Same-store sales at Fred’s Inc. (FRED) climbed up 1.6% in the five-week period ended August 27, 2011, compared with an increase of 3.6% posted in the year-ago period.
August’s comparable store sales were in the higher range of management's expectation of 1% to 2% on the back of increased customer traffic due to the commencement of ‘back to school season’ coupled with improved performance in the pharmacy department with ongoing script growth. Total retail sales in August 2011 inched up 3% to $137.8 million from $134.3 million in the year-ago period.
Retail sales of fiscal 2011 stood at $1.71 billion, which were 2.0% higher than $1.05 million from the year-ago period. Same-store sales for the period edged up 0.6% compared to 2.6% in the previous year.
Walgreen Co. (WAG), a competitor of Fred’s, posted a same-store sales increase of 5.6% in August, which beat analyst’s expectation while net sales increased 7.8% to $6.1 billion in the month.
Store Update
As of August 27, 2011, Fred's Inc. had 677 Discount General Merchandise stores, including 22 franchised Fred's stores, in 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% to 4%, while it expects comparable store sales to increase 1% to 3% versus an increase of 1.5% in the third quarter last year.
The company expects earnings per share to increase 5% to 15% to a range of 21 cents to 23 cents for the third quarter of 2011. Based on this outlook, management expects its full year 2011 earnings to increase 11% to 17% over last year to a range of 83 cents to 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 #5 Rank. On a long-term basis, we maintain a Neutral rating on the stock, with a short-term Strong Sell rating.
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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