Fred's Inc.'s (FRED) Comps Gain in July, Cuts Q2 View on Weak Margins

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Fred’s Inc.’s (FRED) comps have been suffering for the past few months due to inclement weather and stiff competition in the discount retail sector. A harsh winter led to frequent shop shutdowns, and competition emanating from improved weather disrupted sales during the early months of this year. However, improved weather conditions thereafter helped the comps results in July.

Comparable store sales for Fred’s during the four weeks ended Aug 2, 2014, increased 0.7%. However, it was still lower than the 2.5% increase recorded in the year-ago period.

Total sales for the month was also better than previous months, up 4% year over year to $148.0 million backed by positive effects from the improvement in weather, and stronger trends in general merchandise sales and improved customer traffic resulted in improved sales during the quarter. Categories like Health Aids, Housewares, Flooring, Stationery, Toys, Auto & Hardware and several consumable departments performed well during the quarter.

Sales for Second Quarter Fiscal 2014

Along with July comps, the company also reported its sales results for the second quarter fiscal 2014, the results of which are scheduled on Aug 28.

Comps decreased 0.1% versus an increase of 2.2% in the year-earlier period. Same-store sales was at the lower end of management’s expectation of a flat to up 2% growth announced during the first-quarter fiscal 2014 conference call due to lower comps in the first few months of the quarter following inclement weather.

Sales in the second quarter fiscal 2014 increased 2% to $490.6 million as Fred’s’ new marketing plan, including in-store marketing initiatives focusing on diverse product mix offer coupled with an aggressive advertisement program became operational in July. Fred’s also undertook an aggressive clearance program in July to better manage inventory and exit or reduce product categories that do not align with its convenience center model. These initiatives boosted sales during the quarter.

Second Quarter Earnings Outlook

Fred’s lowered its outlook for the second quarter and now expects to incur a loss of 15 to 20 cents compared to earnings of 4 to 9 cents announced during the first quarter conference call.

Though sales improved. the company’s inventory clearance program led to decline in general merchandise gross margin and increase in operating costs during second quarter due to the inventory adjustments and establishment of clearance centers at all stores. The company’s pharmacy department was also under pressure due to significant vendor cost increases on both brand and generic drugs.

As a result gross margin at the pharmacy department shrank 225 basis points during the quarter. These headwinds prompted management to lower its earnings oulook for the second quarter.

Other Stocks to Consider

Fred’s currently carries a Zacks Rank #4 (Sell). Other stocks in the retail sector worth considering include Burlington Stores, Inc. (BURL), Citi Trends Inc. (CTRN) and Zumiez Inc. (ZUMZ). All these stocks sport a Zacks Rank #1 (Strong Buy).

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Read the Full Research Report on ZUMZ
Read the Full Research Report on CTRN


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