have insurance to cover potential product liability and some claims may be subject to indemnification from other parties, we cannot guarantee that our insurance limits and/or indemnification will be adequate to cover any and all product related claims. We also may not be able to maintain this insurance on acceptable terms in the future.  A product liability judgment against the Company or a product recall could have a material, adverse effect on our business, reputation, financial condition or results of operations. Further, certain products dispensed or administered at our stores could be subject to liability protections under the current PREP Act declaration issued for the COVID-19 pandemic, though those liability protections are set to expire in the near future. Even with the protections currently in effect, we may be subject to state tort claims based on recent litigation on the scope of preemption under the PREP Act.

Risks of declining gross margins in the PBM industry could adversely impact our profitability, and could result in further impairment charges.

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 or eliminate the manufacturer rebates we receive. We also have performance guarantees with select customers for rebates, and if our rebate aggregation contracts change or we are unable to meet our obligations due to mix of brand drugs, our financial performance for this business could be impacted.

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

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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.

Legislation exists under Medicare Part D and in the majority of states that affect the ability of our PBM business (and its health plan clients) to limit access to pharmacy provider networks or remove pharmacy network providers. For instance, “any willing provider” laws may mandate that our PBM or its health plan clients admit nonparticipating pharmacies that are willing and able to satisfy the applicable terms and conditions for network participation. Medicare Part D and many states have implemented laws or rules that limit the ability of PBMs and health plans to impose formulary conditions or restrictions, such as co-payment differentials, and drug tiering designs, which may be used to manage drug benefits and promote cost-efficient utilization. Together, these laws could affect the ability of our PBM to effectively manage costs for its health plan clients. Additionally, many states now have legislation impacting the ability of our PBM to conduct audits of claims submitted by network pharmacies. These laws could hinder our PBM’s ability to recover overpayments identified through audits and negatively affect our PBM’s services and its ability to achieve enhanced economic outcomes for its health plan clients.

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. Due to 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 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 medical loss ratio for our 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, Elixir Insurance 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 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 receivables as we did for calendar 2022, however there are no assurances that we can reduce or sell the receivable for calendar 2023. 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.

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Elixir Insurance is subject to various contractual and regulatory compliance requirements associated with participating in Medicare Part D. Elixir Insurance is subject to certain aspects of state laws regulating the business of insurance in all jurisdictions in which Elixir Insurance offers its PDP plans. As a PDP sponsor, Elixir Insurance 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 noncompliance 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 Medicare Part D regulatory requirements, including those governing pharmacy networks, benefit designs, and product pricing, could require us to incur significant costs which could adversely impact our business and our financial results. Similar negative impacts could result from potential Part D reimbursement reductions, adverse CMS audits, government enforcement actions, or decreases in star ratings. Further, Elixir Insurance’s level of margin is limited by minimum MLR requirements imposed by the ACA. Medicare PDPs are subject to minimum MLR audits and Elixir Insurance could be required to pay MLR rebates for failure to meet minimum MLRs in a given year and repeated MLR failures could lead to CMS termination.

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 receive a lower Star rating from 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.

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.

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 to enable us 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 utilize computers, tablets, mobile phones and other electronic devices to shop in our stores and online, as well as provide public reactions concerning each facet of our operation. If we fail to

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keep pace with dynamic customer expectations and new technology developments, our ability to compete and maintain customer loyalty could be adversely affected.

Finally, EI’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.

The impact of extreme events, natural disasters, and climate change could create unpredictability for our business operations.

Extreme weather, natural disasters, and pandemics, such as COVID-19, can have severe negative ramifications for the pharmacy industry, including interfering with revenue flows, reimbursement, and the drug supply chain. More broadly, long-term climate change has unknown and potentially negative impacts on our industry. These sorts of extreme events can lead to unknown cost increases for our business to supply health care services and therefore pose a risk to our business and operating results.

The seasonal nature of our business causes fluctuations in operations.

Our first and fourth fiscal quarter operation results generally fluctuate during the holidays, and cough, cold, and flu season, during which time we typically experience a larger proportion of retail sales and earnings as compared to other fiscal quarters. We increase our merchandise and inventory levels in anticipation of the holiday season, and there is a risk that unpredictable events, such as inclement weather, could impact retail sales and earnings during this time. Furthermore, the unpredictable timing and severity of the cough, cold, and flu season may impact our first and fourth fiscal quarter operation results, including in regard to prescription and non-prescription drug sales.

Changes in laws governing labor, employers, and union organizing may increase our labor costs.

The Company’s business costs are directly impacted by legal and regulatory mandates governing employers and unionizing activities. Federal and state labor laws are subject to ongoing legislative changes, and any new or more stringent mandates imposed on employers, such as minimum wage increases or additional paid leave requirements, will increase our costs as an employer. Our employee-related operating costs could also increase in response to any union organizing activities among our employees. Overall, these potential labor, wage and union-related changes could increase our operating costs and thereby negatively impact our financial condition.

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PART II

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

The Management’s Discussion and Analysis of Financial Condition and Results of Continuing Operations set forth below gives effect to the revision of our previously issued consolidated financial statements for each of the three fiscal years ended March 4, 2023 to correct an error in the periods impacted. For additional information and a detailed discussion of the revision and recast, refer to Note 25 Revision of Previously Issued Consolidated Financial Statements included in Item 8.

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 and our PBM, Elixir. We also offer fully integrated mail-order and specialty pharmacy services through Elixir Pharmacy. Additionally, through Elixir Insurance (“EI”), Elixir also serves 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 and provides various other pharmacy services, 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 over 2,300 retail pharmacy locations across 17 states and through our ecommerce platform available at www.riteaid.com . 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.

Pharmacy Services Segment

Our Pharmacy Services Segment 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. Elixir also provides prescription discount programs and Medicare Part D insurance offerings for individuals and groups. Elixir provides services to various clients across its different lines of business, including major health plans, commercial employers, labor groups and state and local governments, representing over 1.4 million covered lives, including approximately 0.3 million covered lives through our Medicare Part D insurance offerings. Elixir continues 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.

Restructuring

Beginning in fiscal 2019, we initiated a series of restructuring plans designed to reorganize our executive management team, reduce managerial layers, and consolidate roles. In March 2020, we announced the details of our strategy, 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 and update our merchandise assortment, assessing our pricing and promotional strategy, rebranding its retail pharmacy and pharmacy services business, launching our Store of the Future format and further reducing SG&A and headcount, including integrating certain back office functions in the Pharmacy Services Segment both within the segment and across the enterprise. Other strategic initiatives include the expansion of our digital business, replacing and updating our financial systems to improve

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efficiency, and movement to a common client platform at Elixir. In April 2022, we announced further strategic initiatives to reduce costs through the closure of unprofitable stores, reduce corporate administration expenses, improve efficiencies in worked payroll and other store labor costs, engage in a comprehensive review of purchasing and other business processes in both the Retail Pharmacy and Pharmacy Services Segments in order to identify areas of opportunity, as well as expense reductions at the Pharmacy Services Segment. In December 2022, we announced a new multi-year performance acceleration program, which allows us to fast-track initiatives that will improve sales, script volume and operating margins, and free up cash. We are partnering with a leading consulting firm that has worked with several Fortune 150 firms to execute the turnaround model. This program has given us visibility to the profitability opportunities we can drive over the next three years by focusing on improvements and growth in our core businesses. These and future restructuring activities are expected to provide future growth and expense efficiency benefits. There can be no assurance that our current and future restructuring charges will achieve the cost savings and remerchandising benefits in the amounts or time anticipated.

Asset Sale to WBA

As previously disclosed, 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 as buyer, which, based on its magnitude and because we exited certain markets, we applied discontinued operations treatment as required by Generally Accepted Accounting Principles (“GAAP”).

During the thirteen-week period ended May 30, 2020, we completed the final asset transfer under the Amended and Restated Asset Purchase Agreement, resulting in net income from discontinued operations, net of tax of $9.1 million. On October 17, 2020, we and WBA mutually agreed to terminate the services under the Transition Services Agreement (“TSA”).

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. The COVID-19 pandemic has severely impacted the economies of the United States and other countries around the world.

