U.S. Markets open in 28 mins.

Edited Transcript of FRED earnings conference call or presentation 6-Apr-17 12:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Fred's Inc Earnings Call

MEMPHIS Apr 6, 2017 (Thomson StreetEvents) -- Edited Transcript of Fred's Inc earnings conference call or presentation Thursday, April 6, 2017 at 12:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Ben Garner

Fred's, Inc. - VP

* Mary Lou Gardner

Fred's, Inc. - Chief Merchandising & Marketing Officer and EVP

* Michael K. R. Bloom

Fred's, Inc. - CEO, President and Director

* Rick J. Hans

Fred's, Inc. - CFO, EVP and Secretary

================================================================================

Conference Call Participants

================================================================================

* Dennis Mitchell Van Zelfden

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Paul Elliott Trussell

Deutsche Bank AG, Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Welcome to the Fred's, Inc. Fourth Quarter and Year-end 2016 Earnings Conference Call. (Operator Instructions) Please note, today's event is being recorded.

I would now like to turn the conference over to Ben Garner, Vice President and Corporate Controller of Fred's. Please go ahead.

--------------------------------------------------------------------------------

Ben Garner, Fred's, Inc. - VP [2]

--------------------------------------------------------------------------------

Good morning, everyone. Thank you for joining today's call to review Fred's Pharmacy's financial and operating results for the fourth fiscal quarter and fiscal year ended January 28, 2017. Presentation slides to accompany this call are available in the investors section of our website.

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 on the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to uncertainties and risk. 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 Form 10-K and in other filings with the Securities and Exchange Commission. We refer you to these sources for more information.

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, April 6, 2017. 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.

With us this morning and sharing prepared remarks are Mike Bloom, Chief Executive Officer; and Rick Hans, Executive Vice President and Chief Financial Officer. In addition, Tim Liebmann, Chief Operating Officer of Pharmacy; Craig Barnes, Chief Operating Officer of Front Store; Mary Lou Gardner, Chief Merchandising and Marketing Officer; John Foley, Executive Vice President of Stores; and Jason Jenne, Senior Vice President of Finance will be available during the Q&A.

This call is the property of Fred's Pharmacy. Any distribution, transmission, broadcast or rebroadcast of this call for commercial purposes in any form without the expressed written consent of the company is prohibited.

With those remarks, I'll turn the call over to Mike Bloom.

--------------------------------------------------------------------------------

Michael K. R. Bloom, Fred's, Inc. - CEO, President and Director [3]

--------------------------------------------------------------------------------

Thank you, Ben, and good morning, everyone. The transformation of Fred's Pharmacy that has been underway for the past 18 months is working. Our comprehensive strategy and plan to improve our performance sequentially is on target. As we have stated on previous calls, we have been upgrading and developing talent, investing in technology to improve both Pharmacy and Front Store processes and efficiencies, improving the patient-pharmacist relationship and experience, implementing strategies to grow comp scripts, diversifying and growing our specialty pharmacy portfolio, enhancing stores to improve the customer experience, increasing supply chain efficiencies and reducing costs, expanding Front Store and Pharmacy margins and optimizing our store portfolio and inventory to improve performance and cash flow. Simply stated, we have a plan. We are executing it, and we are starting to see improved results.

We knew 2016 would be a challenging year. It was a year to continue rebuilding the foundation for the future of Fred's Pharmacy, our team members and our shareholders. Our teams are making significant progress doing what we said we would do and executing our health care strategy to transform the company.

In 2016, we rolled out a series of initiatives that will be critical to our long-term success, including a number of process and technology improvements. We installed PDX, an enterprise pharmacy system which improved efficiencies and helped to lower our overall cost to fill. We also installed OrderInsite , a pharmacy inventory management system which has helped optimize our inventory while improving our in-stock position on pharmaceuticals. We went live in the Front Store on JDA, a replenishment system that allows us to replenish on a by store, by item basis for the first time in company history to improve in-stocks and lower the company's days of supply in general merchandise.

