10-K 1 file001.htm FORM 10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Fiscal Year Ended February 26, 2005
OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR

15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Transition Period From / To

Commission File Number 1-5742

RITE AID CORPORATION

(Exact name of registrant as specified in its charter)

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

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

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes No

The aggregate market value of the voting and non-voting common stock of the registrant held by non-affiliates of the registrant based on the closing price at which such stock was sold on the New York Stock Exchange on August 28, 2004 was approximately $2,269,154,395. For purposes of this calculation, executive officers, directors and 5% shareholders are deemed to be affiliates of the registrant.

As of April 22, 2005 the registrant had outstanding 520,946,894 shares of common stock, par value $1.00 per share.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the registrant's annual meeting of shareholders to be held on June 23, 2005 are incorporated by reference into Part III.

TABLE OF CONTENTS


		Page
Cautionary Statement Regarding Forward Looking Statements			3

PART I
ITEM 1.	Business		4
ITEM 2.	Properties		9
ITEM 3.	Legal Proceedings		11
ITEM 4.	Submission of Matters to a Vote of Security Holders		12
PART II
ITEM 5.	Market for Registrant's Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities		13
ITEM 6.	Selected Financial Data		14
ITEM 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations		15
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk		35
ITEM 8.	Financial Statements and Supplementary Data		36
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		36
ITEM 9A.	Controls and Procedures		36
ITEM 9B.	Other Information		38
PART III
PART IV
ITEM 15.	Exhibits and Financial Statement Schedules		39

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

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


•	our high level of indebtedness;


•	our ability to make interest and principal payments on our debt and satisfy the other covenants contained in our senior secured credit facility and other debt agreements;


•	our ability to improve the operating performance of our existing stores in accordance with our long term strategy;


•	our ability to hire and retain pharmacists and other store personnel;


•	our ability to open or relocate stores according to our real estate development program;


•	the outcomes of pending lawsuits and governmental investigations;


•	competitive pricing pressures and continued consolidation of the drugstore industry; and


•	the efforts of third-party payors to reduce prescription drug reimbursements and encourage mail order, changes in state or federal legislation or regulations, the success of planned advertising and merchandising strategies, general economic conditions and inflation, interest rate movements, access to capital, and our relationships with our suppliers.

We undertake no obligation to revise the forward-looking statements included in this report to reflect any future events or circumstances. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors that could cause or contribute to such differences are discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations—Overview and Factors Affecting Our Future Prospects" included in this annual report on Form 10-K.

PART I

Item 1. Business

Overview

We are the third largest retail drugstore chain in the United States based on revenues and number of stores. We operate our drugstores in 28 states across the country and in the District of Columbia. As of February 26, 2005, we operated 3,356 stores.

In our stores, we sell prescription drugs and a wide assortment of other merchandise, which we call "front-end" products. In fiscal 2005, prescription drug sales accounted for 63.6% of our total sales. We believe that our pharmacy operations will continue to represent a significant part of our business due to our on-going program of purchasing prescription files from independent pharmacies and favorable industry trends, including an aging population, increased life expectancy, a new federally funded prescription drug benefit to begin in calendar 2006, which is part of the Medicare Prescription Drug Improvement and Modernization Act of 2003, and the discovery of new and better drug therapies. We offer approximately 24,000 front-end products, which accounted for the remaining 36.4% of our total sales in fiscal 2005. Front end products include over-the-counter medications, health and beauty aids, personal care items, cosmetics, household items, beverages, convenience foods, greeting cards, seasonal merchandise and numerous other everyday and convenience products, as well as photo processing. We distinguish our stores from other national chain drugstores, in part, through our private brands and our strategic alliance with GNC, a leading retailer of vitamin and mineral supplements. We offer approximately 2,400 products under the Rite Aid private brand, which contributed approximately 11.5% of our front-end sales in the categories where private brand products were offered in fiscal 2005.

Our stores range in size from approximately 5,000 to 40,000 square feet. The overall average size of each store in our chain is approximately 12,750 square feet. The larger stores are concentrated in the western United States. Approximately 54% of our stores are freestanding; approximately 39% of our stores include a drive-thru pharmacy; approximately 75% include one-hour photo shops; and approximately 31% include a GNC store-within-Rite Aid store.

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

Strategy

Our strategy is to continue to focus on improving the productivity of our existing stores and developing new stores in our strongest existing markets. We believe that improving the sales of existing stores and growing our existing markets is critical to improving our profitability and cash flow.

The following paragraphs describe in more detail the components of our strategy:

Develop Stores in Existing Markets. We have resumed our new store, store relocation and store remodeling program. Our goal is to open or relocate 80 stores by the end of fiscal 2006, of which we expect that approximately 70% will be relocated stores and the remaining 30% will be new stores. As part of this program, we plan to remodel a significant number of stores. The program is focused on our strongest existing markets. An integral part of the program is a new prototype store. Two pilot stores have recently been constructed and opened utilizing the new prototype. One of the pilot stores is a new 14,500 square foot prototype that is about 30% larger than our current prototype. The other pilot store utilizes the features of the new design in a smaller store. We believe that this program over the longer term, along with the execution of the near term strategy of improving store productivity, will continue to increase our sales.

Grow our Pharmacy Sales and Attract More Customers. We believe that customer service and convenience are key factors to growing pharmacy sales. To improve customer service, we are focused

on our "With us it's personal program" that is aimed at delivering more personalized service along with timely delivery to our customers. To help our pharmacists do this, we have completed the development and roll out of our new pharmacy management and dispensing system. This new system, which we call "Nexgen", provides our pharmacists with better tools and information to meet our customers' needs. In addition, the new system provides management with important information about the performance of each pharmacy in critical operating areas that drive customer service. We provide our customers with an easy and convenient way to order refills over the telephone or the internet using our automatic refill program. To provide better value to our customers we recommend, when appropriate, the utilization of generic drugs. Generic drugs, which often cost our customers significantly less than a branded drug, are also more profitable for us. We also plan to grow sales of prescriptions to senior citizens through a program called "Living More" that provides newsletters and discounts. Our Living More program also positions us for greater participation in Medicare endorsed prescription programs.