The COVID-19 pandemic had a significant impact on our operating results for the fiscal years ended March 4, 2023 and February 26, 2022 and will continue to have an impact on several factors underlying our operating results and liquidity in fiscal 2024. Those factors include the number of individuals that receive a COVID-19 vaccine or booster; demand for COVID-19 testing; the timing and extent to which elective procedures return to pre-pandemic levels; the demand for flu and other immunizations and the length and severity of the upcoming cough, cold and flu season.

Overview of Financial Results from Continuing Operations

The following information summarizes our financial results from continuing operations for fiscal 2023 compared to fiscal 2022. For discussion of our financial results from continuing operations for fiscal 2022 to fiscal 2021, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Continuing Operations” included in our Annual Report on Form 10-K for the fiscal year ended February 26, 2022, which we filed with the SEC on April 25, 2022.

Net Loss: Our net loss from continuing operations for fiscal 2023 was $719.2 million or $13.15 per basic and diluted share compared to net loss from continuing operations for fiscal 2022 of $522.4 million or $9.66 per basic and diluted share. The increase in net loss was due primarily to increased goodwill and intangible asset impairment charges for the impairment of goodwill related to the Pharmacy Services Segment, a decrease in Adjusted EBITDA, higher restructuring-related charges, higher interest expense, and increased facility exit and impairment charges. These items were partially offset by a gain on the repurchase of certain bonds at a discount and a gain on sale of assets resulting from sale-leasebacks and script file sales from store closures.

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Adjusted EBITDA: Our Adjusted EBITDA from continuing operations for fiscal 2023 was $429.2 million or 1.8 percent of revenues, compared to $505.9 million or 2.1 percent of revenues for fiscal 2022. The decrease in Adjusted EBITDA from continuing operations was due primarily to a decrease of $104.6 million in the Retail Pharmacy Segment partially offset by an increase of $27.8 million in the Pharmacy Services Segment. The decrease in the Retail Pharmacy Segment Adjusted EBITDA was due to decreased gross profit, partially offset by a decrease in SG&A expenses of $164.5 million. Gross profit was negatively impacted by the decline in COVID vaccinations and testing, partially offset by the increase in prescriptions sold. SG&A expenses benefitted from lower payroll, occupancy, and other operating costs due to store closures and cost control initiatives, partially offset by the extra week in fiscal 2023. The increase in the Pharmacy Services Segment Adjusted EBITDA resulted from improved procurement economics and reductions in SG&A expense. 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

Year Ended

March 4, 2023

February 26, 2022

February 27, 2021

(53 Weeks)

(52 Weeks)

(52 Weeks)

Revenues (a)

Revenue (decline) growth

Net loss

Net loss per diluted share

Adjusted EBITDA (b)

Adjusted Net Loss (b)

Adjusted Net Loss per Diluted Share (b)

Revenues for the fiscal years ended March 4, 2023, February 26, 2022 and February 27, 2021 exclude $215,467, $249,686 and $292,157, respectively, of inter-segment activity that is eliminated in consolidation.

See “Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures” for additional details.

Revenues

Fiscal 2023 compared to Fiscal 2022: The 1.9% decrease in revenues was due primarily to a $800.8 million decrease in Pharmacy Services Segment revenues, partially offset by a $290.3 million increase in Retail Pharmacy Segment revenues. Same store sales trends for fiscal 2023 and fiscal 2022 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

Year Ended

March 4, 2023

February 26, 2022

February 27, 2021

(53 Weeks)

(52 Weeks)

(52 Weeks)

Cost of revenues (a)

Gross profit

Gross margin

Selling, general and administrative expenses

Selling, general and administrative expenses as a percentage of revenues

Facility exit and impairment charges

Goodwill and intangible asset impairment charges

Interest expense

(Gain) loss on debt modifications and retirements, net

(Gain) loss on sale of assets, net

Loss (gain) on Bartell acquisition

Cost of revenues for the fiscal years ended March 4, 2023, February 26, 2022 and February 27, 2021 exclude $215,467, $249,686 and $292,157, respectively, of inter-segment activity that is eliminated in consolidation.

Gross Profit and Cost of Revenues

Gross profit decreased by $302.6 million in fiscal 2023 compared to fiscal 2022. Gross profit for fiscal 2023 includes a decrease of $327.2 million in our Retail Pharmacy Segment and an increase in gross profit of $24.7 million relating to our Pharmacy Services Segment. Gross margin was 19.9% for fiscal 2023 compared to 20.8% in fiscal 2022. 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 $131.8 million in fiscal 2023 compared to fiscal 2022. The decrease in SG&A includes a decrease of $112.6 million relating to our Retail Pharmacy Segment and a decrease of $19.2 million relating to our Pharmacy Services Segment. Please see the section entitled “Segment Analysis” below for additional details regarding SG&A.

Facility Exit 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.

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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 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 $137.1 million in fiscal 2023, $150.8 million in fiscal 2022 and $46.3 million in fiscal 2021. We recorded impairment charges of $59.6 million in the fourth quarter of fiscal 2023, $99.4 million in the fourth quarter of fiscal 2022 and $31.1 million in the fourth quarter of fiscal 2021. Our methodology for recording impairment charges has been consistently applied in the periods presented.

As of March 4, 2023, approximately $717.2 million of our long-lived assets, including intangible assets, were associated with 2,309 active operating stores. Additionally, we have approximately $2.3 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 based on its estimated future discounted cash flows. The discount rate is commensurate with the risks associated with the recovery of a similar asset. 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 $13.6 million in fiscal 2023, $56.2 million in fiscal 2022 and $29.8 million in fiscal 2021.

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), is recorded in the quarter the closure decision is approved. Closure decisions are made on an individual store or regional basis considering all of the macroeconomic, industry and other factors, in addition to the operating store’s individual operating results. We recorded impairment charges for closed facilities of $123.5 million in fiscal 2023, $94.6 million in fiscal 2022 and $16.5 million in fiscal 2021.

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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 2023, 2022 and 2021:

March 4, 2023

February 26, 2022

February 27, 2021

(in thousands, except number of stores)

Number

Charge

Number

Charge

Number

Charge

Active stores:

Stores previously impaired (1)

New, relocated and remodeled stores (2)

Remaining stores not meeting the recoverability test (3)

Total impairment charges—active stores

Total impairment charges—closed facilities

Total impairment charges—all locations

These charges are related to stores that were impaired for the first time in prior periods. In an effort to improve the operating results or to meet geographical competition, we will often make additional capital additions in stores that were impaired in prior periods. These additions will be impaired in future periods if they are deemed to be unrecoverable. Our fiscal 2023 impairment charge includes $3,087 of impairment relating to our right-of-use (“ROU”) and $1,779 of capital additions. Our fiscal 2022 impairment charge includes $5,434 of impairment relating to our ROU and $6,905 of capital additions. Our fiscal 2021 impairment charge includes $15,459 of impairment relating to our ROU and $5,913 of capital additions.

These charges are related to new stores (open at least three years) and relocated stores (relocated in the last two years) and significant strategic remodels (remodeled in the last year) that did not meet their recoverability test during the current period. These stores have not met our original return on investment projections and have a historical loss of at least two years. Their future cash flow projections do not recover their current carrying value. Our fiscal 2023 impairment charge includes $1,765 of impairment relating to our ROU and $2,875 of capital additions. Our fiscal 2022 impairment charge includes $0 of impairment relating to our ROU and $538 of capital additions. Our fiscal 2021 impairment charge includes $347 of impairment relating to our ROU and $1,172 of capital additions.

These charges are related to the remaining active stores that did not meet the recoverability test during the current period. These stores have a historical loss of at least two years. Their future cash flow projections do not recover their current carrying value. Our fiscal 2023 impairment charge includes $1,765 of impairment relating to our ROU and $2,273 of capital additions. Our fiscal 2022 impairment charge includes $26,130 of impairment relating to our ROU and $17,175 of capital additions. Our fiscal 2021 impairment charge includes $3,177 of impairment relating to our ROU and $3,677 of capital additions.

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 March 4, 2023 would have resulted in 8 and 17, respectively, additional stores being subjected to our impairment analysis.

