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Fred’s posts 3Q loss, plans to close 40 stores

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Retailer also reportedly a possible buyer of divested WBA stores

Freds store at night_featured

MEMPHIS, Tenn. — In reporting a net loss for its fiscal 2016 third quarter, Fred’s Inc. said it plans to shut 40 underperforming stores in the first half of next year.

Fred’s also announced at the start of its earnings call Thursday that it wouldn’t take any questions from analysts following its quarterly report — which had been postponed for a week — because of “a pending transaction.” The company gave no details and said “there can be no assurance that the transaction will take place.”

However, a Seeking Alpha report on Friday said Fred’s could be a buyer of stores to be divested by Walgreens Boots Alliance (WBA) as it negotiates with the Federal Trade Commission to get clearance for its $17.2 billion deal to acquire Rite Aid Corp.

For the third quarter ended Oct. 29, Fred’s posted a net loss of $38.4 million, or $1.05 per share, compared with net income of $1.4 million, or 4 cents per share, a year earlier. Adjusted earnings per share (EPS) were a net loss of 27 cents, exceeding the consensus forecast of a 17 cents-per-share loss by Zacks Investment Research.

Fred’s said it recorded total third-quarter charges of $38 million, or 78 cents per share after tax, mainly related to inventory writedowns and the planned store closings. The company also said the charges include $3.1 million on a pretax basis, or 5 cents per share after tax, for fixed asset impairments associated with a relocation of its of its corporate headquarters. The Memphis Daily News reported Friday that Fred’s chief financial officer Rick Hans said the locations being considered are several miles from the current facility.

“We continue to address and improve several key areas of our business, including a heightened focus on positioning Fred’s as a leading health care-focused company,” Fred’s chief executive officer Mike Bloom said in a statement. “These ongoing initiatives are designed to strengthen all aspects of our operations as we seek to create a more dynamic platform to grow our business while maximizing returns on invested capital and, in turn, shareholder value. We look forward to providing additional updates in the months and quarters ahead.”

Sales in the third quarter fell 4.5% to $516.6 million from $541 million a year earlier. Same-store sales also were down in the quarter, declining 3.8% compared with a 2.7% gain a year ago.

The discount and pharmacy retailer also reported a decrease in sales for November. Total sales for the four weeks ended Nov. 26 were down 3.6% to $159.7 million from $165.7 million in the prior-year period. Comparable-store sales fell 2.9% for the month versus an increase of 1.7% a year ago. Fred’s said the November comp-store decreases reflected “continued challenges in both front-store and pharmacy sales.”

In recent years, Fred’s has focused on making pharmacy the linchpin of its business and has continued to have pharmacies in a greater percentage of its store base. About half of the company’s revenue now comes from its pharmacy business, and 57% of its stores include pharmacies.

“As we look ahead to 2017 and beyond, health care is the key to our growth, the key to our profitability and the center of our business model,” Bloom told analysts in the conference call Thursday. “This means an emphasis on our health care customers and patients, the establishment of strategic health care relationships and partnerships with hospitals and payers, and an increased emphasis on both retail pharmacy and specialty pharmacy growth. We have a plan, and we are ready.”

Overall, Fred’s operates 647 discount general merchandise stores and three specialty pharmacy-only locations in 15 Southeastern states, including 18 franchised locations. It has 370 in-store pharmacy departments, including four franchised locations.


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