We believe these new technologies will better enable us to grow sales and reduce inventory and expenses. We have also remodeled 55 stores and closed approximately 40 underperforming stores for which we could no longer foresee a path to profitability.

We are also very focused on improving employee engagement and the overall culture at Fred's Pharmacy by investing in our people and providing a workplace that our team members are proud of. We raised the salaries of our store managers to ensure we could recruit and retain individuals who would be invested in providing the best experience for our customers. Additionally, we are paying our employees health care premium increases in 2017. We are a health care company, and our employees deserve affordable options to access quality care. Both of these decisions represent a most worthwhile investment in our employees and will allow us to be competitive in attracting and retaining higher-caliber managers in the future. Reducing store manager turnover improves profit.

Fred's Pharmacy is on the right path, and we will continue to execute our health care strategy and drive value for our team members, customers and shareholders. We are now consistently seeing favorable sequential growth in Retail Pharmacy adjusted script comps along with sequential progress in sales trends in our Specialty Pharmacy business, continuing our quarter-over-quarter growth trend. We expect the sequential improvement to continue throughout 2017.

The fourth quarter was highlighted by a transformational event for our company: the announcement of the pending acquisition of 865 Rite Aid stores, which would make Fred's the third largest drugstore chain in the nation and transform the largest regional pharmacy player into a true national competitor. Fred's Pharmacy is working collaboratively with Walgreens Boots Alliance, Rite Aid and the Federal Trade Commission to help obtain the FTC's approval of Walgreens Boots Alliance's pending acquisition of Rite Aid and the divestiture of certain Rite Aid assets to Fred's Pharmacy.

Fred's Pharmacy remains committed to purchasing additional assets, including up to 1,200 Rite Aid stores, to the extent necessary to obtain the FTC's approval of the transaction.

Completion of the transaction is subject to approval by the FTC as well as other customary regulatory approvals and closing conditions. We expect that acquiring the Rite Aid stores in these highly attractive markets will further accelerate our health care growth strategy and result in a company with enhanced scale and size that combined will be more competitive and create tremendous opportunities for our customers and team members.

We know we have work ahead of us. Fred's has lacked investment and process improvement for a very long time. That said, we are pleased with the progress we are making against our strategic plan and are focused on doing what needs to be done to have our financial results match our operational successes.

Our health care strategy has been effective, and comparable store sales and margin in our overall Pharmacy business are expected to grow in 2017. Our highly experienced team continues to implement upgrades to our infrastructure, and we look forward to the continued optimization of our business.

Before I hand the call off to Rick, I would like to touch on our recent board announcement. I am delighted to join the Fred's Pharmacy board, and I'm pleased to welcome industry veterans Chris Bodine and Peter Bocian as Directors; along with Linda Longo-Kazanova, former vice President and Chief Human Resources Officer at Keurig Green

Mountain. The entire board plans to work closely to help set the company's strategy and advance the company's efforts to enhance value for Fred's Pharmacy customers, team members and shareholders.

With that, I would like to turn the call over to Rick to take you through our fourth quarter and full year earnings results. Rick?

--------------------------------------------------------------------------------

Rick J. Hans, Fred's, Inc. - CFO, EVP and Secretary [4]

--------------------------------------------------------------------------------

Thank you, Mike, and thank you, everyone, for joining us today. I'll start by addressing a few metrics for the fourth quarter.

For the fourth quarter of 2016, net sales decreased 4.5% to $529.7 million from the fourth quarter of 2015. Comparable store sales for the quarter decreased 3.6% versus a 1.7% increase in comparable store sales in the fourth quarter of last year. Comparable store sales in the fourth quarter of 2016 included a negative 2.6% impact as a result of the sale of low-productive discontinued inventory versus the fourth quarter of 2015.

