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Fred’s Beats Street But Comps Come In Negative

For the fiscal year ended February 2, Fred’s, Inc. reported net income of $29.6 million, or 81 cents per diluted share, compared with $33.4 million, or 87 cents per diluted share, in the prior year. Net income in 2012 included approximately $4.2 million, or 12 cents per diluted share, related to a state income tax settlement as well as other tax-related assumptions and estimates.

Comparable store sales advanced 1.1% in fiscal 2012 versus the year prior. Fred’s total sales for 53-week fiscal 2012 increased 4% to $1.96 billion year over year. Excluding the effect of an extra week, fiscal 2012 comps decreased 1.4% from the year earlier.

In the fourth quarter, Fred’s reported that net income totaled $6.6 million, or 18 cents per diluted share, versus $9.8 million, or 26 cents per diluted share, in the year-ago period.

Comps gained 4.8%, while total sales for the 14-week fourth quarter increased 7% from the year-prior period t o $533.4 million.

To adjust results to comparable 13- and 52-week periods, Fred’s eliminated the week ended February 2 from fiscal 2012. With the effect of the extra week excluded, fourth quarter comps decreased 2.8% from the year-earlier period.

A published consensus analyst estimate from Thomson Reuters called for Fred’s to earn 20 cents per share for the quarter. In a conference call, Fred’s said that customer traffic was down in the fourth quarter while transaction size remained flat, leading to the adjusted comp decrease. The company also noted that Household Goods decreased as a percentage of sales to 23.2% from 24.7% in last year’s fourth quarter.

Bruce Efird, Fred’s CEO, said, in comments on the company’s results, “The fourth quarter brought to a close a challenging year in 2012 as our customers remained under economic pressures and our operating costs trended higher than forecast. We were disappointed by the results but now move forward with optimism about future opportunities and embark on a three-year reconfiguration plan designed to help us regain the momentum we experienced in the prior three years in driving toward our goal of increasing our operating margin to 4%. Fred’s business comprises two distinct focal points, one being our pharmacy department, which continues to perform well, and the other being our general merchandise departments, which overall have seen challenging results. Our reconfiguration plan will seek to elevate our performance by shifting our general merchandise business to a healthier balance of higher gross margin, discretionary departments and consumables, while accelerating our pharmacy and healthcare services growth. Through these efforts, we believe we can improve overall store productivity and space efficiency and enhance product selection in stores with pharmacies. In summary, we look forward to driving improved performance in 2013, delivering earnings growth in the range of 12% to 28% higher than in 2012.”

Fred’s operates 713 discount general merchandise stores, including 21 franchised units, in the southeastern United States.