To help grow sales and script count, we acquire pharmacy files from other drug stores and have initiatives designed to attract and retain those customers. We have also recently added the capability to provide pharmacy benefit management ("PBM") services to employers, health plans and insurance companies. We intend to offer, through our PBM capabilities, a 90 day at retail alternative to mail order. We also believe that providing PBM services will create opportunities to direct customers to our stores.

Grow Front-End Sales. We intend to grow front-end sales through continued emphasis on core drugstore categories, a committment to health and wellness products to enhance our pharmacy position, a focus on seasonal and cross-merchandising, offering a wider selection of products and services to our customers and effective promotions in our weekly advertising circulars. Our focus for expanding our products and services includes a continued strengthening of our collaborative relationship with our suppliers, an emphasis on our Rite Aid private brand products, which provide better value for our customers and higher margins for us, offering ethnic products targeted to selected markets and utilizing digital technology in our one-hour photo development. We believe that the new store and relocation program described above will also contribute to an increase in our front-end sales.

Focus on Customers and Associates. Our "With us, it's personal" commitment encourages associates to provide customers with a superior customer service experience. We obtain feedback on our customer service performance by utilizing an automated survey system that collects store specific information from customers shortly after the point of sale and frequent customer surveys by an independent third party. We also have several programs in place that enhance customer satisfaction, examples of which are the maintenance of a customer support center that centrally receives and processes all customer calls and our "never out of stock" program. We continue to develop and implement associate training programs to improve customer satisfaction and educate our associates about the products we offer. We have implemented programs that create compensatory and other incentives for associates to provide customers with excellent service. We believe that these steps further enable and motivate our associates to deliver superior customer service.

Products and Services

Sales of prescription drugs represented approximately 63.6% of our total sales, in both fiscal 2005 and 2004, an increase from 63.2% in fiscal 2003. In fiscal years 2005, 2004 and 2003, prescription drug sales were $10.7 billion, $10.5 billion, and $9.9 billion, respectively.

We sell approximately 24,000 different types of non-prescription, or front-end products. The types and number of front-end products in each store vary, and selections are based on customer needs and preferences and available space. No single front-end product category contributed significantly to our sales during fiscal 2005, although certain front-end product classes contributed in excess of 10% to our sales. Our principal classes of products in fiscal 2005 were the following:


Product Class	Percentage of Sales
Prescription drugs		63.6	%
Over-the-counter medications and personal care		10.8
Health and beauty aids		4.8
General merchandise and other		20.8

We offer approximately 2,400 products under the Rite Aid private brand, which contributed approximately 11.5% of our front-end sales in the categories where private brand products were offered in fiscal 2005. During fiscal 2005, we added approximately 228 products under our private brand. We intend to continue to increase the number of private brand products, which we believe will result in increased sales.

We have a strategic alliance with GNC under which we have opened 1,049 GNC "stores-within-Rite Aid-stores" and have agreed to open an additional 251 GNC stores-within-Rite Aid-stores across the country by December 31, 2006. GNC is a leading nationwide retailer of vitamin and mineral supplements and personal care, fitness and other health-related products.

Technology

All of our stores are integrated into a common information system, which enables our pharmacists to fill prescriptions more accurately and efficiently and reduces chances of adverse drug interactions. This system can be expanded to accommodate new stores. Our customers may also order prescription refills over the Internet through www.riteaid.com powered by drugstore.com, or over the phone through our telephonic rapid automated refill systems. As of February 26, 2005 we had installed ScriptPro automated pharmacy dispensing units, which are linked to our pharmacists' computers and fill and label prescription drug orders, in 885 stores. The efficiency of ScriptPro units allows our pharmacists to spend an increased amount of time consulting with our customers. Additionally, each of our stores employs point-of-sale technology that supports sales analysis and recognition of customer trends. This same point-of-sale technology facilitates the maintenance of perpetual inventory records which together are the basis for our automated inventory replenishment process.

In fiscal 2005, we completed the roll-out of our next generation pharmacy dispensing system, and expanded e-prescribing services to all of our stores. We believe our next generation pharmacy system is state of the art and will enhance management of customers' prescription orders, assignment of responsibilities within the pharmacy, quality control and measurement and monitoring of each of our pharmacies' key performance indicators, which include timeliness, completeness, and backlog. Our next generation pharmacy system was designed with optimal ease of use in mind so as to further enable our pharmacists to work directly with customers and doctors.

Suppliers

During fiscal 2005, we purchased approximately 93% of the dollar volume of our prescription drugs from a single supplier, McKesson Corp ("McKesson"), under a contract, which runs through March 2009. Under the contract, with limited exceptions, we are required to purchase all of our branded pharmaceutical products from McKesson. If our relationship with McKesson was disrupted, we could temporarily have difficulty filling prescriptions until we executed a replacement strategy, which could negatively affect our business. We purchase generic (non-brand name) pharmaceuticals from a variety of sources. We purchase our non-pharmaceutical merchandise from numerous manufacturers and wholesalers. We believe that competitive sources are readily available for substantially all of the non-pharmaceutical merchandise we carry and that the loss of any one supplier would not have a material effect on our business.

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

Customers and Third-Party Payors

During fiscal 2005, our stores served an average of 1.8 million customers per day. The loss of any one customer would not have a material adverse impact on our results of operations.

In fiscal 2005, 93.5% of our pharmacy sales were to customers covered by health plan contracts which typically contract with third-parties payors (such as insurance companies, prescription benefit management companies, governmental agencies, private employers, health maintenance organizations or other managed care providers) that agree to pay for all or a portion of a customer's eligible prescription purchases and negotiate with us for reduced prescription rates. During fiscal 2005, the top five third-party payors accounted for approximately 31.6% of our total sales, the largest of which represented 10.4% of our total sales. During fiscal 2005, sponsored Medicaid agencies accounted for approximately 12.4% of our total sales, the largest of which was less than 3% of our total sales. Any significant loss of third-party payor business could have a material adverse effect on our business and results of operations.