Fred's net loss for the fourth quarter totaled approximately $22.5 million or $0.60 per share compared with a net loss of $3.9 million or $0.11 per share for the fourth quarter of 2015. The fourth quarter included the following notable charges totaling $23.4 million or $0.49 per share: $9.3 million or $0.25 per share after tax for a valuation allowance against the company's deferred tax asset resulting from the pretax loss created primarily by the other significant charges in the fourth quarter, $10.2 million on a pretax basis or $0.17 per share after tax for professional and legal advisory fees incurred in connection with the proposed acquisition of Rite Aid stores and the development and implementation of the company's growth strategy, $1.5 million on a pretax basis or $0.03 per share after tax for fees incurred from an assessment received from Visa related to the 2015 data security incident, $1.3 million on a pretax basis or $0.02 per share after tax for other nonrecurring items and $1.1 million on a pretax basis or $0.02 per share after tax for inventory write-downs related to the closing of 40 underperforming stores.

Fred's gross profit for the fourth quarter of 2016 decreased 2.5% to $129.6 million from the prior year period. Gross profit margin for the quarter increased 50 basis points to 24.5% from the same quarter last year. The margin includes $3.1 million benefit on a pretax basis or $0.05 per share after tax resulting from the successful sale of discontinued inventory above estimated markdown cost. Fred's recorded LIFO adjustments of $2 million in the fourth quarter of 2016 compared with $4 million in the same quarter last year.

Selling, general and administrative expenses for the quarter, including depreciation and amortization increased 380 basis points to 28.7% of sales versus the prior year quarter. Much of the increase in expenses was attributable to professional, legal, banking and integration planning fees incurred in connection with the announced agreement to acquire Rite Aid stores as well as impairment charges related to store closures, corporate office and other assets.

For the fourth quarter of 2016, operating loss, which is equivalent to earnings before interest and taxes or EBIT, a non-GAAP financial measure, was $22.2 million versus $5.1 million loss in the fourth quarter of 2015. For the fourth quarter of 2016, EBITDA, a non-GAAP financial measure that further excludes depreciation and amortization from EBIT, was a loss of $10.5 million or 2% of sales compared with earnings of $6.8 million or 1.2% of sales for the fourth quarter of 2015.

Moving on to our full year 2016. Fred's net loss totaled $66.5 million or $1.80 per share compared with a net loss of $7.4 million or $0.20 per share for fiscal 2015. Fred's net loss for fiscal year 2016 included charges totaling $61.8 million or $1.28 per share after tax. The details of these charges are further explained in the press release we issued this morning.

Fred's net sales for fiscal 2016 decreased 1.2% to $2.13 billion from $2.15 billion in the year-earlier period. On a comparable store basis, fiscal 2016 sales decreased 2.2%. Comparable sales for the year included a negative 1.7% impact as a result of the sale of low-productive discontinued inventory versus the prior year.

Gross profit for fiscal year 2016 decreased 6.2% to $510.3 million from the year before. Gross margin for fiscal year 2016 decreased 130 basis points to 24% of sales versus the prior year period. Most of the decrease was related to inventory write-downs during 2016 associated with store closures and discontinued unproductive inventory. In fiscal year 2016, Fred's recorded LIFO adjustments of $5.1 million compared to $7.6 million last year.

In fiscal year 2016, selling, general and administrative expenses, including depreciation and amortization, increased 170 basis points to 27.5% compared with 25.8% of sales in fiscal year 2015. Similar to the fourth quarter, for the year, the majority of the increase in expenses was related to professional, legal, banking and integration planning fees incurred in connection with the announced agreement to acquire Rite Aid stores as well as impairment charges related to store closures, corporate office and other assets.

Operating loss for fiscal year 2016 was $74.7 million compared with a loss of $10.4 million in fiscal year 2015. For fiscal year 2016, EBITDA was a loss of $27.7 million or 1.3% of sales compared with EBITDA of $35.3 million in fiscal year 2015.

Let me close with a few comments regarding guidance. Last fall, Fred's suspended its guidance for the second half of 2016. Since then, the company announced the agreement to purchase 865 Rite Aid stores. As a result of that event and pending the outcome of the FTC decision, Fred's is not reinstating specific EPS guidance for 2017. We expect to continue to incur a number of charges similar to those discussed this quarter, including those related to acquisition integration, store closures and valuation allowances. Absent those charges, we expect sequential improvement in core Fred's quarterly earnings per share in 2017.

