Fred’s Inc. (FRED) reported 1.4% year-over-year decline in comparable-store sales (comps) in Dec 2014, lower than management’s expectations of a flat to 2% gain. Results also compared unfavorably with 1.4% comps increase in the year-ago period due to weak store traffic.
Inability to meet the marketing targets in the general merchandise category resulted in lower-than-expected comps. Additionally, the company had to face stiff competition in marketing by its peers which significantly contributed to the decline.
Total sales for December went up 1% to $1.83 million but failed to meet management’s expectation of 4% to 6% growth as competition intensified and Fred’s failed to compete with rivals’ aggressive marketing efforts. Lower traffic at the company’s stores also led to a decline in net sales.
Fred’s has been reporting soft comps for the past few months amid tough retail conditions. Moreover, in third-quarter fiscal 2014, ended Nov 1, 2014, Fred’s’ comps increased 0.3%, but were significantly lower than 1.4% rise in the year-ago period. Total third-quarter sales were $476.1 million, up 3.4% from the year-ago quarter. Sales also beat the Zacks Consensus Estimate of $469.0 million by 1.5%.
However, a loss of 16 cents was wider than the Zacks Consensus Estimate of a loss of 14 cents. The results also compared unfavorably with earnings of 20 cents reported a year ago as well as the company’s loss expectation range of 5 to 11 cents. Softer comps and weak margins led to the disappointing results. (Read: Fred's Posts Wider-than-Expected Q3 Loss on Weak Comps)
However, management is taking steps to improve its top line. Fred’s embarked on a 3-year reconfiguration plan in fiscal 2012 to enhance its focus on high-margin categories and move away from the low-margin consumable categories. It is also shutting down its underperforming assets while remodeling and refreshing its store layouts in order to allocate space to highlight the key revenue-generating categories.
Fred’s opened two full-service stores and four Xpress locations in December. It also closed 47 full service locations in keeping with its reconfiguration plan.
Despite the macroeconomic headwinds affecting comps, the company has been able to deliver positive sales at its pharmacy department. In November too, Fred’s' pharmacy department performed well with comps and sales increasing on a year-over-year basis.
As of Jan 3, 2015, Fred’s operated 661 discount general merchandise stores, including 19 franchised Fred's stores, in the southeastern United States.
Fred’s currently carries a Zacks Rank #4 (Sell).
Stocks to Consider
However, there are some better-ranked stocks in the discount, variety store space such as Burlington Stores, Inc. (BURL), Dollar Tree, Inc. (DLTR) and Ross Stores Inc. (ROST). While Burlington sports a Zacks Rank #1 (Strong Buy), Dollar Tree and Ross Stores carries a Zacks Rank #2 (Buy).
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