) delivered better than expected fourth quarter results and
provided bullish guidance for 2012 on March 21.
This prompted analysts to revise their estimates higher for both
2012 and 2013, sending the stock to a Zacks #2 Rank (Buy).
On top of strong earnings growth, Fred's offers investors a
dividend that yields a solid 1.6%. And valuation looks attractive
with shares trading well below the industry median on both a price
to earnings and price to book value basis.
Fred's, Inc. operates 700 discount general merchandise stores,
including 21 franchised Fred's stores, in the southeast; 325
locations offer in-store pharmacies.
The company targets low to middle income consumers in small to
medium sized towns. It was founded in 1947 and is headquartered in
Fourth Quarter Results
Fred's reported better than expected results for the fourth quarter
on March 21. Earnings per share came in at 27 cents, beating the
Zacks Consensus Estimate by 3 cents. It was a 14% increase over the
same quarter in 2010.
Total sales rose 2% to $497.6 million, in-line with the Zacks
Consensus Estimate. Same-store sales inched up 0.1% on top of a
2.3% increase in the same quarter last year.
Despite fears of rising food costs negatively affecting profit
margins at retailers, gross profit held steady at 27.7% of total
sales. Meanwhile, selling, general and administrative expenses
declined 10 basis points to 24.8% of total sales as the company
leveraged its fixed expenses.
These factors led to a 4% increase in operating income
year-over-year. Earnings per share was boosted in part by a 6%
lower share count.
Following solid Q4 results, management provided initital 2012
earnings guidance of $0.96-$1.04 on sales growth of 5-7%. This
prompted analysts to revise their estimates higher for both 2012
and 2013, sending the stock to a Zacks #2 Rank (Buy).
The 2012 Zacks Consensus Estimate is now $0.99, within guidance,
and representing 14% growth over 2011 EPS. The 2013 consensus
estimate is currently $1.10, corresponding with 11% growth.
In addition to solid earnings growth, the company pays a dividend
that yields 1.6%. After holding its dividend steady for more than 6
years, the company raised it during the depths of the Great
Recession in early 2009. And it has hiked its dividend 3 times
The valuation picture looks reasonable for this discount retailer.
Shares trade at 14.6x 12-month forward earnings, well below the
industry median of 17.8x and its 10-year median of 16.5x.
Its price to book ratio of 1.3 is also well below the industry
multiple of 3.2.
The Bottom Line
With rising estimates, strong growth, a solid 1.6% yield and
reasonable valuation, Fred's offers investors attractive total
Todd Bunton is the Growth & Income Stock Strategist for
and Co-Editor of the
Reitmeister Value Investor
FREDS INC (
): Free Stock Analysis Report
To read this article on Zacks.com click here.