I'll now turn the call back over to Mike. Mike?

--------------------------------------------------------------------------------

Michael K. R. Bloom, Fred's, Inc. - CEO, President and Director [5]

--------------------------------------------------------------------------------

Thank you, Rick. Turning to our Retail Pharmacy business. In the second quarter, we talked about the strategies we were developing with our supplier, payer and health care partners and how they would lay the foundation to begin our health care transformation. In the third quarter, we discussed technology, talent and time and that once technology and talent were in place, time will yield results.

Today, we are happy to report that we are gaining strong traction and that results are beginning to materialize. Key metrics in our business are experiencing growth for the first time in years. Comparable prescriptions adjusted for 30 days increased 30 basis points in 2016 as compared to 2015. And our generic dispensing rate increased by 120 basis points, continuing our focus on more profitable scripts.

A few key elements that are driving these metrics are as follows. We aligned leadership and focused our pharmacy organization to drive scripts into our stores, improve service to our patients and train our teams to ensure a consistent and reliable experience at every store for every patient. We revised our reimbursement strategies that have reversed negative trends and are showing positive results and helping to stabilize margins. We expanded our 340B program by partnering with local hospitals to allow our stores to help our eligible patients gain access to discounted prescriptions.

We launched marketing campaigns that are specific to the stores and communities that we serve. These campaigns are expected to generate new customers in stores to continue to drive prescription growth. We launched a pharmacist outreach program to win back patients. Through our many relationships with hospitals and payers, we've launched a health services platform leveraging our pharmacists who are already the most accessible go-to health care professionals for a wide variety of preventative care, screening and disease management services.

In Q4, we initiated a plan to implement Vistaar's Retail Pharmacy Pricing Solution, which will help us maintain competitive by better managing usual and customary pricing of generic and brand-name drugs. We are piloting concepts related to centers of excellence for specific disease states. We are training our pharmacy teams as well as aligning our Front Store products with a focus on certain disease states such as diabetes, heart conditions, high blood pressure and gastrointestinal conditions. This is meant to deepen the relationship between our stores, pharmacists and our patients and enhance the lifetime value of our customers.

We are actively pursuing the use of alternative dispensing technology, which, when approved by the various regulatory bodies, will allow us to provide prescription services to stores which do not have pharmacies. As you can see, we are excited about the future as these programs and many others take hold and yield long-term sustainable results by improving the patient experience in the store, driving top line sales and script comps and improving overall pharmacy margins.

Turning now to our progress in Specialty Pharmacy. Specialty sales grew double digits in the second half of 2016 versus the first half of 2016, demonstrating the momentum in our strategic shift to focus on health care. The improvement in our specialty business has been accomplished through internal reorganization, geographic expansion and an infusion of new talent that is providing excellent patient service in hepatitis C, rheumatology, multiple sclerosis, growth hormone therapy and oncology. Looking ahead to 2017, we are confident it will be a year of sales growth through the expansion of therapies, new additions to the sales force and the expansion into 340B programs for Specialty Pharmacy.

Regarding our Front Store business, 2016 was a challenging year for the entire retail sector and Fred's was not immune. A combination of market conditions, seasonal changes and other challenges had a negative impact in 2016. However, several categories are showing positive growth or improvement, reflecting changes made to merchandising processes and planograms during the back half of 2016. Fourth quarter holiday sales were up by approximately 3.4%, and we have seen strong year-over-year improvement in categories such as apparel, toys, lawn and garden and beverage. Looking ahead, the Front Store team at Fred's is laying the foundation for success through an emphasis on process improvement, strategic initiatives, training, communication and investments in talent.

Top line growth is poised to drive positive comp sales in 2017. The rollout of beer and wine and a major update to our cosmetics assortment in Q3, combined with other accelerated category updates, will drive comparable sales and margin growth in 2017. We have a series of process improvement initiatives that are underway across merchandising to improve our processes regarding category reporting, planograms, off-shelf and seasonal planning, circular promotions and joint business planning.

