Fred's, Inc.’s FRED shares went down almost 6% in response to the lower-than-expected earnings for the fourth quarter of fiscal 2015. Although sales met estimates, lower comps dampened investor’s confidence.
Fred's’ fourth-quarter earnings of 7 cents missed the Zacks Consensus Estimate of 9 cents by 22.2%. The results, however, improved substantially from an income of 2 cents reported a year ago, mainly on the back of higher revenues.
Adjusted earnings excludes charges totaling approximately $6.3 million after tax for an increase in the LIFO reserve, impairment charges for the closure of five stores, adjustments for taxes and licenses, professional fees and other non-recurring items.
Revenues Strong, Margins Sluggish
Fourth-quarter sales increased 10% year over year to $554.6 million from $504.4 million and were almost in line with the Zacks Consensus Estimate of $554 million.
Comparable store sales increased 1.7%, lower than the 2.7% rise last quarter. Results were, however, better than the flat comps reported a year ago driven by higher customer tickets at the company’s stores. Customer transactions decreased 3.2% from the last year while average customer ticket, increased 4.9% year over year. Excluding sales of $16.0 million from the stores closed in late 2014, revenues went up 14% year over year. The robust sales figures prove that management’s sales and profit-driving initiatives along with the EntrustRx acquisition, completed last year, bore fruit.
Adjusted gross margin declined 200 basis points (bps) to 25.0% of sales, reflecting increase in the company's profitable, but lower-margin specialty pharmacy sales.
Selling, general and administrative expenses decreased 280 bps to 24.3% of sales due to lower occupancy costs and lower expense related to the growth of specialty pharmacy.
Fred's reported an adjusted operating income of $3.6 million. In the prior-year period, the company suffered a loss of $0.7 million.
During the fourth quarter, the company opened three specialty pharmacy locations. At the end of the fourth quarter, there were 659 general merchandise stores, which included 373 retail pharmacy departments.
Fiscal Results
Fred's’ fiscal 2015 earnings of 9 cents came in line with the Zacks Consensus Estimate. Last year, the company incurred a loss of 20 cents. Profits grew mainly on the back of higher revenues.
Fiscal sales increased 9% to $2.15 billion from $1.97 billion last year. Excluding sales of $71.7 million from stores closed in 2014, total sales increased 13%. On a comparable store basis, fiscal 2015 sales increased 1.5% as against a 0.6% decline in fiscal 2014. Sales marginally surpassed the Zacks Consensus Estimate of $2.13 billion.
Fiscal First-Quarter Outlook
For fiscal first quarter, Fred's expects total sales to increase in the range of 8% to 12% on a year-over-year basis.
Comparable store sales are expected to be up 1% to 3% compared with an increase of 0.8% in first-quarter 2015. Earnings per share are projected in the range of flat to 3 cents compared with nearly flat results in the prior year.
Fiscal 2016 Guidance
For fiscal 2016, Fred’s expects total sales to increase 5% to 9%. Comparable store sales are expected to increase in the range of 2% to 5% compared with 1.5% rise in fiscal 2015.
Earnings per share are expected in the range of 27 cents to 32 cents compared with 9 cents reported last year.
The Zacks Rank #4 (Sell) company seems to be turning around after the sluggish comps and intense competition in the discount retailing sector hurt results over the past few quarters. Sales and profitability initiatives are yielding results as can be seen from the improvement in fiscal fourth-quarter comps. However, the declining margins remain a concern in our view.
Stocks to Consider
Some better-ranked stocks in the same sector are Burlington Stores Inc. BURL, Dollar General Stores Inc. DG and Target Corporation TGT. All the three stocks carry a Zacks Rank #2 (Buy).
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