Facility Exit Charges: We calculate our liability for facility exit or disposal cost obligations to include long-term contract termination costs and costs related to the disposal of long-lived assets. 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 inventory liquidation charges, as well as impairment of assets at these locations.

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In fiscal 2023, 2022 and 2021, we recorded facility exit charges of $43.6 million, $13.3 million, and $11.4 million, respectively.

Goodwill and intangible asset impairment charges

In connection with the restructuring initiatives previously announced on March 16, 2020, we rebranded our EnvisionRxOptions and MedTrak subsidiaries to its new brand name, Elixir. These trademarks qualify as Level 3 within the fair value hierarchy. Upon the implementation of the rebranding initiatives during the first quarter of fiscal 2021, we have determined that the carrying value exceeded the fair value and consequently we incurred an impairment charge of $29.9 million for these trademarks, which is included within goodwill and intangible asset impairment charges within the condensed consolidated statement of operations.

In the fourth quarter of fiscal 2021, 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 recorded for the fiscal year ended February 27, 2021.

In the fourth quarter of fiscal 2022, 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 and Medicare Part D business compression due to industry consolidation, an increase in the medical loss ratio at Elixir Insurance, and a decision to exit our rebate aggregation business. This resulted in goodwill impairment charges of $229.0 million for the fiscal year ended February 26, 2022.

In the second quarter of fiscal 2023, 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 an update to our preliminary fiscal 2024 and beyond forecasted revenue driven by current updates in the estimate of lives for calendar year 2023 based on the latest estimates of existing client retention for 2023, the latest selling season and EI bid results and other business factors which only became evident during the second quarter. This resulted in goodwill impairment charges of $252.2 million in the second quarter of fiscal 2023.

In the fourth quarter of fiscal 2023, 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 downward macroeconomic pressure during the fourth quarter of fiscal 2023 which manifested in increased interest rates, increased cost of borrowing and a decrease of industry multiples. The market factors that drove the goodwill impairment charges of $119.0 million in the fourth quarter of fiscal 2023 were not known in prior quarters.

Interest Expense

In fiscal 2023, 2022 and 2021, interest expense was $224.4 million, $191.6 million and $201.4 million, respectively.

The annual weighted average interest rates on our indebtedness in fiscal 2023, 2022 and 2021 were 7.2%, 5.6% and 5.4%, respectively.

Income Taxes–Continuing Operations

Income tax benefit of $6.5 million, $3.8 million and $20.2 million, has been recorded for fiscal 2023, 2022 and 2021, respectively. Net loss for fiscal 2023 included a provision for income tax based on an overall tax rate of 0.9%,

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which was net of adjustments to maintain a full valuation allowance for federal deferred tax assets as well as the majority of our state deferred tax assets. These assets 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 our net deferred tax assets.

Net loss for fiscal 2022 included a provision for income tax based on an overall tax rate of 0.7%, which was net of adjustments to maintain a full valuation allowance for federal deferred tax assets as well as the majority of our state deferred tax assets. These assets 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 our net deferred tax assets.

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 $1,636.5 million, $1,818.1 million and $1,657.2 million against remaining net deferred tax assets at fiscal year-end 2023, 2022 and 2021, 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 our stock by “5-percent shareholders” (as defined in the Code) that exceeds 50 percentage points over a rolling three-year period. We determined that no ownership change has occurred for purposes of Section 382 for the period ended March 4, 2023. 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.

On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022 , which, among other things, implemented a 15% minimum tax on book income of certain large corporations, a 1% excise tax on net stock repurchases and several tax incentives to promote clean energy. Based on our current analysis of the provisions, we do not believe that this legislation will have a material impact on our financial statements.

Dilutive Equity Issuances

On March 4, 2023, 56.6 million shares of common stock, which includes unvested restricted shares, were outstanding and an additional 0.5 million shares of common stock were issuable related to outstanding stock options.

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On March 4, 2023, our 0.5 million shares of potentially issuable common stock consisted of the following (shares in thousands):

Outstanding

Stock

Strike price

Options(a)

$160.00 and over

Total issuable shares

The exercise of these options would provide cash of $6.8 million.

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:

Retail

Pharmacy

Intersegment

Pharmacy

Services

Eliminations (1)

Consolidated

March 4, 2023:

Revenues

Gross Profit

Adjusted EBITDA (*)

February 26, 2022:

Revenues

Gross Profit

Adjusted EBITDA (*)

February 27, 2021:

Revenues

Gross Profit

Adjusted EBITDA (*)

Intersegment eliminations include intersegment revenues and corresponding cost of revenues that occur when Pharmacy Services Segment customers use Retail Pharmacy Segment stores to purchase covered products. When this occurs, both the Retail Pharmacy and Pharmacy Services Segments record the revenue on a stand-alone basis.

See the section entitled “Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures” below for additional details.

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Retail Pharmacy Segment Results of Continuing Operations

Revenues and Other Operating Data

Year Ended

March 4, 2023

February 26, 2022

February 27, 2021

(53 Weeks)

(52 Weeks)

(52 Weeks)

(Dollars in thousands)

Revenues

Revenue growth

Same store sales growth

Pharmacy sales growth

Same store prescription count growth, adjusted to 30-day equivalents

Same store pharmacy sales growth

Pharmacy sales as a % of total retail sales

Front-end sales (decline) growth

Same store front-end sales growth (decline)

Front-end sales as a % of total retail sales

Adjusted EBITDA (*)

Store data:

Total stores (beginning of period)

New stores

Store acquisitions

Closed stores

Total stores (end of period)

Relocated stores

Remodeled and expanded stores

See the section entitled “Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures” below for additional details.

Revenues

Fiscal 2023 compared to Fiscal 2022: The 1.7% increase in revenue was due primarily to an extra week in the fourth quarter of fiscal 2023 and an increase in both acute and maintenance prescriptions, partially offset by a reduction in COVID-19 vaccine and testing revenue as well as store closures. Same store sales trends for fiscal 2023 and fiscal 2022 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 9.1%. Pharmacy same store sales were positively impacted by an increase of 3.5% in same store prescription count, adjusted to 30-day equivalents, compared to the prior year driven primarily by an increase in same store prescriptions, excluding COVID immunizations and tests, of 6.9%, with same store maintenance prescriptions increasing 5.9% and other same store acute prescriptions increasing 10.1%.

Front-end same store sales increased 1.1%. Front-end same stores sales, excluding cigarettes and tobacco products, increased 1.6% driven by increases in health and consumable products, partially offset by decreases in alcohol sales.

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Costs and Expenses

Year Ended

March 4, 2023

February 26, 2022

February 27, 2021

(53 Weeks)

(52 Weeks)

(52 Weeks)

(Dollars in thousands)

Cost of revenues

Gross profit

Gross margin

FIFO gross profit (*)

FIFO gross margin (*)

Selling, general and administrative expenses

Selling, general and administrative expenses as a percentage of revenues

See the section entitled “Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures” below for additional details.

Gross Profit and Cost of Revenues

Gross profit decreased by $327.2 million in fiscal 2023 compared to fiscal 2022. The decrease in gross profit was driven by the decline in COVID vaccinations and testing, partially offset by the increase in prescriptions sold.

Overall gross margin was 24.7% for fiscal 2023 compared to 27.0% in fiscal 2022. The decline in gross margin as a percentage of revenues is due primarily to the reductions in COVID vaccinations and testing.

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 charge for fiscal 2023 was $53.0 million compared to a LIFO charge of $1.3 million in fiscal 2022. The LIFO charge for fiscal 2023 is due to higher front-end inflation in the current year.

Selling, General and Administrative Expenses

SG&A decreased $112.6 million due primarily to lower payroll, occupancy, and other operating costs due to store closures and cost control initiatives, partially offset by an extra week. SG&A as a percentage of revenue was 25.6% in fiscal 2023 compared to 26.6% in fiscal 2022. The decrease is due primarily to the items noted above.

Pharmacy Services Segment Results of Operations

Revenues and Other Operating Data

Year Ended

March 4,

February 26,

February 27,

(53 Weeks)

(52 Weeks)

(52 Weeks)

(Dollars in thousands)

Revenues

Revenue (decline) growth

Adjusted EBITDA (*)

See the section entitled “Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures” below for additional details.