In addition, we are making significant progress in other areas, including: the implementation of our new vendor funding tool in Q1 that will give visibility to category management teams with key suppliers to better manage funding and profitability; the launch of our mobile app that will integrate the experience of our existing pharmacy app for the customer and will allow us to offer digital coupons and personalized offers to our customers; the leveraging of our new JDA platform to implement an inventory optimization initiative which will lower our days of supply, improve in-stock and ultimately drive sales while improving cash flow; and the continuation of our supply chain initiative focused on driving increased efficiency in our end-to-end supply chain, resulting in lower SG&A expenses. We have laid a solid foundation for the Front Store which will result in incremental sales and profit.

In closing, this is an exciting time for our company and our shareholders. We're executing on our health care strategy in order to enhance shareholder value. Looking ahead to 2017, we are focused on Retail and Specialty Pharmacy, health care services, improving trends in Front Store and reducing inventory and expenses throughout the business, which will improve cash flow. Our highly experienced management team continues to execute on value-enhancing initiatives. We continue to take a long-term view of our business and the opportunities ahead as a significant provider of health care services and value merchandise in the markets that we serve.

Since we assembled the new management team, we began placing greater emphasis on our health care customers and patients and 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 also believe that key marketing and merchandising initiatives we have implemented will drive future sales, traffic and profits and represent a solid strategic response to the near-term challenges we are currently experiencing.

The momentum that we are creating today is just the beginning. In 2017, we look forward to continued sequential improvement as the initiatives underway take hold across the organization.

As a reminder, the purpose of today's call is to discuss our earnings results, and we would appreciate it if you could please keep your questions focused on that topic. We thank you for your cooperation in that regard.

And with that, I'd like to open the call up for questions. Operator?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question comes from David Magee of SunTrust.

--------------------------------------------------------------------------------

Dennis Mitchell Van Zelfden, SunTrust Robinson Humphrey, Inc., Research Division - Associate [2]

--------------------------------------------------------------------------------

This is Mitch on for David. A couple of questions. First, you made several management hires over the past several months. Do you think you have the team set now? Or do you anticipate making additional hires down the road?

--------------------------------------------------------------------------------

Michael K. R. Bloom, Fred's, Inc. - CEO, President and Director [3]

--------------------------------------------------------------------------------

Yes. Mitch, it's Mike. First of all, yes, we're very pleased with the hires we've made, and we've talked about those in the past. I would tell you that at the end of the day, we are always looking to upgrade talent and continue to develop the talent we have, so I think it's an ever-changing process. I don't know that I could sit here and tell you that we're not going to hire any more or upgrade any more talent. We'll always be doing that as a retailer. So I'm -- but I will tell you, and as you can see by our sequential improvement, we are very pleased. This team that we've assembled here is a high-caliber, talented team that is really getting it done and making progress.

--------------------------------------------------------------------------------

Dennis Mitchell Van Zelfden, SunTrust Robinson Humphrey, Inc., Research Division - Associate [4]

--------------------------------------------------------------------------------

Okay. And then the traffic metric has been weak for some time now, and certainly, you're not alone in that regard. But just given all the initiatives that you're doing, is there a potential for that metric to stabilize this year or possibly inflect?

--------------------------------------------------------------------------------

Rick J. Hans, Fred's, Inc. - CFO, EVP and Secretary [5]

--------------------------------------------------------------------------------

Yes. Mitch, it's Rick. Yes, like a lot of other retailers, we have had negative traffic, and it's not a recent phenomenon. I mean, you've seen this in other, certainly, drugstore chains for many years. Obviously, the perplexing part about it is that the basket has increased, so you've seen, in many cases, the basket increase can meet or offset the loss of traffic. And there are other many factors that caused that. I won't go through that right now. But obviously, we have programs in place this year at Fred's to try to drive traffic. That is one of our key goals.