Competition

The retail drugstore industry is highly competitive. We compete with, among others, retail drugstore chains, independently owned drugstores, supermarkets, mass merchandisers, discount stores, dollar stores and mail order pharmacies. We compete on the basis of store location and convenient access, customer service, product selection and price. We believe continued consolidation of the drugstore industry, continued new store openings and increased mail order will further increase competitive pressures in the industry.

Marketing and Advertising

In fiscal 2005, marketing and advertising expense was $278.9 million, which was spent primarily on nationwide weekly circular advertising. We have implemented various programs that are designed to support our health and wellness vision and improve our image with customers by delivering upon our "With Us, It's Personal" brand promise. These include health condition marketing platforms focused on specific health conditions, increased GNC presence through expanded locations and promotional activity, continuation of our Rite Aid Health and Beauty Expos, and marketing and merchandising strategies that capitalize on emerging beauty trends such as men's grooming, spa products, proprietary cosmetics and skincare. We continue to implement programs that are specifically directed to our pharmacy business. These include a card-based loyalty program for senior citizens called "Living More" that provides meaningful discounts and targeted newsletters and offers, direct marketing programs, a comprehensive diabetes disease state management program, and other educational materials to help customers with their healthcare decisions. We are creating a more inviting store environment for our Hispanic customers through tailored product assortments and bi-lingual signing and advertising in stores with large Hispanic customer bases.

Associates

We believe that our relationships with our associates are good. As of February 26, 2005, we had 71,200 associates, 12% of which were pharmacists, 46% of which were part-time and 38% of which were unionized. Associate satisfaction is critical to the success of our strategy. We have surveyed our associates to obtain feedback on various employment-related topics, including job satisfaction and their understanding of our core values and mission.

There is a national shortage of pharmacists. We have implemented various associate incentive plans in order to attract and retain qualified pharmacists. We have also expanded our efforts in recruitment of pharmacists through an increase in the number of recruiters, a successful pharmacist intern program, improved relations with pharmacy schools and the development of an international recruiting effort.

Research and Development

We do not make significant expenditures for research and development.

Licenses, Trademarks and Patents

The Rite Aid name is our most significant trademark and the most important factor in marketing our stores and private brand products. We hold licenses to sell beer, wine and liquor, cigarettes and lottery tickets. As part of our strategic alliance with GNC we have a license to operate GNC "stores-within-RiteAid stores". Additionally, we hold licenses granted to us by the Nevada Gaming Commission that allow us to place slot machines in our Nevada stores. We also hold licenses to operate our pharmacies and our distribution facilities. Together, these licenses are material to our operations.

Seasonality

We experience moderate seasonal fluctuations in our results of operations concentrated in the first and fourth fiscal quarter as the result of the concentration of the cold and flu season and the holidays. We tailor certain front-end merchandise to capitalize on holidays and seasons. We increase our inventory levels during our third fiscal quarter in anticipation of the seasonal fluctuations described above. Our results of operations in the fourth and first fiscal quarter may fluctuate based upon the timing and severity of the cold and flu season, both of which are unpredictable.

Regulation

Our business is subject to various federal and state regulations. For example, pursuant to the Omnibus Budget Reconciliation Act of 1990 ("OBRA") and comparable state regulations, our pharmacists are required to offer counseling, without additional charge, to our customers about medication, dosage, delivery systems, common side effects and other information deemed significant by the pharmacists and may have a duty to warn customers regarding any potential adverse effects of a prescription drug if the warning could reduce or negate such effect.

The appropriate state boards of pharmacy must license our pharmacies and pharmacists. Our pharmacies and distribution centers are also registered with the Federal Drug Enforcement Administration and are subject to Federal Drug Enforcement Agency regulations relative to our pharmacy operations, including regulations governing purchasing, storing and dispensing of controlled substances. Applicable licensing and registration requirements require our compliance with various state statutes, rules and/or regulations. If we were to violate any applicable statute, rule or regulation, our licenses and registrations could be suspended or revoked.

In recent years, an increasing number of legislative proposals have been enacted, introduced or proposed in Congress and in some state legislatures that effect or would effect major changes in the healthcare system, either nationally or at the state level. The legislative initiatives include drug importation and a prescription drug benefit for Medicare participants, changes in qualified participants and changes in reimbursement levels. Although we believe we are well positioned to respond to these developments, we cannot predict the long-term outcome or effect of legislation from these efforts.

Our pharmacy business is subject to patient privacy and other obligations, including corporate, pharmacy and associate responsibility imposed by the Health Insurance Portability and Accountability Act. As a covered entity, we are required to implement privacy standards, train our associates on the permitted uses and disclosures of protected health information, provide a notice of privacy practice to our pharmacy customers and permit pharmacy customers to access and amend their records and receive an accounting of disclosures of protected health information. Failure to properly adhere to these requirements could result in the imposition of civil as well as criminal penalties.

We are also subject to laws governing our relationship with our associates, including minimum wage requirements, overtime and working conditions. Increases in the federal minimum wage rate, associate benefit costs or other costs related to associates could adversely affect our results of operations.

In addition, in connection with the ownership and operations of our stores, distribution centers and other sites, we are subject to laws and regulations relating to the protection of the environment

and health and safety matters, including those governing the management and disposal of hazardous substances and the cleanup of contaminated sites. Violations of or liabilities under these laws and regulations as a result of our current or former operations or historical activities at our sites, such as gasoline service stations and dry cleaners, could result in significant costs.

Corporate Governance and Internet Address

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

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

Our website also provides information on how to contact us and other items of interest to investors. We make available on our website, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports, as soon as practical after we file these reports with the SEC.

