Charges from Rite Aid deal, store closings impact bottom line

MEMPHIS, Tenn. — Fred’s Pharmacy posted a fiscal 2017 first-quarter net loss, stemming largely from charges related to store closings and its planned purchase of at least 865 Rite Aid stores.

Fred’s said Tuesday that for the first quarter ended April 29, the company had a net loss of $36.5 million, or 98 cents per share, compared with net earnings of $1.3 million, or 3 cents per share, a year earlier.

The 2017 quarter’s net loss reflects charges of $45 million, or 92 cents per share after tax.

Those items include $14.6 million (39 cents per share after tax) for a valuation allowance against the company’s deferred tax asset resulting from a pretax loss primarily from the following charges: $16.9 million (29 cents per share) for fees in connection with the proposed acquisition of Rite Aid stores, the development and implementation of Fred’s growth strategy and other fees, and $13.5 million (24 centers per share) for lease liability impairments and other expenses from the closing of 39 underperforming stores.

Analysts, on average, had forecast a net loss (adjusted) of 3 cents per share for Fred’s first quarter, with estimates ranging from a net loss of 8 cents per share to a net loss of 1 cent per share, according to Thomson Reuters.

Fred’s first-quarter sales came in at $532.3 million, down 3.1% from $549.5 million a year ago.

Same-store sales for the quarter dipped 1.2%, compared with a 1% gain in the prior-year period. Fred’s said comparable-store sales in the 2017 quarter reflected a negative 1.4% impact from the sale of low productive discontinued inventory.

Operating income in the 2017 first quarter fell to a loss of $34.2 million, or 6.4% of sales, compared with operating income of $2.4 million a year ago.

Meanwhile, earnings before interest, taxes, depreciation and amortization (EBITDA) declined to a loss of $22.6 million versus EBITDA of $14 million in the year-ago quater. Fred’s noted that EBITDA in the 2017 quarter reflected charges of $30.4 million stemming from the Rite Aid store acquisition, company growth strategy and fees ($16.9 million) and from the closing of the 39 stores ($13.5 million).

“In the first quarter of fiscal year 2017, we continued executing the Fred’s Pharmacy health care transformation, a clear point of differentiation in our markets, which resulted in positive script comps in retail pharmacy and record sales and year-over-year growth in specialty pharmacy,” Fred’s chief executive officer Michael Bloom said in a statement. “Our strong performance in total pharmacy was the primary driver for sequential improvement in our operating performance, excluding nonoperating items.”

Bloom noted that Fred’s continues to invest in talent and technology as well as expand its specialty pharmacy sales force and portfoloio.

“We also continue to improve the pharmacist-patient relationship, which is reflected in our positive script comps in the retail pharmacy. Both our retail and specialty pharmacy businesses are rapidly improving and driving momentum,” he explained. “In the front store, our remodel program — which will be accelerated in the back half of 2017 — is already improving the customer experience and driving sales. Notably, the comp sales of our remodeled stores with our new prototype are performing approximately 4% better than the chain average through April.”

Currently, Fred’s has 601 discount general merchandise stores, including about 360 in-store pharmacies, and three specialty pharmacy-only locations. The store base includes 14 franchised Fred’s Pharmacy locations.

For the 2017 fiscal year, analysts estimate Fred’s adjusted earnings per share at 29 cents, on average, with projections running from a low of 1 cent to a high of 55 cents.

Fred’s continues to await Federal Trade Commission approval to buy up to 1,200 Rite Aid drug stores in the eastern and western U.S. in connection with the Walgreens-Rite Aid merger. Under the deal, announced in December, Fred’s agreed to acquire 865 Rite Aid stores and related operations for $950 million in cash. Fred’s has committed to acquiring more Rite Aid stores if required by the FTC as part of mandated divestitures for antitrust clearance of Walgreens Boots Alliance’s deal to acquire Rite Aid Corp.

“Looking ahead, we are focused on executing our key objectives for 2017, including diversifying and optimizing our assets to improve performance and cash flow,” Bloom added. “In large part we are on track with the Fred’s 2017 plan and doing exactly what we said we would do to optimize Fred’s Pharmacy’s business model and enhance value for our shareholders. We anticipate continued sequential operational improvement, excluding nonoperating items, throughout 2017 as the initiatives under way continue to take hold, and we expect to be profitable on an operational basis by the end of 2017.”