Fred's, Inc.’s FRED earnings have been suffering for the past few quarters due to lower comps and underperforming assets. The company did not start fiscal 2015 on a strong note either.
During the first quarter, Fred's reported breakeven earnings results compared to earnings of 17 cents reported a year ago. Higher sales were offset by lower margins during the period. Earnings, however, compared favorably with the Zacks Consensus Estimate of a loss of 2 cents. Earnings during the first quarter were at the lower end of management’s expectations of a range of 0 to 3 cents announced during the fourth quarter earnings conference call.
Fred's Inc. – Earnings Surprise | FindTheCompany
Soft Revenues and Margin
First-quarter sales increased 2.2% to $509.0 million from $498.26 million in the year-ago quarter backed by strong performance of the pharmacy department. Sales also surpassed the Zacks Consensus Estimate of $503.0 million by 1.2%. Comparable store sales increased 0.8%, better than 1.9% decrease in the year-ago period backed by higher customer transactions at the company’s stores.
Sales declined year over year in segments like Household goods and consumables. However, Pharmaceuticals sales improved driven by Fred’s’ goal to increase pharmacy penetration at its stores.
Gross profit declined 3.8% year over year to $137.1 million. Gross margin shrank 170 basis points (bps) to 26.9% of sales, excluding the impact of the inventory provision. Margins were affected by lower margins in the pharmacy departments.
Selling, general and administrative (SG&A) expenses increased to 26.9% of sales, up 30 basis points (bps) year over year due to higher salary and benefit cost increases in depreciation and amortization expense and professional fees related to pharmacy initiative. Operating income remained flat year over year at $10.0 million or 2% of sales.
During the quarter, Fred's opened three Xpress pharmacy locations while closing one full-service store.
Pharmacy Acquisition
On Apr 10, 2015, Fred's stated that it has inked an agreement to acquire Reeves-Sain Drug Store, Inc., for approximately $66 million. The private specialty and retail pharmacy company based in greater Nashville, TN, is likely to strengthen Fred’s’ specialty pharmacy portfolio and expand its presence in the specialty pharmacy sector. Fred's financed the acquisition with $53 million in cash and a note payable worth $13 million. The company said that the takeover has attribute to top line growth during the quarter.
Second-Quarter Fiscal 2015 Outlook
For second-quarter fiscal 2015, Fred’s expects total sales to increase in the range of 16% to 19% on a year-over-year basis. Comparable store sales are expected to increase 1% to 3% compared with a decrease of 0.1% in the second quarter last year. Earnings per share are forecasted in the range of 2 cents to 7 cents as against a loss of 19 cents incurred a year ago.
Fiscal 2015 Outlook
For fiscal 2015, Fred’s expects total sales to increase 10% to 15%, including the acquisition impact. Comparable store sales are expected to increase 4% to 6%, better than 0.6% decline last year. Earnings per share are expected in the range of 50 cents to 58 cents. The earnings outlook reflects Fred’s new pharmacy distribution contract, strong pharmacy department performance and reconfiguration initiatives to drive sales and gross profit.
Fred’s currently carries a Zacks Rank #3 (Hold). The company has been reporting soft earnings for the past few quarters mainly due to sluggish comps, mainly because intense competition in the discount retailing sector has affected traffic at its stores. Moreover, it is expected to experience pressurized margins due to higher payroll and pension costs. However, the company is focused on growing its pharmacy footprint — a key segment — that has shown some momentum recently.
Stocks to Consider
Better-ranked stocks in the retail discount sector are Gordmans Stores Inc. GMAN, Dollar General Corporation DG and Target Corporation TGT. While Gordmans sports a Zacks Rank #1 (Strong Buy), Dollar General and Target carry a Zacks Rank #2 (Buy).
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