Item 2. Properties

As of February 26, 2005, we operated 3,356 retail drugstores. The overall average selling square feet of each store in our chain is 11,100 square feet. The overall average total square feet of each store in our chain is 12,750. The stores in the eastern part of the U.S. average 8,700 selling square feet per store (9,700 average total square feet per store). The stores in the central part of the U.S. average 9,500 selling square feet per store (10,200 average total square feet per store). The stores in the western part of the U.S. average 16,600 selling square feet per store (20,500 average total square feet per store).

Our new store prototype, which is being utilized in our new store and store relocation program, has an overall average selling square footage of 13,000 and an overall average total square feet of 15,900. The new store prototype in the eastern and central parts of the U.S. will average 11,900 square feet (14,600 average total square feet per store). The new store prototype in the western part of the U.S. will average 14,100 selling square feet (17,300 average total square feet per store).

The table below identifies the number of stores by state as of February 26, 2005:


State	Store Count
Alabama		115
Arizona		3
California		580
Colorado		27
Connecticut		35
Delaware		24
District of Columbia		8
Georgia		48
Idaho		20
Indiana		9
Kentucky		115
Louisiana		82
Maine		79
Maryland		135
Michigan		320
Mississippi		30
Nevada		36
New Hampshire		39
New Jersey		160
New York		382
Ohio		237
Oregon		71
Pennsylvania		347
Tennessee		47
Utah		26
Vermont		12
Virginia		134
Washington		132
West Virginia		103
Total		3,356

Our stores have the following attributes at February 26, 2005:


Attribute	Number			Percentage
Freestanding		1,799			54	%
Drive through pharmacy		1,295			39	%
One-hour photo development department		2,530	(1)		75	%
GNC stores-within a Rite Aid-store		1,049			31	%


(1)	All have digital capabilities.

We own our corporate headquarters, which is located in a 205,000 square foot building at 30 Hunter Lane, Camp Hill, Pennsylvania 17011. We lease a 100,000 square foot building near Harrisburg, Pennsylvania for use by additional administrative personnel. We lease 3,111 of our operating drugstore facilities under non-cancelable leases, many of which have original terms of 10 to 22 years. In addition to minimum rental payments, which are set at competitive market rates, certain leases require additional payments based on sales volume, as well as reimbursement for taxes, maintenance and insurance. Most of our leases contain renewal options, some of which involve rent increases.

We operate the following distribution centers and overflow storage locations, which we own or lease as indicated:


Location	Owned or Leased	Approximate Square Footage
Rome, New York	Owned		283,000
Utica, New York(1)	Leased		172,000
Poca, West Virginia	Owned		255,000
Dunbar, West Virginia(1)	Leased		110,000
Perryman, Maryland	Owned		885,000
Belcamp, Maryland(1)	Leased		252,000
Tuscaloosa, Alabama	Owned		230,000
Cottondale, Alabama(1)	Leased		155,000
Pontiac, Michigan	Owned		325,000
Woodland, California	Owned		513,000
Woodland, California(1)	Leased		200,000
Wilsonville, Oregon	Leased		517,000
Lancaster, California	Owned		914,000


(1)	Overflow storage locations.

The original terms of the leases for our distribution centers range from five to 22 years. In addition to minimum rental payments, certain distribution centers require tax reimbursement, maintenance and insurance. Most leases contain renewal options, some of which involve rent increases. Although from time to time, we may be near capacity at some of our distribution facilities, particularly at our older facilities, we believe that the capacity of our facilities is adequate. Our strategic growth plan could require additional distribution capacity in the future.

We also own a 55,800 square foot ice cream manufacturing facility located in El Monte, California.

On a regular basis and as part of our normal business, we evaluate store performance and may reduce in size, close or relocate a store if the store is redundant, under performing or otherwise deemed unsuitable. When we reduce in size, close or relocate a store, we often continue to have leasing obligations or own the property. We attempt to sublease this space. As of February 26, 2005, we have 6,708,237 square feet of excess space, of which 4,403,111 square feet was subleased.

Item 3. Legal Proceedings

Federal investigations

There are currently pending federal governmental investigations, both civil and criminal, by the United States Attorney, involving various matters related to prior management's business practices. We are cooperating fully with the United States Attorney. We have begun settlement discussions with the United States Attorney for the Middle District of Pennsylvania. The United States Attorney has proposed that the government would not institute any criminal proceeding against us if we enter into a consent judgment providing for a civil penalty payable over a period of years. The amount of the civil penalty has not been agreed to and there can be no assurance that a settlement will be reached or that the amount of such penalty will not have a material adverse effect on our financial condition and results of operations. We have recorded an accrual of $20.0 million in fiscal 2003 in connection with the resolution for these matters; however, we may incur charges in excess of that amount and we are unable to estimate the possible range of loss. We will continue to evaluate our estimate and to the extent that additional information arises or our strategy changes, we will adjust our accrual accordingly.

These investigations and settlement discussions are ongoing and we cannot predict their outcomes. If we were convicted of any crime, certain licenses and government contracts such as

Medicaid plan reimbursement agreements that are material to our operations may be revoked, which would have a material adverse effect on our results of operations, financial condition or cash flows. In addition, substantial penalties, damages or other monetary remedies assessed against us, including a settlement, could also have a material adverse effect on our results of operations, financial condition or cash flows.

Other

In June 2000, we were sued by the Lemelson Foundation in a complaint which alleges that portions of the technology included in our point-of-sale system infringe upon a patent held by the plaintiffs. The Lemelson Foundation has brought a similar suit against a significant number of major U.S. retailers. The amount of damages sought is unspecified and may be material. We cannot predict the outcome of this litigation or whether it could result in a material adverse effect on our results of operations, financial conditions or cash flows.

We are subject from time to time to lawsuits arising in the ordinary course of business. In the opinion of our management, these matters are adequately covered by insurance or, if not so covered, are without merit or are of such nature or involve amounts that would not have a material adverse effect on our financial conditions, results of operations or cash flows if decided adversely.