--------------------------------------------------------------------------------

Michael K. R. Bloom, Fred's, Inc. - CEO, President and Director [6]

--------------------------------------------------------------------------------

Mitch, it's Mike. We've mentioned beer and wine in our prepared remarks so that's clearly a traffic driver. And second, as we've talked about before, we had a hiccup and -- on tobacco last year. We have our arms around that. That's fixed, replenishing, going well. So that will clearly drive traffic. And in addition, on the pharmacy side, more importantly, is the Rx marketing that we're doing, the pharmacy marketing that we're doing to drive feet into the pharmacy area and grow scripts. So I'm not suggesting it's -- we're going to have a major turnaround traffic, but we're doing everything we can with new initiatives and pharmacy marketing to sort of reverse that trend.

--------------------------------------------------------------------------------

Dennis Mitchell Van Zelfden, SunTrust Robinson Humphrey, Inc., Research Division - Associate [7]

--------------------------------------------------------------------------------

Okay. And then one more, if I could. You intend to close about 40 stores in the current quarter. How do you feel about the rest of your core fleet? Do you intend to close additional stores this year? Just any color you can provide around that front would be helpful.

--------------------------------------------------------------------------------

Michael K. R. Bloom, Fred's, Inc. - CEO, President and Director [8]

--------------------------------------------------------------------------------

Yes. Sure, Mitch. So the way we think about our portfolio today is we -- it's a constant evolution of the portfolio. The 40 stores we closed previously and then -- we, at Fred's, have been closing stores in tranches over the last several years, and what I would tell you is that we're done with the tranches. What we'll do now is we'll open and close stores on a regular basis like most retailers as we manage the portfolio of stores. I mean stores come and go, competition comes and goes, and we'll just manage the portfolio in a much more sort of singular-store basis.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

The next question comes from Paul Trussell of Deutsche Bank.

--------------------------------------------------------------------------------

Paul Elliott Trussell, Deutsche Bank AG, Research Division - Research Analyst [10]

--------------------------------------------------------------------------------

So look, I certainly understand and I don't want to ask a question directly on the pending transaction, but Mike, you do have a stated goal at this point to transform Fred's from this regional pharmacy player into now a national competitor. And to that, can you at least speak to us about what investments or what steps need to be made in order to make sure that Fred's can make that leap and that transition into kind of a national competitive player?

--------------------------------------------------------------------------------

Michael K. R. Bloom, Fred's, Inc. - CEO, President and Director [11]

--------------------------------------------------------------------------------

Yes, sure. Well, certainly, we're collaboratively working on the biggest piece of that transformation with Rite Aid and Walgreens Boots Alliance. So clearly, that would be number one, right? But second to that would be, as we transform to a health care organization, which I think we're proving we're making quite a bit of progress there, there's a lot of opportunity throughout the U.S. with potential growth, if you will, that I think that we would -- that was the original strategy, right, the original strategy when we got here. Remember the WBA Rite Aid divestiture was not even in the mirror -- or in the picture at all. So we were always talking about growing nationally. And I know that's a big statement, but you start in your -- the 16 states we operate in and then you expand from there and you move into states and you continue to grow. And who knows whether -- we're always looking at acquisitions both on the health care side and the retail side. So I think that, that's sort of how we think about it. And more importantly -- or as importantly, we've certainly assembled the team that can help us get that done.

--------------------------------------------------------------------------------

Paul Elliott Trussell, Deutsche Bank AG, Research Division - Research Analyst [12]

--------------------------------------------------------------------------------

Okay, fair enough. And then as we talk about the Front Store, help us understand maybe a few pieces that you commented on earlier in the call. One is just on Front Store margin expansion. Help us understand what's driving that and what should be the factors benefiting the Front Store margins going forward, especially in what we kind of perceive to be a challenging pricing environment. And maybe you can just touch on your strategy in that regards. And then just on top line, you mentioned March same-store sales down slightly. Help us just understand some of the puts and takes or if you can help us quantify tax refund shifts from February to March and Easter shift from March to April. Any of that anecdotal color would be helpful.