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Revenues

Pharmacy Services Segment revenues decreased $800.8 million in fiscal 2023 compared to fiscal 2022. Approximately $198.0 million of the decline was primarily the result of a decrease in Elixir Individual Part D Insurance membership due to a change in the Company’s pricing structure and approximately $166.0 million of the decline was due to a loss of a large commercial client. The remaining decline was driven by the loss of revenue from smaller commercial clients, partially offset by increased utilization and higher cost drugs.

The Inflation Reduction Act of 2022 contains several provisions affecting Medicare, which will take effect over various periods of time from 2023 to 2029. Based on our current analysis of the provisions, we do not believe that this legislation will have a material impact on our financial statements.

Costs and Expenses

Year Ended

March 4,

February 26,

February 27,

(53 Weeks)

(52 Weeks)

(52 Weeks)

(Dollars in thousands)

Cost of revenues

Gross profit

Gross margin

Selling, general and administrative expenses

Selling, general and administrative expenses as a percentage of revenues

Gross Profit and Cost of Revenues

Gross profit increased by $24.7 million in fiscal 2023 compared to fiscal 2022. The increase in gross profit was due primarily to improved procurement economics, partially offset by the decline in revenues as mentioned above.

Gross margin was 6.3% in fiscal 2023 compared to 5.2% in fiscal 2022. The increase in gross margin is due primarily to improved procurement economics and change in client mix.

Selling, General and Administrative Expenses

Pharmacy Services Segment selling, general and administrative expenses decreased $19.2 million in fiscal 2023 compared to fiscal 2022. SG&A expenses as a percentage of revenues was 5.5% in fiscal 2023 compared to 5.1% in fiscal 2022. The decrease in SG&A is due primarily to further consolidation of administrative functions. The increase in SG&A as a percentage of revenues is due primarily to the loss of sales volume.

Liquidity and Capital Resources

General

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 March 4, 2023 was $1,484.8 million, which consisted of revolver borrowing capacity of $1,404.0 million and invested cash of $80.8 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 “Prior Credit Agreement”; and the Credit Agreement, as further amended by the Second Amendment (as defined below), the “Prior Amended Credit Agreement”), which provided for

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facilities consisting of a $2.7 billion senior secured asset-based revolving credit facility and a $450.0 million “first-in, last out” senior secured term loan facility, the proceeds of which were used in December 2018 to refinance our prior $2.7 billion existing credit agreement.

On August 20, 2021, we entered into the Second Amendment to Credit Agreement (the “Second Amendment”), which, among other things, amended the Prior Credit Agreement to provide for a $2.8 billion senior secured asset-based revolving credit facility (the “Prior Senior Secured Revolving Credit Facility”) and a $350.0 million “first-in, last-out” senior secured term loan facility (“Prior Senior Secured Term Loan” and together with the Prior Senior Secured Revolving Credit Facility, collectively, the “Prior Amended Facilities”). The Prior Amended Facilities extended our debt maturity profile and provided additional liquidity. Borrowings under the Prior Senior Secured Revolving Credit Facility bore interest at a rate per annum equal to, at our option, (x) a base rate (determined in a customary manner) plus a margin of between 0.25% to 0.75% or (y) an adjusted LIBOR rate (determined in a customary manner) plus a margin of between 1.25% and 1.75%, in each case based upon the Average ABL Availability (as defined in the Prior Amended Credit Agreement).  Borrowings under the Prior Senior Secured Term Loan bore interest at a rate per annum equal to, at our option, (x) a base rate (determined in a customary manner) plus a margin of 1.75% or (y) an adjusted LIBOR rate (determined in a customary manner) plus a margin of 2.75%.

On December 1, 2022, we entered into the Third Amendment to Credit Agreement (the “Third Amendment”), which, among other things, amended the Prior Amended Credit Agreement (the Prior Amended Credit Agreement, as modified by the Third Amendment, the “Existing Credit Agreement”) to provide for a $2.85 billion senior secured asset-based revolving credit facility (the “Existing Senior Secured Revolving Credit Facility”) and a $400.0 million “first-in, last-out” senior secured term loan facility (the “Existing Senior Secured Term Loan” and, together with the Existing Senior Secured Revolving Credit Facility, collectively, the “Existing Facilities”), replaced the LIBOR rate with a Term SOFR-based rate as the applicable benchmark for the Existing Facilities, included COVID-19 vaccines in the borrowing base under the Existing Senior Secured Revolving Credit Facility, subject to limitations and conditions as specified in the Existing Credit Agreement, and increased the interest rate applicable to loans under the Existing Senior Secured Term Loan to (x) a base rate (determined in a customary manner) plus a margin of 2.00% or (y) an adjusted Term SOFR-based rate (determined in a customary manner) plus a margin of 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 Existing Senior Secured Revolving Credit Facility, depending on Average ABL Availability (as defined in the Existing Credit Agreement). The Existing Facilities are scheduled to mature on August 20, 2026 (subject to a springing maturity if certain of our existing secured notes are not refinanced or repaid prior to the date that is 91 days prior to the stated maturity thereof).

Our borrowing capacity under the Existing Senior Secured Revolving Credit Facility is based upon a specified borrowing base consisting of accounts receivable, inventory and prescription files. As of March 4, 2023, we had approximately $1,600.0 million of borrowings outstanding under the Existing Facilities and had letters of credit outstanding under the Existing Senior Secured Revolving Credit Facility in a face amount of approximately $208.7 million, which resulted in remaining borrowing capacity under the Existing Senior Secured Revolving Credit Facility of $1,404.0 million. If at any time the total credit exposure outstanding under the Existing Senior Secured Revolving Credit Facility exceeds the borrowing base, we will be required to repay amounts outstanding to eliminate such shortfall.

The Existing Credit Agreement restricts us and all of our subsidiaries, including the subsidiaries that guarantee our obligations under the Existing Facilities, the secured guaranteed notes and unsecured 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 store and lockbox deposit accounts and cash necessary to cover our current liabilities). The Existing 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 the Existing Facilities or (ii) availability under the Existing Senior Secured Revolving Credit Facility is less than or equal to $283.3 million for three consecutive business days or less than or equal to $206.0 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

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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 the 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 Existing Senior Secured Term Loan) and certain other assets arising therefrom or related thereto (including substantially all of 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 Existing 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 Existing 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 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 maturity date of any Term Loan or Other Revolving Commitment (each as defined in the Existing 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 the immediately preceding sentence, the Existing 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 Existing 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 Existing Credit Agreement also contains certain restrictions on the amount of secured first priority debt we are able to incur. The Existing 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 the Existing Senior Secured Revolving Credit Facility of more than $375.95 million.

The Existing 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 Existing Senior Secured Revolving Credit Facility is less than $206.0 million or (ii) on the third consecutive business day on which availability under the Existing Senior Secured Revolving Credit Facility is less than $257.5 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 $257.5 million. As of March 4, 2023, the availability under the Existing Senior Secured Revolving Credit Facility was at a level that did not trigger the Existing Credit Agreement’s financial covenant. The Existing 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 Existing 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 secured notes contain restrictions on the amount of additional secured and unsecured debt that we may incur. As of March 4, 2023, we had the ability to issue additional secured and unsecured debt under the indentures governing our secured notes, including the ability to draw the full amount of our Existing Senior Secured Revolving Credit Facility and enter into certain sale and leaseback transactions. We also have certain limitations in our unguaranteed unsecured notes on the amount of secured debt that we may incur. We have additional debt incurrence capacity under such indentures.

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Fiscal 2021, 2022 and 2023 Transactions

On June 25, 2020, we commenced an offer to exchange (the “June 25, 2020 Exchange Offer”) up to $750.0 million aggregate principal amount of the outstanding 6.125% Senior Notes due 2023 (the “6.125% Notes”) for a combination of $600.0 million newly issued 8.0% Senior Secured Notes due 2026 (the “8.0% Notes”) and $145.5 million cash. On July 10, 2020, we increased the maximum amount of 6.125% Notes that may be accepted for exchange from $750.0 million to $1,125.0 million and, on July 24, 2020, we announced that we accepted for payment $1,062.7 million aggregate principal amount of the 6.125% Notes in exchange for $849.9 million aggregate principal amount of newly issued 8.0% Notes and $206.4 million in cash. In connection therewith, we recorded a gain on debt modification of $5.3 million which is included in the results of operations and cash flows of continuing operations. The 8.0% Notes are secured on an equal and ratable basis by the same assets that secure the 7.500% Notes. The 8.0% Notes are guaranteed on a senior secured basis by the same subsidiaries that guarantee the 7.500% Notes. In conjunction with the June 25, 2020 Exchange Offer, we also commenced a solicitation of consents from the holders of outstanding 6.125% Notes to certain proposed amendments to the indenture governing the 6.125% Notes. On July 9, 2020, following the receipt of the requisite number of consents, we entered into a supplemental indenture, which modified certain limitations in the debt covenant to allow for the creation of the 8.0% Notes.

On April 28, 2021, we issued a notice of redemption for all of the 6.125% Notes that were outstanding on May 28, 2021, pursuant to the terms of the indenture of the 6.125% Notes. On May 28, 2021, we redeemed 100% of the remaining outstanding 6.125% Notes at par. In connection therewith, we recorded a loss on debt retirement of $0.4 million which included unamortized debt issuance costs. The debt repayment and related loss on debt retirement is included in the results of operations and cash flows.

On August 20, 2021, we entered into the Second Amendment in order to, among other things, increase the aggregate principal amount of commitments under the Prior Senior Secured Revolving Credit Facility from $2.7 billion to $2.8 billion and decrease the aggregate principal amount of loans outstanding under the Prior Senior Secured Term Loan from $450.0 million to $350.0 million. In connection therewith, we recorded a loss on debt modification and retirement of $2.8 million which included unamortized debt issuance costs. The debt repayment and related loss on debt modification and retirement is included in the results of operations and cash flows.

On June 13, 2022, we commenced a series of cash tender offers to purchase up to $150.0 million aggregate principal amount of our 7.500% Senior Secured Notes due 2025 (the “7.500% Notes”), 8.0% Notes, 7.70% Notes due 2027 (the “7.70% Notes”) and 6.875% Notes due 2028 (the “6.875% Notes”), subject to prioritized acceptance levels, a subcap of $100.0 million with respect to the 7.500% Notes and proration. On June 29, 2022, pursuant to an early settlement, we purchased an aggregate principal amount of $114.9 million of our 7.500% Notes, $51.7 million aggregate principal amount of our 7.70% Notes and $27.0 million aggregate principal amount of our 6.875% Notes. In connection therewith, we recorded a gain on debt retirement of $41.3 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.

On November 3, 2022, we announced the commencement of a cash tender offer to purchase up to $200.0 million aggregate purchase price (not including any accrued and unpaid interest) of our 7.500% Notes, subject to proration. On November 30, 2022, pursuant to an early settlement, we purchased an aggregate principal amount of $ 160.5 million of our 7.500% Notes and on December 9, 2022, pursuant to the final settlement, we purchased an additional aggregate principal amount of $4.6 million of our 7.500% Notes. In connection therewith, we recorded a gain on debt retirement of $38.9 million, which includes unamortized debt issuance costs. The debt repayment and related gain on debt retirement is included in the results of operations and cash flows .

On December 1, 2022, we entered into the Third Amendment in order to, among other things, increase the aggregate principal amount of commitments under the Existing Senior Secured Revolving Credit Facility from $2.8 billion to $2.85 billion and increase the aggregate principal amount of loans outstanding under the Existing Senior Secured Term Loan from $350.0 million to $400.0 million. As a result of the Third Amendment, we have increased our liquidity by $100.0 million. In connection therewith, we recorded a loss on debt modification and retirement of $0.1 million, which includes unamortized debt issuance costs. The related loss on debt modification and retirement is included in the results of operations and cash flows.

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Guarantor Summarized Financial Information

Certain of our subsidiaries, which are listed on Exhibit 22 to this Annual Report on Form 10-K, have guaranteed our obligations under the 7.500% Notes and the 8.00% Notes (collectively, the "Guaranteed Notes"). As discussed in Note 16 to the consolidated financial statements, the Guaranteed Notes were issued by us, as the parent company, and are guaranteed by substantially all of the parent company’s consolidated subsidiaries (the “guarantors” or “Subsidiary Guarantors”) except for EI (the “non-guarantor”). The parent company and guarantors are referred to as the “obligor group.” The Subsidiary Guarantors fully and unconditionally and jointly and severally guarantee the Guaranteed Notes. The 7.500% Notes, the 8.00% Notes 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 Existing 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 files (including eligible script lists) and, intellectual property (prior to the repayment of the Existing Senior Secured Term Loan) (collectively, the “ABL priority collateral”), which, in each case, also secure the Existing Facilities.

Under certain circumstances, subsidiaries may be released from their guarantees without consent of the note holders. Our subsidiaries conduct substantially all of our operations and have significant liabilities, including trade payables. If the subsidiary guarantees are invalid or unenforceable or are limited by fraudulent conveyance or other laws, the registered debt will be structurally subordinated to the substantial liabilities of our subsidiaries.

Condensed Combined Financial Information

The following tables include summarized financial information of the obligor group. Investments in and the equity in the earnings of EI, which is not a member of the obligor group, have been excluded. The summarized financial information of the obligor group is presented on a combined basis with intercompany balances and transactions between entities in the obligor group eliminated. The obligor group’s amounts due to/from and transactions with EI have been presented in separate line items, if material.

March 4,

February 26,

In millions

Due from EI

Other current assets

Total current assets

Operating lease right-of-use assets

Goodwill

Other noncurrent assets

Total noncurrent assets

Due to EI

Other current liabilities

Total current liabilities

Long-term debt less current maturities

Long-term operating lease liabilities

Other noncurrent liabilities

Total noncurrent liabilities

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Year Ended

March 4, 2023

In millions

(53 Weeks)

Revenues (a)

Cost of revenues (b)

Gross profit

Net loss from continuing operations

Net income from discontinued operations

Net loss

Net loss attributable to Rite Aid

Includes $6.6 million of revenues generated from the non-guarantor for the fifty-three week period ended March 4, 2023.

Includes $6.4 million of cost of revenues incurred in transactions with the non-guarantor for the fifty-three week period ended March 4, 2023.

Off-Balance Sheet Arrangements

As of March 4, 2023, 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 March 4, 2023, as well as other contractual cash obligations and commitments.

Payment due by period

Less Than 1 Year

1 to 3 Years

3 to 5 Years

After 5 Years

Total

(Dollars in thousands)

Contractual Cash Obligations

Long-term debt (1)

Lease financing obligations (2)

Operating leases

Open purchase orders

Other, primarily self-insurance and retirement plan obligations (3)

Minimum purchase commitments (4)

Total contractual cash obligations

Payment due by period

Less Than 1 Year

1 to 3 Years

3 to 5 Years

After 5 Years

Total

Commitments

Lease guarantees (5)

Lease guarantees (6)

Outstanding letters of credit

Total contractual cash obligations and commitments

Includes principal and interest payments for all outstanding debt instruments. Interest was calculated on variable rate instruments using rates as of March 4, 2023.

Represents the minimum lease payments on non-cancelable leases, including interest, net of sublease income on a continuing operations basis as the minimum lease payments on non-cancelable leases, including interest, net of sublease income have been assumed by WBA as part of the Sale.

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Includes the undiscounted payments for self-insured medical coverage, actuarially determined undiscounted payments for self-insured workers’ compensation and general liability, and actuarially determined obligations for defined benefit pension and nonqualified executive retirement plans.

Represents commitments to purchase products and licensing fees from certain vendors.

Represents lease guarantee obligations for 3 former stores related to certain business dispositions. The respective purchasers assume the obligations and are, therefore, primarily liable for these obligations.

Represents lease guarantee obligations for 676 former stores related to the Asset Sale. WBA assumed the obligations and are, therefore, primarily liable for these obligations.

Obligations for income tax uncertainties pursuant to ASC 740, “Income Taxes” of approximately $1.5 million are not included in the table above as we are uncertain as to if or when such amounts may be settled.