Item 4. Submission of Matters to a Vote of Security Holders

No matter was submitted to a vote of our security holders, through the solicitation of proxies or otherwise, during the fourth quarter of our fiscal year covered by this report.

PART II


Item 5.	Market for Registrant's Common Equity and Related Stockholder Matters and Issuers Purchases of Equity Securities.

Our common stock is listed on the New York and Pacific Stock Exchanges under the symbol "RAD." On April 22, 2005, we had approximately 22,999 record shareholders. Quarterly high and low stock prices, based on the New York Stock Exchange composite transactions, are shown below.


Fiscal Year	Quarter	High		Low
2006 (through April 22, 2005)	First	$	4.24	$	3.50

2005	First		5.75		4.53
	Second		5.38		4.38
	Third		4.58		3.35
	Fourth		3.81		3.41

2004	First		3.90		2.17
	Second		5.05		3.67
	Third		6.30		4.73
	Fourth		6.40		5.25

We have not declared or paid any cash dividends on our common stock since the third quarter of fiscal 2000 and we do not anticipate paying cash dividends on our common stock in the foreseeable future. Our senior secured credit facility does not allow us to pay cash dividends on our common stock. Some of the indentures that govern our other outstanding indebtedness also restrict our ability to pay dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."

During fiscal 2005, we exchanged 3.5 million shares of our Series D preferred stock for shares of our Series F, G and H preferred stock.

Other than as set forth above, we have not sold any unregistered equity securities during the period covered by this report, nor have we repurchased any equity securities during the period covered by this report.

The Chief Executive Officer of the Company certified to the NYSE on June 28, 2004 that she was not aware of any violation by the Company of the NYSE's corporate governance listing standards.


Item 6.	Selected Financial Data

The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited consolidated financial statements and related notes appearing on pages 44-83.


	Fiscal Year Ended
	February 26, 2005 (52 weeks)			February 28, 2004 (52 weeks)			March 1, 2003 (52 weeks)			March 2, 2002 (52 weeks)			March 3, 2001 (53 weeks)(1)
	(Dollars in thousands, except per share amounts)
Summary of Operations:
Revenues	$	16,816,439		$	16,600,449		$	15,791,278		$	15,166,170		$	14,516,865
Costs and expense:
Cost of goods sold, including occupancy costs		12,608,988			12,568,729			12,036,003			11,695,871			11,152,285
Selling, general and administrative expenses (2)		3,721,442			3,624,226			3,476,379			3,406,492			3,458,307
Goodwill amortization (3)		—			—			—			21,007			20,670
Store closing and impairment charges		35,655			22,074			135,328			251,617			388,078
Interest expense		294,871			313,498			330,020			396,064			649,926
Interest rate swap contracts		—			—			278			41,894			—
Loss (gain) on debt modifications and retirements, net		19,229			35,315			(13,628	)		221,054			100,556
Share of loss from equity investments		—			—			—			12,092			36,675
Loss (gain) on sale of assets and investments, net		2,247			2,023			(18,620	)		(42,536	)		(6,030	)
Total cost and expenses		16,682,432			16,565,865			15,945,760			16,003,555			15,800,467
Income (loss) from continuing operations before income taxes		134,007			34,584			(154,482	)		(837,385	)		(1,283,602	)
Income tax (benefit) expense		(168,471	)		(48,795	)		(41,940	)		(11,745	)		148,957
Income (loss) from continuing operations		302,478			83,379			(112,542	)		(825,640	)		(1,432,559	)
Income (loss) from discontinued operations, net of income tax expense of $13,846		—			—			—			—			11,335
Loss on disposal of discontinued operations, net of income tax benefit of $734		—			—			—			—			(168,795	)
Net income (loss)	$	302,478		$	83,379		$	(112,542	)	$	(825,640	)	$	(1,590,019	)
Basic and diluted net income (loss) per share:
Income (loss) from continuing operations	$	0.50		$	0.11		$	(0.28	)	$	(1.81	)	$	(5.15	)
Loss from discontinued operations		—			—			—			—			(0.50	)
Basic net income (loss) per share	$	0.50		$	0.11		$	(0.28	)	$	(1.81	)	$	(5.65	)
Diluted net income (loss) per share	$	0.47		$	0.11		$	(0.28	)	$	(1.81	)	$	(5.65	)
Year-End Financial Position:
Working capital	$	1,335,017		$	1,894,247		$	1,676,889		$	1,580,218		$	1,955,877
Property, plant and equipment, net		1,733,694			1,882,763			1,867,830			2,095,552			3,040,790
Total assets		5,932,583			6,245,634			6,132,766			6,491,281			7,913,693
Total debt (4)		3,311,336			3,891,666			3,862,628			4,056,468			5,894,548
Redeemable preferred stock (5)		—			—			19,663			19,561			19,457
Stockholders' equity (deficit)		322,934			(8,277	)		(129,938	)		(7,527	)		(373,619	)
Other Data:
Cash flows from continuing operations provided by (used in):
Operating activities		518,446			227,515			305,383			16,343			(704,554	)
Investing activities		(118,985	)		(242,150	)		(72,214	)		342,531			677,653
Financing activities		(571,395	)		(15,931	)		(211,903	)		(107,109	)		(64,324	)
Capital expenditures		222,417			267,373			116,154			187,383			141,504
Cash dividends declared per common share	$	0		$	0		$	0		$	0		$	0
Basic weighted average shares		518,716,000			515,822,000			515,129,000			474,028,000			314,189,000
Diluted weighted average shares (6)		634,062,000			525,831,000			515,129,000			474,028,000			314,189,000
Number of retail drugstores		3,356			3,382			3,404			3,497			3,648
Number of associates		71,200			72,500			72,000			75,000			75,500


(1)	PCS was acquired on January 22, 1999. On October 2, 2000, we sold PCS. Accordingly, our Pharmacy Benefit Management ("PBM") segment was reported as a discontinued operation in the fiscal year ended March 3, 2001.

