Fred’s Plans Big Changes Following Steep Q2 Loss

For the second quarter ended August 2, Fred’s, Inc. posted a net loss of $16.4 million, or 45 cents per share, versus a net income of $3.3 million, or nine cents per share, for the period ended August 3. In the circumstances, the company announced that it was implementing several key operational changes, which include addressing low-productive inventory, closing 60 stores that have no pharmacies and do not meet operational performance targets, improving supply chain productivity and expanding general merchandise product sourcing capabilities.

As part of its initiatives to improve results, Fred’s stated, it had established reserves, which effected earnings. Excluding the effect of those reserves, Fred’s net loss in the second quarter was $7.1 million, or 19 cents per share, the company asserted.

Fred’s total sales increased 2% to $491.2 million from $482.2 million in last year’s quarter, but comparable store sales slipped 0.1% year-over-year, the retailer noted.

“Our second quarter results reflected the strategic decisions the company has made to build our business model for the future as a convenience/pharmacy-centric store, driven by data-based inventory management and measured by GMROI,” Bruce Efird, Fred’s CEO, said in announcing the financial results. “The dynamic challenges we face surfaced in the fourth quarter of 2013 throughout our general merchandise and pharmacy departments. Customer trips came under pressure from Internet intrusion, while generic drug price inflation ramped up faster than payor increases were occurring. As a result, in January, we undertook a deep analysis into all processes with a recognition that retail will not continue with business as usual and changes will have to take place. In the course of this evaluation, the go-forward convenience/pharmacy-centric store model emerged from the input of management, consultants, marketing teams and other market studies. Also included in this analysis was a critical view of the ongoing process of evaluating strategic alternatives, as various teams challenged and questioned the what, why, and why-not decisions in our processes. From this thinking came key changes that will drive the transformation of the stores to a convenience/pharmacy-centric store, which began in the second quarter.”

Initiatives launched, beyond store closures, include the acceleration of pharmacy acquisitions that will help the company achieve a target of 65% to 70% pharmacy penetration through the chain, Fred’s maintained. The company also initiated a new marketing plan focused on expanded ad circulars and in-store programs, implemented data-driven inventory and category-management tools and metrics, changed distribution and store procedures to get inventory directly from the truck to the store floor in the same day, and expanded leadership in merchandising sourcing, store operations and information technology, Fred’s added.

“Although we were disappointed in second quarter financial results, there were several key wins in the quarter,” Efird said, “We saw improvement in general merchandise sales and customer traffic from our new marketing program, which indicates positive traction for the future. The radical changes in our marketing strategy were successful in improving customer traffic, which we see as an opportunity to expand programs within the stores to show the need-it-now advantages of our model. Lastly, in pharmacy, we completed the prime vendor agreement that has substantial benefits to all aspects of our pharmacy operations and our specialty division, with components needed to support our accelerated investment in pharmacy acquisitions.”