Net Cash (Used In) Provided By Operating, Investing and Financing Activities from Continuing Operations

Cash flow used in operating activities was $52.4 million in fiscal 2023. Operating cash flow was impacted by lower payroll, benefit and other operating expense related accruals, the timing of warehouse payables and the timing of payments to Elixir’s pharmacy network. These amounts were partially offset by lower manufacturer rebates receivables and lower third-party receivables.

Cash flow provided by operating activities was $379.3 million in fiscal 2022. Operating cash flow was positively impacted by the timing of warehouse payables, the timing of payments to Elixir’s pharmacy network, increased payroll, litigation and other operating expense related accruals and a reduction of manufacturer rebates receivables. These amounts were partially offset by increases in pharmacy inventory and the payment of $51.0 million of employer payroll taxes that were previously deferred under the CARES Act.

Cash used in investing activities was $104.8 million in fiscal 2023. Cash used in investing activities includes purchases of property, plant and equipment of $215.3 million and prescription file buys of $32.4 million, partially offset by proceeds from sale-leaseback transactions and proceeds from the sale of assets and investments.

Cash used in investing activities was $134.1 million in fiscal 2022. Cash used in investing activities includes purchases of property, plant and equipment of $194.1 million and prescription file buys of $26.6 million, partially offset by proceeds from sale-leaseback transactions, insurance proceeds and proceeds from the sale of assets and investments.

Cash provided by financing activities was $274.6 million in fiscal 2023. Cash provided by financing activities reflects incremental borrowings on the Existing Senior Secured Revolving Credit Facility and Existing Senior Secured Term Loan, partially offset by the repayment of a portion of the 7.5% Notes, 7.7% Notes, and 6.875% Notes.

Cash used in financing activities was $366.4 million in fiscal 2022. Cash used by financing activities reflects the repayment of our 6.125% Notes and the amendment and extension of our Prior Senior Secured Revolving Credit Facility and Prior Senior Secured Term Loan.

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Capital Expenditures

During the fiscal years ended March 4, 2023, February 26, 2022 and February 27, 2021 capital expenditures were as follows:

Year Ended

March 4,

February 26,

February 27,

(53 weeks)

(52 weeks)

(52 weeks)

(Dollars in thousands)

New store construction, store relocation and store remodel projects

Technology enhancements, improvements to distribution centers and other corporate requirements

Purchase of prescription files from other retail pharmacies

Total capital expenditures

Future Liquidity

We are highly leveraged. Our high level of indebtedness could: (i) limit our ability to obtain additional financing; (ii) limit our flexibility in planning for, or reacting to, changes in our business and the industry; (iii) place us at a competitive disadvantage relative to our competitors with less debt; (iv) render us more vulnerable to general adverse economic and industry conditions, including those resulting from COVID-19; a decline in the overall economy, and the current rising interest rate environment, and (v) require us to dedicate a substantial portion of our cash flow to service our debt. Additionally, we currently expect continued pressure on consumer spending and supply chain challenges. Based upon our current levels of operations, we believe that cash flow from operations together with available borrowings under the revolver and other sources of liquidity will be adequate to meet our requirements for working capital, debt service, capital expenditures and other strategic investments at least for the next twelve months. Based on our liquidity position, which we expect to remain strong, we do not expect to be subject to the minimum fixed charge covenant in the Amended Facilities in the next twelve months. We will continue to assess our liquidity position and potential sources of supplemental liquidity in light of our operating performance, and other relevant circumstances, and we may evaluate alternative sources of liquidity (particularly in light of the current market volatility), including further opportunities related to any receivable due to us from CMS, sale and leaseback transactions, and other transactions to optimize our asset base. From time to time, we may seek additional deleveraging or refinancing transactions, including entering into transactions to exchange debt for shares of common stock or other debt securities (including additional secured debt), issuance of equity (including preferred stock and convertible securities), repurchase or redemption of outstanding indebtedness, including our recent cash tender offers whereby we purchased an aggregate principal amount of $193.6 million of certain of our outstanding series of senior notes as announced on June 13, 2022 and an aggregate principal amount of $165.1 million of our outstanding 7.500% Senior Secured Notes due 2025 as announced on November 3, 2022, or seek to refinance our outstanding debt or may otherwise seek transactions to reduce interest expense and extend debt maturities. We may also look to make additional investments in our business to further our strategic objectives, including targeted acquisitions, the performance acceleration program, technology investments or other transactions to optimize our asset base. Any of these transactions could impact our financial results, including additional changes or realization of cancellation of indebtedness-income. As a result of the current market volatility and rising interest rate environment, we cannot assure you whether any of such transactions will be consummated, whether we will achieve the benefits of any such transaction, or whether our cost of capital will increase, any of which could have an impact on our future liquidity.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to inventory shrink, goodwill impairment, impairment of long-lived assets, revenue recognition, vendor discounts and purchase discounts,

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self-insurance liabilities, lease termination charges, income taxes and litigation. Additionally, we have critical accounting policies regarding revenue recognition and vendor allowances and purchase discounts for our Pharmacy Services Segment. We base our estimates on historical experience, current and anticipated business conditions, the condition of the financial markets and various other assumptions that are believed to be reasonable under existing conditions. Variability reflected in the sensitivity analyses presented below is based on our recent historical experience. Actual results may differ materially from these estimates and sensitivity analyses.

The following critical accounting policies require the use of significant judgments and estimates by management:

Inventory shrink: The carrying value of our inventory is reduced by a reserve for estimated shrink losses that occur between physical inventory dates. When estimating these losses, we consider historical loss results at specific locations. Shrink expense is recognized by applying the estimated shrink rate to sales since the last physical inventory. Although possible, we do not expect a significant change to our shrink rate in future periods. A 10 basis point difference in our estimated shrink rate for the year ended March 4, 2023, would have affected pre-tax income by approximately $12.7 million.

Goodwill Impairment: Our policy is to perform an impairment test of goodwill at least annually, and more frequently if events or circumstances occurred that would indicate a reduced fair value in our reporting units could exist. In our quantitative impairment test, fair value estimates are calculated using an average of the income and market approaches. The income approach is based on the present value of future cash flows of each reporting unit, while the market approach is based on certain multiples of selected guideline public companies or selected guideline transactions. The approaches incorporate a number of market participant assumptions including future growth rates, discount rates, income tax rates and market activity in assessing fair value and are reporting unit specific. If the carrying amount exceeds the reporting unit’s fair value, we recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. In addition, we consider the income tax effect of any tax deductible goodwill when measuring a goodwill impairment loss. Our Pharmacy Services reporting unit has goodwill of $464.4 million as of March 4, 2023 and the fair value of the reporting unit is equal to the carrying value. The goodwill related to our Pharmacy Services Segment is at risk of future impairment if the fair value of this segment, and its associated assets, decrease in value due to further declines in its operating results or an inability to execute management’s business strategies. Future cash flow estimates are, by their nature, subjective, and actual results may differ materially from our estimates. If our ongoing cash flow projections are not met or if market factors utilized in the impairment test deteriorate, including an unfavorable change in the terminal growth rate or the weighted-average cost of capital, we may have to record impairment charges in future periods.

Impairment of long-lived assets: 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. 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 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 and gross profit, pharmacy reimbursement rates, expected costs such as payroll, and estimates for other significant selling, general and administrative expenses.

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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.

We assess stores and distribution centers for potential closure. Impairment charges for closed stores, if any, are evaluated and recorded in the quarter the closure decision is approved.

We also evaluate assets to be disposed of on a quarterly basis to determine if an additional impairment charge is required. Fair value estimates are provided by independent brokers who operate in the local markets where the assets are located.

If our actual future cash flows 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 March 4, 2023 would have resulted in 8 and 17, respectively, additional stores being subjected to our impairment analysis.

Revenue recognition for our loyalty program: We offered a chain-wide customer loyalty program, “wellness+ Rewards”. Members participating in our wellness+ Rewards loyalty card program earned points on a calendar year basis for eligible front-end merchandise purchases and qualifying prescription purchases. The wellness+ program was terminated as of July 1, 2020, with benefits earned as of that date available to be used through the end of calendar 2020. Beginning in December 2020, we granted temporary extensions of benefits to certain previous members that were eligible for a discount as of the end of each previous six-month period such that those prior members were eligible to continue to receive that discount on purchases made through the subsequent six months with no additional purchase requirement. New and existing customers who were not already eligible for program benefits also had the opportunity to earn additional discounts on purchases made through each six-month period. A final extension was granted on December 31, 2021 through February 26, 2022 at which point all discounts were terminated.

