Fred’s Rethinking Business After Poor Q1

For the first quarter ended May 3, Fred’s, Inc. has posted net income totaling $6.1 million or 17 cents per diluted share versus $11.4 million or 31 cents per diluted share for the year-prior period. First quarter comparable store sales slipped 1.9% year over year, the company reported.

Earnings per diluted share missed a Thomson Reuter’s average analyst estimate by three cents.

First quarter total sales were $498.3 million compared with $501.5 million for the period last year.

In comments on the company’s financial results, Bruce Efird, Fred’s CEO, said, “As we outlined in our April sales release, the first quarter was a challenging period for Fred’s due to a number of headwinds. These challenges included intense competitive promotions and poor weather throughout much of the spring, which affected general merchandising. In addition to the sales impact of these issues, we also encountered extraordinary inflationary pressures on generic drugs in the first quarter, as we forecasted in our year-end 2013 press release. Third-party payers have been slow to increase reimbursement rates to match higher drug costs, lowering pharmacy margin for the first quarter. In addition, typical delays in the approval of Work Opportunity Tax Credits increased our income tax rate for the quarter, which in turn reduced earnings per share for the quarter by one cent. This tax credit is expected to be renewed retroactively this year.

He added, “Using internal resources, focus groups and consultants, we have identified several key opportunities, after factoring out the impact of the slower economic recovery in the southeast and the unusually harsh winter. What we learned from the four months of research is exciting and has provided the basis for an action plan. In mid-April, we implemented a two-part strategy designed to address pharmacy opportunities and the general merchandising changes we will be making to become the convenient, small-box store of choice.

“Fred’s new strategy takes into consideration the ongoing emergence of Internet shopping. This trend continues to reduce trips to conventional brick-and-mortar stores, but, at the same time, potentially expands the number of convenience, need-based shopping trips. We will be marketing the diverse categories we carry compared with other small box competitors to emphasize convenience, using a new marketing and signage strategy. The front end of our stores will be re-laid with power displays and pallets, along with a faster check-out configuration, all focused on ease of shopping and designed to emphasize the advantages of shopping at Fred’s 15,000-square-foot box. With these changes, Fred’s will be better positioned to serve more of the need-based categories, providing our customers with an easier and more convenient shopping experience. We will be making the general merchandising changes over the balance of this year, which include cleaning out unproductive SKUs and exiting categories that do not align with Fred’s enlarged convenience model.

The costs of these branding, marketing and merchandising strategies will be finalized by the end of the second quarter. We currently estimate the book write-down of cleared inventory to be in the range of $10 to $12 million, exclusive of additional store closings. Our new marketing program began in late May and is scheduled to be fully implemented in mid-July. Our plan is to begin implementing the new front end, adjacencies and fixtures in late June, with substantial completion early in the fourth quarter and the balance in the first quarter of 2015. Based on this outlook, we expect that second quarter earnings per share will be in the range of four cents to nine cents on an operating basis, exclusive of one-time charges, compared with operating performance of nine cents last year. However, we are optimistic about the opportunities we see in the back half of 2014, and we are confident that full-year operating earnings per share will reach a range of 60 cents to 68 cents.”