--------------------------------------------------------------------------------

Michael K. R. Bloom, Fred's, Inc. - CEO, President and Director [13]

--------------------------------------------------------------------------------

Sure. I'm going to let -- I'm going to actually put it -- turn it over to Mary Lou, and I'll jump in where appropriate. But she's doing all the hard heavy lifting in improving the Front Store margin.

--------------------------------------------------------------------------------

Mary Lou Gardner, Fred's, Inc. - Chief Merchandising & Marketing Officer and EVP [14]

--------------------------------------------------------------------------------

Paul, thanks for your question. So let me address the first part of the question first, which is the profitability, the margin expansion. So in regards to margin expansion, there are several levers that we've been focused on. The first one is around imports and purchasing, so improving our cost of goods. The second is around store brand, so our store brand penetration. We've been focusing very hard on driving store brands, and we've been going through a refresh on our store brand portfolio. And the last is really mix of goods, so when we look across the entire Front Store, the mix of goods and where we're choosing to focus to drive sales. So the 3 are really blending and expanding margin, and we're going to continue that all the way through '17 and beyond. Do you want to...

--------------------------------------------------------------------------------

Rick J. Hans, Fred's, Inc. - CFO, EVP and Secretary [15]

--------------------------------------------------------------------------------

Yes. Mitch, this is Rick. Let me talk about the comp sales for March -- or Paul, I'm sorry. We had obviously talked earlier about the shift in sales from just the tax refund checks being late. And those were delayed in January and February, and we got a benefit from that in March. To offset that, we had the problem with the Easter shift. So to be honest with you, it's very hard to quantify these things until you get through Easter. So we'll do a combined March, April comp next month, and then we'll give -- we'll be in a much better position to really tell you the impact of Easter. And then perhaps you can go back in to talk about the impact of the tax refund delay.

--------------------------------------------------------------------------------

Paul Elliott Trussell, Deutsche Bank AG, Research Division - Research Analyst [16]

--------------------------------------------------------------------------------

That's helpful. And then my last question is just regarding the balance sheet. And if you can just help us get comfortable, Mike and Rick, with the balance sheet just given the decline we've seen in EBITDA of late. I know you're not giving specific guidance, but help us understand what your thoughts are around EBITDA this upcoming year and how we should think about your balance sheet post the potential transaction.

--------------------------------------------------------------------------------

Rick J. Hans, Fred's, Inc. - CFO, EVP and Secretary [17]

--------------------------------------------------------------------------------

Right. We -- obviously, with the guidance that we did give, we would expect commensurate increases in EBITDA in the year with that. But with the balance sheet today, obviously, we have -- you're probably looking at -- there was an increase in the amount that we've borrowed year-over-year, and that is really a function of several factors. Obviously, we had CapEx and dividends in the year. And then we did have a -- we did rethink the way we deal with suppliers, and we have actually done some trade-offs with term versus pricing. We're going for better pricing. And so that had an impact on our debt balance year-over-year. In addition to that, obviously, we've incurred fees related to integration planning and legal fees and so forth, which have had an impact on our balance sheet. What was the second part of that, Paul, your question?

--------------------------------------------------------------------------------

Paul Elliott Trussell, Deutsche Bank AG, Research Division - Research Analyst [18]

--------------------------------------------------------------------------------

Just how we should think about the balance sheet kind of post transaction potentially.

--------------------------------------------------------------------------------

Rick J. Hans, Fred's, Inc. - CFO, EVP and Secretary [19]

--------------------------------------------------------------------------------

Yes. We haven't really given much guidance on that. I mean we can talk in general about it. Obviously, we have talked about the fact that this will be an all debt-financed deal. We had committed financing on the original 865 stores. So the beauty of it is, is that there's good collateral in these assets we're buying, and we can get the financing to do that. So I can tell you that we will be -- have less leverage than the current Rite Aid today. So I think we'd be in a position to reinvest in stores to make them very competitive in their individual markets.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.