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Edited Transcript of FRED earnings conference call or presentation 19-Jun-19 12:00pm GMT

Q1 2019 Fred's Inc Earnings Call

MEMPHIS Jun 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Fred's Inc earnings conference call or presentation Wednesday, June 19, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jen Ehlers

Fred's, Inc. - VP of Brand Marketing

* Joseph M. Anto

Fred's, Inc. - CEO & Secretary

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Presentation

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Operator [1]

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Good morning, everyone, and thank you for attending today's conference call to review Fred's financial results for the first fiscal quarter ended May 4, 2019.

Joining us today are Fred's Chief Executive Officer, Joe Anto; as well as Fred's Vice President of Brand Marketing, Jen Ehlers.

Now I would like to turn the call over to Jen Ehlers. Jen?

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Jen Ehlers, Fred's, Inc. - VP of Brand Marketing [2]

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Thank you. Good morning, everyone, and thank you for joining today's call to review Fred's financial and operating results for the first fiscal quarter ended May 4, 2019.

Before we begin, I'd like to remind everyone that management's comments during this conference call that are not based on historical facts are forward-looking statements. These statements are made in reliance of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to uncertainties and risks. It should be noted that the company's future results may differ materially from those anticipated and discussed in the forward-looking statements. Some of the factors that could cause or contribute to such differences have been described in the news release issued earlier today and the company's annual report on 10-K and in other filings with the Securities and Exchange Commission. We refer you to these sources for more information.

Also, I'd like to remind you that during the course of this call, we will discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in our earnings release, which is available on our website at investors.fredsinc.com and on the Securities and Exchange Commission website at sec.gov, where we filed our earnings release earlier today as an exhibit to our current report on Form 8-K.

Lastly, I would like to point out that management's remarks during this conference call are based on information and understandings believed accurate as of today's date, June 19, 2019. Because of the time-sensitive nature of this information, it is the company's policy to limit the archived replay of this conference call webcast to a period of 30 days. The call is the property of Fred's, and any distributions, transmissions, broadcast or rebroadcast of this call for commercial purposes in any form without the expressed written consent of the company is prohibited.

With that, I'd like to turn the call over to Joe Anto, Fred's Chief Executive Officer. Joe?

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Joseph M. Anto, Fred's, Inc. - CEO & Secretary [3]

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Thank you, Jen, and good morning, everyone. The first quarter was a challenging one for the company as sales in the front store declined versus Q1 of last year. This was due primarily to added stocks which have been exacerbated by our constrained liquidity situation.

Despite the underperformance in our core business, we have made progress over the last 2 months in rightsizing our store footprint, reducing our cost structure and paying down our ABL. Additionally, we are continuing to evaluate opportunities to monetize noncore assets, which would enable us to further simplify our business and pay down our ABL further.

The previously announced store closure activity has allowed us to reduce our cash burn rate and generate proceeds to pay down our ABL balance. We ended the quarter at $81.3 million outstanding on our ABL, and as of June 17, the balance stood at $51.1 million.

Additionally, we have aggressively reduced corporate and distribution expense, and this should contribute significantly to our efforts to generate positive free cash flow. Getting the right inventory back on to our shelves and making investments in the right marketing vehicle should directly contribute to our recovery of the sales trend, and improving this trend is our main priority. However, our ability to do these things is significantly limited by our current liquidity situation.

We continue to work constructively with our banks, and per our forbearance agreement, we have specific milestones related to refinancing our current facility. Putting the stable capital structure in place will be critical to the success of the go-forward business, and we are encouraged by the progress we are making in our refinancing process, although there could be no assurance that we will be able to achieve the milestones set forth in our forbearance agreement or close on our refinancing at all.

I will now turn to the numbers and will address the first quarter results and trends in a year-over-year basis. As a reminder, all of them reflect the fact that our Specialty Pharmacy business as well as the sale of prescription files and certain other assets from 179 of the company's Retail Pharmacy stores to Walgreens in 2018 have been classified as a discontinued operation.

For the first quarter of 2019, net sales decreased 5.2% to $319 million from $336.4 million for the first quarter of 2018. Comparable store sales for the quarter decreased by 8.5%. We continue to struggle with out-of-stock issues at certain product categories, which has led to weak customer traffic and revenue in the front store.

Gross profit in the first quarter decreased 16.2% to $74.6 million from $89.1 million in the prior year period.

Gross margin as a percentage of sales decreased 309 basis points to 23.4% from 26.5% in the same quarter last year. We experienced negative margin impact during the quarter as a result of the chain-wide discounting initiatives at both the closing as well as the go-forward store locations.

Adjusted selling, general and administrative expenses decreased in the first quarter to $93.4 million from $106.6 million in the same quarter last year. We are slowly starting to realize the benefits of our various cost savings initiatives, including workforce reductions and will continue to work on reducing SG&A even further.

Net loss for continuing operations for the first quarter of 2019 was $29.5 million, or negative $0.84 per share compared to a net loss of $22 million, or negative $0.60 per share in the first quarter of 2018.

For the first quarter of 2019, adjusted EBITDA, which further excludes items that management does not consider to be indicative of our core operating performance, was negative $11.7 million compared to negative $7.4 million in 2018.

Turning to our balance sheet, we ended the quarter with approximately $7.2 million in cash compared to $5.4 million at the end of fiscal 2018. Inventory at quarter end was $221.5 million, down from $246.5 million at year end 2018, a $25 million reduction. Total debt stood at $95.1 million compared to $73.1 million at the end of last year. In terms of capital deployment, our CapEx spend was $1.4 million in Q1 2019 compared to $2.5 million in Q1 of 2018.

Before I end the call, I'd like to make one thing clear. The team at Fred's is committed to the turnaround effort of the company, and we appreciate the continued support and patience from our customers and vendors as we navigate this challenging time for the company.

Thank you for participating today, and we look forward to releasing our Q2 results in September.

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Operator [4]

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Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.