Fred's Reports First Quarter 2014 Results

  Fred's Reports First Quarter 2014 Results

Business Wire

MEMPHIS, Tenn. -- May 29, 2014

Fred's, Inc. (NASDAQ: FRED) today 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 $151.0million 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

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.

The Company provides the following guidance for the second quarter of 2014:

  *Total sales are expected to increase in the range of 1% to 3%.
  *Comparable store sales are expected to be in the range of flat to up 2%,
    reflecting the new marketing initiatives and continued growth in Pharmacy
    department sales.
  *Earnings per diluted share on an operating basis are forecasted to be in
    the range of $0.04 to $0.09 compared with $0.09 last year. The lower
    earnings are primarily attributed to the continued impact of higher
    generic drug pricing on pharmacy department gross margin.
  *Based on this outlook, the Company expects operating earnings per diluted
    share for 2014 to be in the range of $0.60 to $0.68 for 2014.

Currently, Fred's, Inc. operates 704 discount general merchandise stores,
including 21 franchised Fred's stores, in the southeastern United States. For
more information about the Company, visit Fred's website at

A public, listen-only simulcast and replay of Fred's first quarter 2014
conference call may be accessed at the Company's web site. The simulcast will
begin at approximately 10:00 a.m. Eastern Time today; a replay of the call
will be available beginning at approximately 1:00 p.m. Eastern Time and will
run until June 29, 2014.

Comments in this news release that are not historical facts are
forward-looking statements that involve risks and uncertainties that could
cause actual results to differ materially from those projected in the
forward-looking statements. A reader can identify forward-looking statements
because they are not limited to historical facts or they use such words as
"outlook," guidance," "may," "should," "could," "believe," "anticipate,"
"plan," "expect," "estimate," "forecast," "goal," "intend," "committed,"
"continue," or "will likely result" and similar expressions that concern the
Company's strategy, plans, intentions or beliefs about future occurrences or
results. These risks and uncertainties include, but are not limited to, those
associated with the Company's announced strategic plan, the ultimate terms of
the reworked pharmacy distribution agreement, lease buyouts and the underlying
assumptions and projections upon which they are based, as well as risks that
intended results may not be achieved or may not occur as quickly as expected;
general economic trends; changes in consumer demand or purchase patterns;
delays or interruptions in the flow of merchandise between the Company's
distribution centers and its stores or between the Company's suppliers and
same; a disruption in the Company's data processing services; costs and delays
in acquiring or developing new store sites; and the factors listed under "Risk
Factors" in the Company's most recent Annual Report on Form 10-K and any
subsequent quarterly filings on Form 10-Q filed with the Securities and
Exchange Commission. Forward-looking statements speak only as of the date
made. Fred's undertakes no obligation to release revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unforeseen events, except as required
to be reported under the rules and regulations of the Securities and Exchange


Unaudited Financial Highlights

(In thousands, except per share amounts)

                                          13 Weeks      13 Weeks      Percent
                                          Ended         Ended         Change
                                          May 3, 2014   May 4, 2013
Net sales                                 $  498,264    $  501,495    (0.6  )%
Operating income                          $  10,029     $  17,784     (43.6 )%
Net income                                $  6,118      $  11,411     (46.4 )%
Net income per share, basic and diluted   $  0.17       $  0.31       (45.2 )%
Average shares outstanding:
Basic                                        36,606        36,507
Diluted                                      36,834        36,621


Unaudited Fiscal 2014 First Quarter Results

(in thousands, except per share amounts)
                                 13 Weeks      % of      13 Weeks      % of
                                 Ended         Total     Ended         Total
                                 May 3, 2014             May 4, 2013
Net sales                        $  498,264    100.0 %   $  501,495    100.0 %
Cost of goods sold                 355,790    71.4  %     350,476    69.9  %
Gross profit                        142,474    28.6  %      151,019    30.1  %
Depreciation & amortization         9,839      2.0   %      10,301     2.1   %
Selling, general and               122,606    24.6  %     122,934    24.5  %
administrative expenses
Operating income                    10,029     2.0   %      17,784     3.5   %
Interest expense, net              135        0.0   %     135        0.0   %
Income before income taxes          9,894      2.0   %      17,649     3.5   %
Provision for income taxes         3,776      0.8   %     6,238      1.2   %
Net income                       $  6,118      1.2   %   $  11,441     2.3   %
Net income per share, basic      $  0.17                 $  0.31
and diluted
Weighted average shares
Basic                               36,606                  36,507
Diluted                             36,834                  36,621


Unaudited Balance Sheet

(in thousands)
                                             May 3,      May 4,
                                             2014        2013
Cash and cash equivalents                    $ 8,189     $ 7,795
Inventories                                    382,882     369,883
Receivables                                    38,835      34,135
Other non-trade receivables                    31,253      30,667
Prepaid expenses and other current assets     13,833     13,058
Total current assets                           474,992     455,538
Property and equipment, net                    151,071     157,031
Intangibles                                    60,455      41,162
Other non-current assets                      5,243      3,258
Total assets                                 $ 691,761   $ 656,989
Accounts payable                             $ 141,746   $ 112,166
Current portion of indebtedness                2,062       594
Accrued expenses and other                     47,413      50,910
Income taxes payable                           -           1,418
Deferred income taxes                         24,768     23,876
Total current liabilities                      215,989     188,964
Long-term portion of indebtedness              2,231       5,190
Deferred income taxes                          -           3,745
Other non-current liabilities                 16,911     17,522
Total liabilities                              235,131     215,421
Shareholders' equity                          456,630    441,568
Total liabilities and shareholders' equity   $ 691,761   $ 656,989


Fred's, Inc.
Jerry A. Shore, 901-362-3733, Ext. 2217
Executive Vice President and
Chief Financial Officer
Press spacebar to pause and continue. Press esc to stop.