Rite Aid 2012 Annual Report Download - page 32

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, 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. Many long-term macro-
economic and industry factors are considered, both quantitatively and qualitatively, in our future cash
flow assumptions. In addition to current and expected economic conditions such as inflation, interest
and unemployment rates that affect customer shopping patterns, we consider that we operate in a
highly competitive industry which includes the actions of other national and regional drugstore chains,
independently owned drugstores, supermarkets, mass merchandisers, dollar stores and internet
pharmacies. Many of our competitors are spending significant capital and promotional dollars in certain
geographies to gain market share. We have assumed certain sales growth from a new loyalty program,
which although it’s in its early marketing stages, is expected to not only retain but gain loyal customers.
Recent and proposed Pharmacy Benefit Management consolidation and efforts of third party public
and private payers have reduced pharmacy reimbursement rates in recent years. We expect this rate
compression, which currently affects over 96% of our pharmacy business, to continue to affect us in the
foreseeable future. We operate in a highly regulated industry and must make assumptions related to
Federal and State efforts and proposals to affect the pricing and regulations related to prescription
drugs, as well as, expected revenues and costs related to the new Patient Protection and Affordable
Care Act (health care reform).
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 $52.0 million in fiscal 2012, $115.1 million in fiscal 2011 and
$75.5 million in fiscal 2010. Our methodology for recording impairment charges has not changed
materially, and has been consistently applied in the periods presented.
At March 3, 2012, approximately $2.0 billion of our long-lived assets, including intangible assets,
were associated with 4,667 active operating stores.
If an operating store’s estimated future undiscounted cash flows are not sufficient to cover its
carrying value, its carrying value is reduced to fair value which is its estimated future discounted cash
flows. The discount rate is commensurate with the risks associated with the recovery of a similar asset.
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 carrying cost. The amount of the impairment charge is the entire difference between
the current carrying value and the estimated fair value of the assets using discounted future cash flows.
Most stores are fully impaired in the period that the impairment charge is originally recorded.
We recorded impairment charges for active stores of $43.4 million in fiscal 2012, $109.0 million in
fiscal 2011 and $48.9 million in fiscal 2010.
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