A new loyalty program, Rite Aid Rewards, was initiated on February 27, 2022. Customers that enroll in the new program earn points for each dollar spent on front of store purchases as well as for eligible pharmacy prescriptions. Points can then be converted into a “Rite Aid Rewards” coupon that can be tendered as payment in a future purchase. Each point is worth $0.002. Customers must accumulate 1,000 points and create an online account in order to convert earned points to a “Rite Aid Rewards” coupon. Unused/unconverted points expire after 90 days. Unredeemed “Rite Aid Rewards” coupons expire 30 days after conversion from points earned.

Points earned pursuant to the Rite Aid Rewards program represent a performance obligation. The value of unredeemed Rite Aid Rewards points is deferred as a contract liability (included in other current liabilities). As members redeem points in the form of a Rite Aid Rewards coupon or when points or unredeemed Rite Aid Rewards coupons expire, the Retail Pharmacy Segment recognizes the redeemed/expired portion of the deferred contract liability into revenue.

Self-insurance liabilities: We expense claims for self-insured workers’ compensation and general liability insurance coverage as incurred including an estimate for claims incurred but not paid. The expense for self-insured workers’ compensation and general liability claims incurred but not paid is determined using several factors, including historical claims experience and development, severity of claims, medical costs and the time needed to settle claims. We discount the estimated expense for workers’ compensation to present value as the time period from incurrence of the claim to final settlement can be several years. We base our estimates for such timing on previous settlement activity. The discount rate is based on the current market rates for Treasury bills that approximate the average time to settle the workers’ compensation claims. These assumptions are updated on an annual basis. A 25 basis point difference in the discount rate for the year ended March 4, 2023, would have affected pre-tax income by approximately $0.8 million.

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Income taxes: We currently have net operating loss (“NOL”) carryforwards that can be utilized to offset future income for federal and state tax purposes. These NOLs generate significant deferred tax assets. Realization is dependent on generating sufficient taxable income prior to the expiration of the loss carryforwards.

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 Code. In general, an ownership change will occur if there is a cumulative change in ownership of our stock by “5-percent shareholders” (as defined in the Code) that exceeds 50 percentage points over a rolling three-year period. We determined that no ownership change has occurred for purposes of Section 382 for the period ended March 4, 2023. 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.

We regularly review the deferred tax assets for recoverability considering the relative impact of negative and positive evidence including our historical profitability, projected taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. The weight given to the potential effect of the negative and positive evidence is commensurate with the extent to which it can be objectively verified. In evaluating the objective evidence that historical results provide, we consider three years of cumulative pre-tax book income (loss).

We establish a valuation allowance against deferred tax assets when we determine that it is more likely than not that some portion of our deferred tax assets will not be realized. Valuation allowances are based on evidence of our ability to generate sufficient taxable income by jurisdiction. On a quarterly basis, management evaluates the likelihood that we will realize the deferred tax assets and adjusts the valuation allowances, if appropriate. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would impact the provision for income taxes.

We recognize tax liabilities in accordance with ASC 740, “Income Taxes” and we adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities.

Litigation reserves: We are involved in litigation on an ongoing basis. We accrue our best estimate of the probable loss related to legal claims. Such estimates are based upon a combination of litigation and settlement strategies. These estimates are updated as the facts and circumstances of the cases develop and/or change. To the extent additional information arises or our strategies change, it is possible that our best estimate of the probable liability may also change. Changes to these reserves during the last three fiscal years were not material.

Revenue recognition for our Pharmacy Services segment:

The Pharmacy Services Segment sells prescription drugs indirectly through its retail pharmacy network and directly through its mail service dispensing pharmacy. The Pharmacy Services Segment recognizes revenue from prescription drugs sold by: (i) its mail service dispensing pharmacy and (ii) under retail pharmacy network contracts, where it is the principal, at contract prices negotiated with its clients, 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. Revenues include: (i) the portion of the price the client pays directly to the Pharmacy Services Segment, net of any volume-related or other discounts paid back to the client (see “Drug Discounts” below); (ii) the price paid to the Pharmacy Services Segment by client plan members for mail order prescriptions (“Mail Co-Payments”); (iii) client plan member copayments made directly to the retail pharmacy network and; (iv) administrative fees. Revenue is recognized when the Pharmacy Services Segment meets its performance obligations relative to each transaction type. The following revenue recognition policies have been established for the Pharmacy Services Segment:

Revenues generated from prescription drugs sold by third-party pharmacies in the Pharmacy Services Segment’s retail pharmacy network and associated administrative fees are recognized at the Pharmacy Services Segment’s point-of-sale, which is when the claim is adjudicated by the Pharmacy Services

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Segment’s online claims processing system. At this point, we have performed across all of our performance obligations;

Revenues generated from prescription drugs sold by the Pharmacy Services Segment’s mail service dispensing pharmacy are recognized when the prescription is shipped. At the time of shipment, the Pharmacy Services Segment has performed all of its performance obligations under its client contracts, as control of and title to the product has passed to the client plan members. The Pharmacy Services Segment does not experience a significant level of returns or reshipments, and;

Revenues generated from administrative fees based on membership or claims volume are recognized monthly based on the terms within the individual contracts, either a monthly member based fee, or a claims volume based fee.

In the majority of its contracts, the Pharmacy Services Segment is the principal because its client contracts give clients the right to obtain access to its pharmacy contracts under which the Pharmacy Services Segment directs its pharmacy network to provide the services (drug dispensing, consultation, etc.) and goods (prescription drugs) to the clients’ members at its negotiated pricing. The Pharmacy Services Segment’s obligations under its client contracts are separate and distinct from its obligations to the third-party pharmacies included in its retail pharmacy network contracts. In the majority of these contracts, the Pharmacy Services Segment is contractually required to pay the third-party pharmacies in its retail pharmacy network for products sold after payment is received from its clients. The Pharmacy Services Segment has control over these transactions until the prescription is transferred to the member and, thus, that it is acting as a principal. As such, the Pharmacy Services Segment records the total prescription price contracted with clients in revenues.

Amounts paid to pharmacies and amounts charged to clients are exclusive of the applicable co-payment under Pharmacy Services Segment contracts. Retail pharmacy co-payments, which we instruct retail pharmacies to collect from members, are included in our revenues and our cost of revenues.

For contracts under which the Pharmacy Services Segment acts as an agent or does not control the prescription drugs prior to transfer to the client, no revenue is recognized.

We deduct the manufacturers’ rebates that are earned by our clients based on their members’ utilization of brand-name formulary drugs from our revenues that are generated from prescription drugs sold by third-party pharmacies. For the majority of our clients, we pass these rebates to clients at point-of-sale based on actual claims data and our estimates of the manufacturers’ rebates earned by our clients. We base our estimates on the best available data and recent history for the various factors that can affect the amount of rebates earned by the client. We also deduct pricing guarantees and guarantees regarding the level of service we will provide to the client or member as well as other payments made to our clients from our revenues. Because the inputs to most of these estimates are not subject to a high degree of subjectivity or volatility, the effect of adjustments between estimated and actual amounts has not been material to our results of operations, financial condition or cash flows.

We participate in the federal government’s Medicare Part D program as a PDP through our EI subsidiary. Our net revenues include insurance premiums earned by the PDP, which are determined based on the PDP’s annual bid and related contractual arrangements with CMS. The insurance premiums include a beneficiary premium, which is the responsibility of the PDP member, but is subsidized by CMS in the case of low-income members, and a direct premium paid by CMS. Premiums collected in advance are initially deferred as accrued expenses and are then recognized ratably as revenue over the period in which members are entitled to receive benefits.

