) reported first-quarter 2012 adjusted earnings of 28 cents, which
exceeded the prior-year quarter earnings of 24 cents by 17%.
However, earnings were in line with the Zacks Consensus Estimate.
The earnings were at the higher end of management's guidance range
of 26 to 28 cents per share. Results were driven by strong sales in
the pharmacy department and decent same-store sales.
Revenue and Margin Performance
Total sales increased 3% year over year to $500.5 million. Sales
for the first quarter of fiscal 2012 surpassed the Zacks Consensus
Estimate of $475 million. Fred's comparable store sales slipped
0.4% during the quarter compared to a 1.0% rise in the year-ago
Gross profits grew 7% to $147.8 million, while gross margin
expanded 100 basis points to 29.5% from the year-ago quarter. The
improved margin was the result of promotional markdowns and higher
rebates and allowances from vendors.
Selling, general and administrative expense margin, including
depreciation and amortization, increased 70 basis points to 26.1%
from 25.4% in the year-ago quarter, driven by higher depreciation
and amortization, group medical expenses and legal and professional
Operating income went up 13% to $17.1 million in the quarter,
while margins expanded 30 basis points to 3.4% of sales.
As part of the fiscal 2012 operating plan of opening 22 to 28
stores, Fred's opened 3 new stores and 4 express pharmacy stores
during the quarter.
Fred's operates 707 discount general merchandise stores, which
includes 21 franchised stores. Fred's stores are located in
Other Financial Update
At the end of April 28, 2012, Fred's cash and cash equivalents
came down to $7.8 million from $57.1 million as of April 30,
2011.The company used cash for renovating its pharmacy stores and
give it a new look. There were also number of new acquisitions in
the pharmacy department which attributed to the significant decline
in cash held by the company.
Management expects tough retail conditions to continue across
the markets in fiscal 2012. The company estimates that fiscal 2012
will witness the largest conversion of branded drugs to generic
drugs. This will negatively affect comparable store sales.
Comparable store sales are estimated to remain flat in the second
quarter of 2012.
For the second quarter of 2012, Fred's forecasts its total sales
to increase 4% to 6%. The company expects earnings to grow
between15% and 30% and remain within the range of 15 cents - 17
cents per share in the second quarter of 2012. Fred's expects its
2012 earnings to be in the range of 98 cents to $1.04 per
Fred's faces stiff competition from
Dollar General Corporation
Wal-Mart Stores Inc.
). Currently, we have a long-term Neutral recommendation on Fred's,
which carries a Zacks #2 Rank (short-term Buy rating).
DOLLAR GENERAL (DG): Free Stock Analysis Report
FREDS INC (FRED): Free Stock Analysis Report
WALGREEN CO (WAG): Free Stock Analysis Report
WAL-MART STORES (WMT): Free Stock Analysis
To read this article on Zacks.com click here.