(2)

Includes stock-based compensation expense (benefit). Stock-based compensation expense for the fiscal years ended February 26, 2005 and February 28, 2004 was determined using the fair value method set forth in Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation". Stock-based compensation expense (benefit) for the fiscal years ended March 1, 2003, March 2, 2002 and March 3, 2001 was determined using the intrinsic method set forth in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".


(3)	Effective March 3, 2002 we adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Intangible Assets", which specifies that goodwill and indefinite life intangibles shall no longer be amortized. Accordingly, no goodwill amortization expense was recorded for the fiscal years ended February 26, 2005, February 28, 2004, and March 1, 2003.


(4)	Total debt included capital lease obligations of $168.3 million, $183.2 million, $176.2 million and $182.6 million, and $1.1 billion, as of February 26, 2005, February 28, 2004, March 1, 2003, March 2, 2002, March 3, 2001, respectively.


(5)	Redeemable preferred stock of $19,868 and $19,766 was included in "Other Non-current liabilities" as of February 26, 2005 and February 28, 2004, respectively.


(6)	Diluted weighted average shares for the year ended February 26, 2005 included the impact of stock options, convertible debt and preferred stock, as calculated under the treasury stock method. Diluted weighted average shares for the year ended February 28, 2004 included the impact of stock options, as calculated under the treasury stock method.


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

Overview

Net income for fiscal 2005 was $302.5 million, compared to $83.4 million in fiscal 2004, and a loss of $112.5 million in fiscal 2003. Reasons for the improvement in our results are described in more detail in the Results of Operations and Liquidity and Capital Resources sections of this Item 7. However, some of the key factors that impacted this improvement are summarized as follows:

Sales Trends. Our revenue growth for fiscal 2005 compared to fiscal 2004 was 1.3%. Factors effecting our growth are discussed more thoroughly in the Results of Operations section of this Item 7. Compared to the prior year, our revenue grew 4.9% and 1.8% in the first and second quarters, respectively, was flat in the third quarter and declined 1.3% in the fourth quarter. A significant factor negatively effecting our revenue as the year progressed was the continuing penetration of mail order prescription programs, particularly the mandatory mail program that the United Auto Workers implemented between January 2004 and June 2004. Additionally, our revenue growth was negatively effected by the difficult comparisons to prior year revenues for our stores in Southern California that benefited from the effects of a strike at several Southern California grocery chains that lasted from October 2003 until February 2004. As described in the Strategy section of Item 1 of this Form 10-K, we are taking steps to address this declining revenue trend by working to increase sales at our existing stores through improved customer service and developing new stores in our strongest markets. We also believe that the introduction of a 90-day mail option through our PBM capabilities will have a positive impact on our revenue trend. However, we expect our revenue results to continue to face significant pressures from the existing competitive environment.

Income Tax Valuation Allowance Adjustment. Until the fourth quarter of fiscal 2005, we provided a full valuation allowance against our net deferred tax assets. Based upon a review of a number of factors, including historical operating performance and our expectation that we can

generate sustainable consolidated net income for the foreseeable future, we now believe it is more likely than not that a portion of these net deferred tax assets will be utilitzed. Based upon our expectation of future utilization, we have reduced a portion of our valuation allowance at year end resulting in a non-cash increase in net income of $179.5 million during fiscal 2005. An additional reduction in the valuation allowance of $5.3 million was recorded as additional paid-in capital in fiscal 2005 to reflect the tax benefit associated with previously recorded stock based compensation. We will continue to monitor all available evidence related to our ability to utilize our remaining net deferred tax assets. To the extent that it becomes more likely than not that those net deferred tax assets would be realized, we would be required to reverse all or a portion of the remaining valuation allowance. We continue to maintain a valuation allowance of $1.4 billion against remaining net deferred tax assets at fiscal year end 2005.

Debt Refinancing and Receivables Securitization. In fiscal 2005 and in fiscal 2004, we took several steps to improve our leverage and extend the terms of a substantial amount of our debt. In fiscal 2005, we replaced our senior secured credit facility with a new credit facility, entered into receivable securitization agreements, issued new senior secured notes, and repurchased portions of several existing notes prior to maturity. As a result of entering into the new senior secured credit facility and the receivables securitization agreements, we recorded a loss on debt modifications of $20.0 million, offset by net gains of $0.8 million related to the note repurchases described above. In fiscal 2004, we replaced our then existing senior secured credit facility with a new senior secured credit facility, issued new senior notes, and repurchased portions of several existing notes prior to maturity. These activities resulted in a loss of $43.2 million related to the termination of the old senior secured credit facility and the issuance of the new senior secured credit facility, offset by net gains of $7.9 million related to the note repurchases described above. These steps have enabled us to reduce our debt from $3.9 billion as of March 1, 2003 to $3.3 billion as of February 26, 2005, and to extend the maturity of the majority of our debt to 2009 and beyond. These transactions are discussed in more detail in the Liquidity and Capital Resources section below.

Dilutive Equity Issuances. At February 26, 2005, 520.4 million shares of common stock were outstanding and an additional 200.0 million shares of common stock were issuable related to outstanding stock options, convertible notes and preferred stock.

Our 200.0 million shares of potentially issuable common stock consist of the following:


(Shares in thousands)
Strike price	Outstanding Stock Options (a)		Convertible Notes (b)		Preferred Stock		Total
	(Shares in thousands)
$5.50 and under		56,310		—		96,597		152,907
$5.51 to $7.50		2,407		38,462		—		40,869
$7.51 and over		6,214		—		—		6,214
Total issuable shares		64,931		38,462		96,597		199,990


(a)	The exercise of these options would provide cash of $310.1 million


(b)	The conversion of these notes to equity would reduce the principal amount of debt by $250.0 million

Working Capital. We generally finance our inventory and capital expenditure requirements with internally generated funds, funds generated from our securitization facility, funds generated from sale-leaseback transactions and borrowings under our senior secured credit facility. We expect to use cash from operating activities, proceeds from our securitization facility and, when necessary, borrowings under our revolving credit facility to finance inventories and to support our continued growth. The majority of our front-end sales are in cash. Third-party payors, which typically settle in fewer than 30 days, accounted for 93.5% of our pharmacy sales and 63.6% of our revenues in fiscal 2005.

