) third quarter 2012 earnings of 18 cents declined 25% from the
prior-year quarter earnings of 24 cents. Earnings also missed the
Zacks Consensus Estimate of 21 cents and the company guidance
range of 22 cents to 26 cents. The ongoing tough retail
environment and higher operating expenses also led to the
Revenue and Margin Performance
Total sales increased 1% year over year to $450.6 million, in
line with the Zacks Consensus Estimate. Despite a decline in
comparable sales, Fred's exhibited positive growth on the back of
higher merchandise sales and improved consumer traffic, resulting
from marketing initiatives. Fred's comparable store sales slipped
2.5% during the quarter compared to a 1.5% rise in the year-ago
Gross profits grew 2% to $138.1 million while gross margin
expanded 10 basis points to 30.7% from the year-ago quarter. The
improved margin was the result of higher pharmacy department
gross margin, partially offset by increased charges on pharmacy
department inventory, as well as promotional markdowns and
Selling, general and administrative expense margin increased
90 basis points to 28.5% in the quarter, due to higher
depreciation and amortization expenses and labor and occupancy
Operating income plummeted 25.7% to $10.1 million in the
quarter while margins shrank 80 basis points to 2.2% of sales due
to higher operating expenses.
Other Financial Update
Fred's board declared a special dividend of 19 cents per share
in the quarter, in addition to the company's regular quarterly
dividend of 6 cents per share. The combined dividend of 25 cents
will be paid on December 17, 2012, to shareholders as of December
Management expects tough retail conditions to continue across
the markets in fiscal 2012. For the fourth quarter of 2012,
Fred's forecasts its total sales, including one extra week, to
increase 9% to 11%.
Comparable store sales, including one extra week, are expected
to increase 6% to 8%. The company expects earnings to increase in
a range of 19% to 38% and remain within a range of 31 cents - 36
cents per share in the fourth quarter of 2012.
Fred's lowered its 2012 earnings guidance to a range of 94
cents to 99 cents per share from 97 cents to $1.04 per share
The Zacks Consensus Estimate is pegged at earnings of 32 cents
for the fourth quarter and 96 cents for fiscal 2012.
We currently have a long-term Neutral recommendation on
Fred's. The stock carries a Zacks #3 Rank (a short-term Hold
rating). Its peers,
Dollar General Corporation
Wal-Mart Stores Inc.
), both carry a Zacks #3 Rank (short-term Hold rating).
DOLLAR GENERAL (DG): Free Stock Analysis
FREDS INC (FRED): Free Stock Analysis Report
WAL-MART STORES (WMT): Free Stock Analysis
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