We have recorded estimates of various assets and liabilities arising from our participation in the Medicare Part D program based on information in our claims management and enrollment systems. Significant estimates arising from our participation in the Medicare Part D program include: (i) estimates of low-income cost subsidy, reinsurance amounts and coverage gap discount amounts ultimately payable to or receivable from CMS based on a detailed claims reconciliation, (ii) an estimate of amounts receivable from CMS under a risk-sharing feature of the Medicare Part D program design, referred to as the risk corridor (iii) estimates for claims that have been reported and are in the process of

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being paid or contested and (iv) our estimate of claims that have been incurred but have not yet been reported. Actual amounts of Medicare Part D-related assets and liabilities could differ significantly from amounts recorded. Historically, the effect of these adjustments has not been material to our results of operations, financial position or cash flows.

Vendor allowances and purchase discounts for our Pharmacy Services Segment: Our Pharmacy Services Segment receives purchase discounts on products purchased. Contractual arrangements with vendors, including manufacturers, wholesalers and retail pharmacies, normally provide for the Pharmacy Services Segment to receive purchase discounts from established list prices in one, or a combination, of the following forms: (i) a direct discount at the time of purchase or (ii) a discount (or rebate) paid subsequent to dispensing when products are purchased indirectly from a manufacturer (e.g., through a wholesaler or retail pharmacy). These rebates are recognized based on estimates when prescriptions are dispensed and are generally calculated and billed within 30 days of the end of each completed quarter. Historically, the effect of adjustments resulting from the reconciliation of rebates recognized to the amounts billed and collected has not been material to the results of operations, financial condition or cash flows. We account for the effect of any such differences as a change in accounting estimate in the period the reconciliation is completed. During the thirteen-week period ended February 26, 2022, we reassessed our historical policy for estimating our allowance for manufacturer rebate receivables at our Pharmacy Services Segment and concluded that, due to changes in our business practices and other conditions, certain amounts within the outstanding receivable had an increased risk of uncollectability. As a result, we increased our allowance for manufacturer rebate receivables by $15.1 million, which was recorded as an increase to cost of revenues in the thirteen-week period ended February 26, 2022. This change in estimate is a non-recurring item that is excluded from Adjusted EBITDA (see “Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non GAAP Measures” for details). The Pharmacy Services Segment also receives additional discounts under its wholesaler contract. In addition, the Pharmacy Services Segment receives fees from pharmaceutical manufacturers for administrative services. Purchase discounts and administrative service fees are recorded as a reduction of cost of revenues.

Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures

In addition to net income (loss) determined in accordance with GAAP, we use certain non-GAAP measures, such as “Adjusted EBITDA”, in assessing our operating performance. We believe the non-GAAP measures serve as an appropriate measure in evaluating the performance of our business. We define Adjusted EBITDA as net income (loss) excluding the impact of income taxes, interest expense, depreciation and amortization, LIFO adjustments (which removes the entire impact of LIFO, and effectively reflects the results as if we were on a FIFO inventory basis), charges or credits for facility exit and impairment, goodwill and intangible asset impairment charges, inventory write-downs related to store closings, gains or losses on debt modifications and retirements, and other items (including stock-based compensation expense, merger and acquisition-related costs, non-recurring litigation and other contractual settlements, severance, restructuring-related costs, costs related to facility closures, gain or loss on sale of assets, the gain or loss on Bartell acquisition, and the change in estimate related to manufacturer rebate receivables). We reference this particular non-GAAP financial measure frequently in our decision-making because it provides supplemental information that facilitates internal comparisons to the historical periods and external comparisons to competitors. In addition, incentive compensation is primarily based on Adjusted EBITDA and we base certain of our forward-looking estimates on Adjusted EBITDA to facilitate quantification of planned business activities and enhance subsequent follow-up with comparisons of actual to planned Adjusted EBITDA.

We present these non-GAAP financial measures in order to provide transparency to our investors because they are measures that management uses to assess both management performance and the financial performance of our operations and to allocate resources. In addition, management believes that these measures may assist investors with understanding and evaluating our initiatives to drive improved financial performance and enables investors to supplementally compare our operating performance with the operating performance of our competitors including with those of our competitors having different capital structures. While we have excluded certain of these items from historical non-GAAP financial measures, there is no guarantee that the items excluded from non-GAAP financial measures will not continue into future periods. For instance, we expect to continue to experience charges for facility exit and impairment charges and inventory write-downs related to store closures as we continue to complete a multi-year

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strategic initiative designed to improve overall performance. We also expect to continue to experience and report restructuring-related charges associated with continued execution of our strategic initiatives.

Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share or other non-GAAP measures should not be considered in isolation from, and are not intended to represent an alternative measure of, operating results or of cash flows from operating activities, as determined in accordance with GAAP. Our definition of these non-GAAP measures may not be comparable to similarly titled measurements reported by other companies, including companies in our industry.

The following is a reconciliation of our net loss to Adjusted EBITDA for fiscal 2023, 2022 and 2021:

March 4, 2023

February 26, 2022

February 27, 2021

(53 weeks)

(52 weeks)

(52 weeks)

(Dollars in thousands)

Net loss from continuing operations

Interest expense

Income tax benefit

Depreciation and amortization

LIFO charge (credit)

Facility exit and impairment charges

Goodwill and intangible asset impairment charges

(Gain) loss on debt modifications and retirements, net

Merger and Acquisition‑related costs

Stock-based compensation expense

Restructuring-related costs

Inventory write-downs related to store closings

Litigation and other contractual settlements

(Gain) loss on sale of assets, net

Loss (gain) on Bartell acquisition

Change in estimate related to manufacturer rebate receivables

Other

Adjusted EBITDA

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The following is a reconciliation of our net loss from continuing operations to Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Diluted Share for fiscal 2023, 2022 and 2021. Adjusted Net Income (Loss) is defined as net income (loss) excluding the impact of amortization expense, merger and acquisition-related costs, non-recurring litigation and other contractual settlements, gains or losses on debt modifications and retirements, LIFO adjustments (which removes the entire impact of LIFO, and effectively reflects the results as if we were on a FIFO inventory basis), goodwill and intangible asset impairment charges, restructuring-related costs, the gain or loss on Bartell acquisition, and the change in estimate related to manufacturer rebate receivables. We calculate Adjusted Net Income (Loss) per Diluted Share using our above-referenced definition of Adjusted Net Income (Loss). We believe Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Diluted Share are useful indicators of our operating performance over multiple periods. Adjusted Net Income (Loss) per Diluted Share is calculated using our above-referenced definition of Adjusted Net Income (Loss):

March 4, 2023

February 26, 2022

February 27, 2021

(53 weeks)

(52 weeks)

(52 weeks)

(Dollars in thousands)

Net loss

Add back - Income tax benefit

Loss before income taxes

Adjustments:

Amortization expense

LIFO charge (credit)

Goodwill and intangible asset impairment charges

(Gain) loss on debt modifications and retirements, net

Merger and Acquisition‑related costs

Restructuring-related costs

Loss (gain) on Bartell acquisition

Change in estimate related to manufacturer rebate receivables

Litigation and other contractual settlements

Adjusted loss before income taxes

Adjusted income tax benefit (a)

Adjusted net loss

Net loss per diluted share

Adjusted net loss per diluted share

The fiscal year 2023, 2022 and 2021 adjustments to the income tax provision include adjustments to the GAAP basis tax provision commensurate with non-GAAP adjustments and certain discrete tax items, when applicable, was used for the fifty-three weeks ended March 4, 2023 and the fifty-two weeks ended February 26, 2022 and February 27, 2021, respectively.

In addition to Adjusted EBITDA, Adjusted Net (Loss) Income and Adjusted Net (Loss) Income per Diluted Share, we occasionally refer to several other Non-GAAP measures, on a less frequent basis, in order to describe certain components of our business and how we utilize them to describe our results. These measures include but are not limited to Adjusted EBITDA Gross Margin and Gross Profit (gross margin/gross profit excluding non-Adjusted EBITDA items), Adjusted EBITDA SG&A (SG&A expenses excluding non-Adjusted EBITDA items), FIFO Gross Margin and FIFO Gross Profit (gross margin/gross profit before LIFO charges), and Free Cash Flow (Adjusted EBITDA less cash paid for interest, rent on closed stores, capital expenditures, restructuring-related costs and the change in working capital).

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