Industry Trends. We believe pharmacy sales in the United States will increase at least 20% over the next three years based upon studies published by pharmacy benefit management companies and a pharmaceutical market intelligence firm. This rate of increase is lower than it has been in the past five years. The anticipated increase of 20% over the next three years is expected to be driven by the "baby boom" generation entering their fifties, the increasing life expectancy of the American population, the new Medicare endorsed prescription program, the introduction of several new drugs and the rate of inflation.

The retail drugstore industry is highly competitive and has been experiencing consolidation. We believe that the continued consolidation of the drugstore industry, continued new store openings, increased mail order and drug importation will further increase competitive pressures in the industry. In addition, sales of potential generic pharmaceuticals continue to grow as a percentage of total prescription drug sales, which has a dampening effect on sales growth. The growth rate of prescription drug sales has also been impacted by slower introductions of successful new prescription drugs and safety concerns related to recalls of prescription medications, such as the recent antiarthritic drug recalls.

The retail drugstore industry relies significantly on third party payors at an increasing rate. Third party payors, especially state sponsored Medicaid agencies, have recently evaluated and reduced certain reimbursement levels. Also, modifications to the Medicare program will expand coverage of prescription drugs. If third-party payors, including state sponsored Medicaid agencies, reduce their reimbursement levels, or if Medicare covers prescription drugs at lower reimbursement levels, sales and margins in the industry could be reduced, and profitability of the industry could be adversely affected.

Results of Operations

Revenue and Other Operating Data


	Year Ended
	February 26, 2005 (52 Weeks)			February 28, 2004 (52 Weeks)			March 1, 2003 (52 Weeks)
	(Dollars in thousands)
Revenues	$	16,816,439		$	16,600,449		$	15,791,278
Revenue growth		1.3	%		5.1	%		4.1	%
Same store sales growth		1.6	%		5.7	%		6.7	%
Pharmacy sales growth		1.3	%		5.8	%		7.1	%
Same store pharmacy sales growth		1.6	%		6.4	%		9.7	%
Pharmacy sales as a % of total sales		63.6	%		63.6	%		63.2	%
Third-party sales as a % of total pharmacy sales		93.5	%		93.3	%		92.7	%
Front-end sales growth (decline)		1.1	%		3.9	%		(0.5	)%
Same store front-end sales growth		1.6	%		4.6	%		1.9	%
Front-end sales as a % of total sales		36.4	%		36.4	%		36.8	%
Store data:
Total stores (beginning of period)		3,382			3,404			3,497
New stores		7			2			3
Closed stores		(38	)		(26	)		(97	)
Store acquisitions, net		5			2			1
Total stores (end of period)		3,356			3,382			3,404
Remodeled stores		169			170			138
Relocated stores		13			7			12

Revenues

Fiscal 2005 compared to Fiscal 2004: The 1.3% growth in revenues for fiscal 2005 was driven by pharmacy sales growth of 1.3%, and front-end sales growth of 1.1%. Sales growth in both pharmacy and front end was driven by increases in same store sales, which are discussed in more detail in the paragraphs below. We include in same store sales all stores that have been open at least one year. Stores in liquidation are considered closed. Relocated stores are included in same store sales.

Fiscal 2005 pharmacy same store sales increased by 1.6%, due to increases in price per prescription. The increase in price per prescription is due to inflation, offset by an increase in generic sales and lower reimbursement rates. Offsetting the increase in price per prescription was a decrease in the number of prescriptions filled. This reduction is due primarily to certain third-party payors requiring or encouraging customers to use mail order, safety concerns in hormone therapy, psychotherapeutic and antiarthritic prescriptions, the movement of certain prescription drugs to over-the-counter and a milder cold and flu season than in the prior year. We expect the negative impact from mail order activity to continue for the foreseeable future. The lower rate of increase in fiscal 2005 is also partially attributable to our Southern California stores benefiting from an increase in business in fiscal 2004 related to a union strike at several grocery store chains.

Fiscal 2005 front-end same store sales increased 1.6%, primarily as a result of improvement in our consumable over-the-counter and health and beauty care categories, partially offset by a decrease in photo and film sales, sales decreases in categories negatively impacted by a milder cold and flu season and decreased traffic in stores that were negatively impacted by mail order programs. The lower rate of increase in fiscal 2005 is also partially attributable to our Southern California stores benefiting from an increase in business in fiscal 2004 related to a union strike at several grocery store chains.

Fiscal 2004 compared to Fiscal 2003: The 5.1% growth in revenues for fiscal 2004 was driven by pharmacy sales growth of 5.8% and front-end sales growth 3.9%. Sales growth in both pharmacy and front end was driven by same store sales which are discussed in more detail in the paragraphs below.

Fiscal 2004 pharmacy same store sales increased by 6.4% due primarily to increases in price per prescription and, to a lesser extent, increases in the number of prescriptions filled. The increase in price per prescription was driven by inflation, partially offset by an increase in generic sales mix. The increase in the number of prescriptions filled was aided by prescription file purchases, a more severe flu season and favorable industry trends. Favorable industry trends include an aging population, the use of pharmaceuticals to treat a growing number of healthcare problems, and the introduction of a number of successful prescription drugs. Partially offsetting increases in the number of prescriptions filled was an increase in third-party payors requiring customers to use mail order for certain prescriptions and a reduction in hormone replacement and non-sedating antihistamine prescriptions.

