On Aug 29, Zacks Investment Research downgraded Fred's Inc. (FRED) to a Zacks Rank #5 (Strong Sell). A disappointing second-quarter fiscal 2014 and a weak view for the upcoming quarter led to the downgrade.
Why the Downgrade?
On Aug 28, Fred's posted second-quarter fiscal 2014 loss of 19 cents per share which wider than the Zacks Consensus Estimate of a loss of 18 cents per share.. The results compared unfavorably to earnings of 9 cents reported a year ago as well as the company’s expectation of loss of 15 to 20 cents. Lower comps and weak margins resulted in the wider loss.
Although sales of $491.2 million inched past the year-ago results and were in line with the Zacks Consensus Estimate, comps slipped 0.1% as against a gain of 2.2% in the year-ago period. Lower customer confidence resulted in the soft comps during the period.
Gross margin shrank 260 basis points to 25.6% of sales, excluding the impact of the inventory provision. Margins were under pressure due to increased promotional environment and competitive activity in the discount retail industry that increased the cost of sales during the quarter.
Fred’s recently embarked on a new plan to reposition its merchandise assortment to focus on convenience and consumables instead of the discretionary categories where the company has little competitive advantage. Fred’s plans to accelerate its pharmacy acquisition to achieve its target of 65% to 70% penetration rate of stores with a pharmacy. The company also plans to initiate a new marketing plan, directed at driving customer traffic through multiple avenues, including expanded ad circulars and in-store programs. However, we remain concerned about the company’s ability to execute these initiatives in the specified timeframe.
Management expects tough retail conditions to continue across the markets throughout the rest of the fiscal year. In the third quarter, the company expects to incur 5 to 11 cents loss comparing unfavorably to earnings of 9 cents reported a year ago.
This general merchandise retailer witnessed sharp downward estimate revisions post the second-quarter fiscal 2014 results. Most of the estimates for the third quarter declined over the past 7 days and the Zacks Consensus Estimate decreased from earnings of 12 cents to a loss of 8 cents.
Other Stocks to Consider
Some better-ranked stocks to consider in the apparel industry include Crocs, Inc. (CROX), Perry Ellis International Inc. (PERY)and Michael Kors Holding Limited (KORS), all carrying a Zacks Rank #2 (Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
To read this article on Zacks.com click here.
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment