Fred's Inks Multi-year Supply Agreement with Cardinal Health

Zacks Equity Research
August 12, 2014

Specialty pharmacy service provider Fred’s Inc. (FRED) inked a multi-year supply agreement with one of the largest healthcare service companies Cardinal Health Inc. (CAH). Per the deal, Cardinal Health will be the primary supplier of all branded and generic drugs to all of Fred’s’ in-store pharmacies and EIRIS health services.

The new deal comes at an opportune time, as Fred’s’ existing supply agreement with AmerisourceBergen (ABC) is scheduled to end in early 2015.

The supply agreement is in line with Fred’s’ ongoing strategy of rapid growth in the pharmacy department at retail locations, specialty pharmacies and clinical services. Considering the substantial contribution of the pharmacy department to overall profit, Fred’s is geared to put greater focus on the sector and plans to increase the penetration of the department at its stores to 70% by 2015.

The agreement also falls fits Cardinal’s long-term strategy of adding independent pharmacies to its supply chain and boosting its generic drug sales.

Fred’s’ 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 the year.

Moreover, higher vendor costs on both branded and generic drugs are keeping margins under pressure in the pharmacy sector. Additionally, decline in general merchandise gross margin and increase in operating costs due to Fred’s’ inventory adjustments prompted management to lower its outlook for the second quarter. Fred’s now expects to incur a loss of 15 to 20 cents down from earnings of 4 to 9 cents announced during the first-quarter conference call. (Read More: Fred's Inc.'s (FRED) Comps Gain in July, Cuts Q2 View on Weak Margins.)

This deal isexpected to ease the pressure on the margin of the pharmacy sector in the upcoming quarters.

Other Stocks to Consider

Fred’s currently carries a Zacks Rank #4 (Sell). A stock in the retail sector worth considering includes Burlington Stores, Inc. (BURL) sporting a Zacks Rank #1 (Strong Buy).

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