Fiscal 2004 front-end same store sales increased by 4.6%, primarily as a result of improvements in core categories, such as over-the-counter items, consumables and vitamins and improved assortments. Also contributing to front-end same store sales increases was the switch of certain drugs from prescription to over-the-counter products.

Pharmacy and front-end same store sales increases in fiscal 2004 benefited from increased business in Southern California stores, driven by the migration of customers impacted by a union strike at several grocery store chains. The union strike ended in the beginning of March 2004.

The 4.1% growth in revenues for fiscal 2003 was driven by pharmacy sales growth of 7.1%, offset slightly by front-end sales decline of 0.5%. The decline in front-end sales was a direct result of closing 97 stores in fiscal 2003, partially offset by same store sales growth of 1.9%.

Fiscal 2003 compared to Fiscal 2002: Fiscal 2003 pharmacy same store sales increased by 9.7%, due to increases in both the number of prescriptions filled and sales price per prescription. Factors contributing to our pharmacy same store sales increases include inflation, improved attraction and retention of managed care customers, our increased focus on pharmacy initiatives, such as predictive refill, and favorable industry trends. These favorable factors were partially offset by the increase in generic sales mix, a reduction in hormone replacement therapy prescriptions and the impact of a less severe flu season than in the prior year.

Fiscal 2003 front-end same store sales increased 1.9%, primarily as a result of improvement in most core categories, such as over-the-counter items, consumables and vitamins, and improved assortments.

Costs and Expenses


	Year Ended
	February 26, 2005 (52 Weeks)			February 28, 2004 (52 Weeks)			March 1, 2003 (52 Weeks)
	(Dollars in thousands)
Costs of goods sold, including occupancy costs	$	12,608,988		$	12,568,729		$	12,036,003
Gross profit	$	4,207,451		$	4,031,720		$	3,755,275
Gross margin		25.0	%		24.3	%		23.8	%
Selling, general and administrative expenses		3,721,442		$	3,624,226		$	3,476,379
Selling, general and administrative expenses as a percentage of revenues		22.1	%		21.8	%		22.0	%
Store closing and impairment charges		35,655			22,074			135,328
Interest expense		294,871			313,498			330,020
Interest rate swap contracts		—			—			278
Loss (gain) on debt modifications and retirements, net		19,229			35,315			(13,628	)
Loss (gain) on sale of assets and investments, net		2,247			2,023			(18,620	)

Cost of Goods Sold

Gross margin was 25.0% for fiscal 2005 compared to 24.3% in fiscal 2004. Gross margin was positively impacted by improvements in pharmacy margin, which was driven by improved generic product mix and reduced inventory costs resulting from purchasing improvements. These items were partially offset by lower reimbursement rates. Gross margin was also positively impacted by the recording of a LIFO credit in fiscal 2005, which resulted from a decrease in the pricing indices caused by generic drug deflation. Partially offsetting these items was a decrease in front-end margin, which was caused by increased markdowns and a decrease in one-hour photo margins.

Gross margin was 24.3% for fiscal 2004 compared to 23.8% in fiscal 2003. Gross margin was positively impacted by improvements in both pharmacy and front-end margin. Improvement in pharmacy margin was driven by improved generic product mix and reduced inventory costs resulting from purchasing improvements, partially offset by lower reimbursement rates. Front-end gross margin improved due to more efficient promotional markdowns and lower inventory costs due to purchasing improvement. Overall gross margin was also positively impacted by lower occupancy and depreciation and amortization charges. Gross margin was negatively impacted by an increase in pharmacy sales mix.

We use the last-in, first-out (LIFO) method of inventory valuation. The LIFO (credit) charge was $(18.9) million in fiscal 2005, $19.9 million in fiscal 2004, and $19.7 million in fiscal 2003. The credit in fiscal 2005 was caused by generic drug deflation.

Selling, General and Administrative Expenses

Total selling, general and administrative expenses ("SG&A") for fiscal 2005 was 22.1% as a percentage of revenues, compared to 21.8% for fiscal 2004. Increased costs for pharmacy labor, union sponsored benefits and increased advertising and bad debt expenses were partially offset by reductions in incentive compensation expense and professional fees, decreased self-insurance expense for general liability insurance, decreased depreciation and amortization costs resulting from certain store equipment and intangible assets becoming completely depreciated and amortized in the current year and a decrease in stock-based compensation expense, which was primarily due to awards granted becoming fully vested in the prior year.

SG&A expense for fiscal 2004 was 21.8% as a percentage of revenues, compared to 22.0% for fiscal 2003. SG&A expenses for fiscal 2004 include $15.1 million incurred primarily to defend against litigation related to prior management's business practices and to defend prior management. Offsetting these charges are net credits of $20.7 million related to favorable litigation settlements.

SG&A expense for fiscal 2003 includes $20.7 million incurred primarily to defend against litigation related to prior management's business practices and to defend prior management. SG&A for fiscal 2003 also includes net charges of $20.0 million for an investigation by the United States Attorney into various matters related to former management, a credit of $10.9 million related to favorable litigation settlements and a credit of $27.7 million related to the elimination of severance liabilities for former executives.

After considering the items described in the previous paragraphs, SG&A was lower in fiscal 2004 than fiscal 2003 due to decreased depreciation and amortization charges resulting from certain store equipment and intangible assets becoming completely depreciated and amortized, a reduction in professional fees and better leveraging of our fixed costs resulting from higher sales volume, partially offset by higher associate benefit costs.

Store Closing and Impairment Charges

Store closing and impairment charges consist of:


	Year Ended
	February 26, 2005		February 28, 2004			March 1, 2003
	(Dollars in thousands)
Impairment charges	$	30,014	$	24,914		$	69,508
Store and equipment lease exit charges (credits)		5,641		(2,840	)		65,820

Delaware
(State or other jurisdiction of
incorporation or organization)

23-1614034
(I.R.S. Employer Identification No.)

30 Hunter Lane, Camp Hill, Pennsylvania
(Address of principal executive offices)

17011
(Zip Code)