News Column

Fred's Reports First Quarter 2014 Results

June 14, 2014

By a News Reporter-Staff News Editor at Marketing Weekly News -- Fred's, Inc. (NASDAQ: FRED) reported financial results for the first quarter ended May 3, 2014.

For the first quarter ended May 3, 2014, Fred's net income totaled $6.1 million or $0.17 per diluted share compared with net income of $11.4 million or $0.31 per diluted share for the first quarter ended May 4, 2013.

Fred's total sales for the first quarter of fiscal 2014 were $498.3 million compared with $501.5 million for the first quarter last year. Comparable store sales for the quarter declined 1.9% versus a decrease of 1.3% for the first quarter last year.

Commenting on the results, Bruce A. Efird, Chief Executive Officer, 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 $0.01; this tax credit is expected to be renewed retroactively this year.

"We were pleased with sales trends in our pharmacy department, reflecting ongoing comparable script growth, and its continued expansion, as we added seven new pharmacies during the quarter," Efird added. "EIRIS Health Services, Fred's specialty pharmacy division, added several new team members and experienced solid script and sales growth, as we continue to accelerate our penetration of this fast-expanding segment of the pharmacy industry.

"Realizing that customers' shopping habits are changing faster than ever, we recognize that we need to adapt to these changes and meet customers' needs on their terms," Efird continued. "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," said Efird. "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 are now engaged in a robust reworking of our current pharmacy distribution agreement, with benefits expected to begin in the second half of 2014 and with the full impact anticipated in 2015," Efird added. "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."

In closing, Efird said, "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 $0.04 to $0.09 on an operating basis, exclusive of one-time charges, compared with operating performance of $0.09 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 $0.60 to $0.68."

Fred's gross profit for the first quarter of 2014 decreased to $142.5 million from $151.0 million in the prior-year period. Gross margin for the quarter decreased 150 basis points to 28.6% from 30.1% in the same quarter last year. The deleveraging for the quarter was driven by inflation on pharmacy department purchases, primarily generics, coupled with continued pressure on reimbursement rates. The general merchandise margins were negatively affected by the ongoing sales mix shift to lower-margin consumables and increased promotional activities.

Selling, general and administrative expenses for the quarter, including depreciation and amortization, were flat compared with the prior-year at 26.6% of sales. Increasing occupancy-related costs were offset by controlling other store-controllable expenses and insurance-related expenses.

For the first quarter of 2014, earnings before interest, taxes, depreciation and amortization, or EBITDA, a non-GAAP measure, decreased to $19.9 million or 4.0% of sales compared with $28.1 million or 5.6% of sales in the year-earlier quarter.

For the first quarter of 2014, operating income, which is equivalent to earnings before interest and taxes, or EBIT, also a non-GAAP measure, decreased to $10.0 million or 2.0% of sales compared with $17.8 million or 3.5% of sales in the prior-year period.

During the first quarter, Fred's net new locations were unchanged, but activity consisted of two full-service store openings, four new Xpress pharmacy locations and the closure of four full-service stores and two Xpress pharmacy locations, one of which was converted to a full-service store.

Keywords for this news article include: Marketing, Advertising, Fred's Inc..

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Source: Marketing Weekly News

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