Same-store sales at Fred’s Inc. (FRED) climbed up 1.1% in the five-week period ended September 27, 2011, after posting flat same-store sales growth a year ago. Total sales for the month increased 1% to $170.5 million from $169.5 million in September 2010.
September’s comparable-store sales matched management’s guidance on the back of strong customer traffic in the stores. Strong performance by the merchandise departments during September, driven by increased sales of Core 5 Pet, Household Supplies areas, as well as other consumable departments also boosted sales in the month.
However, sales were at the lower end of management’s guidance due to brand-to-generic shift within the pharmacy department. Moreover, the compulsory payment of Social Security payments in September resulted in a sales shift to October.
Retail sales of fiscal 2011 stood at $1,245.0 million, which were 2.0% higher than $1,225.0 million from the year-ago period. Same-store sales for the period edged up 0.6% compared to 2.3% in the previous year.
Walgreen Co. (WAG), a competitor of Fred’s, posted a same-store sales increase of 3.4% in September, while total sales grew 5.4% in September, to $5.95 billion from $5.65 billion in the same period a year ago.
Store Update
As of September 27, 2011, Fred's Inc. operates 678 discount general merchandise stores, including 22 franchised Fred's stores, in the southeastern United States.
Fred's Inc. runs Discount General Merchandise stores in a number of states in the southeastern United States. Fred's stores generally serve low, middle and fixed income families located in small to medium -sized towns. Majority of the company's stores have full service pharmacies. The company also markets goods and services to franchised Fred's stores.
Guidance
Management expects tough retail conditions to continue across the markets in 2011 due to ongoing concerns about rising petroleum prices and their macroeconomic effects. Additionally, Fred anticipates improvements from its Core 5 Program, and expects its strategic initiatives and cost reduction programs to help retain profitability compared with last year. Fred thus expects an income growth of 10% to 20% for the final two quarters of 2011.
For the third quarter of 2011, Fred’s forecasts its total sales to increase 2%-4%, while it expects comparable store sales to increase 1%-3% versus an increase of 1.5% in the third quarter last year.
The company expects earnings per share to increase 5%-15% to a range of 21 cents-23 cents for the third quarter of 2011. Based on this outlook, management expects its full year 2011 earnings to increase 11%-17% over last year to a range of 83 cents-88 cents per share.
The Zacks Consensus Estimate is currently pegged at 22 cents and the full-year estimate is 83 cents.
The company expects to open 20 to 25 stores and 10 to 15 pharmacies during 2011 and anticipates closing down approximately 10 stores and 5 pharmacies.
Conclusion
The company operates in a highly fragmented industry and faces intense competition from national, regional and local retailing establishments, including department stores, discount stores, discount clothing, grocery and convenience stores and drug stores. Consequently, the company is under severe stress to maintain profitability.
Fred’s faces stiff competition from Dollar General Corporation (DG) and Walgreen Co. It currently holds a Zacks #3 Rank. On a long-term basis, we have downgraded the stock from a Neutral rating to an Underperform rating with a short term Hold rating on the stock.
DOLLAR GENERAL (DG): Free Stock Analysis Report
FREDS INC (FRED): Free Stock Analysis Report
WALGREEN CO (WAG): Free Stock Analysis Report
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