Fred's Beats, Ups 2012 Guidance - Analyst Blog


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Fred's Inc. ( FRED ) reported a decent fourth quarter 2011 adjusted earnings of 25 cents (excluding the favorable tax effect of 2 cents) which exceeded the prior-year quarter earnings by 3 cents and the Zacks Consensus Estimate by 1 cent. The earnings were within the previously provided guidance range of 23 to 27 cents per share. The results were driven by top-line growth and strong gross profits.

Total sales increased 2% year over year to $497.6 million, in line with the Zacks Consensus Estimate. Fred's comparable store sales grew 0.1%, lower than the increase of 2.3% in the prior-year quarter.

Annual Results

The fiscal year 2011 earnings of 87 cents also exceeded the prior-year earnings of 75 cents and the Zacks Consensus Estimate of 85 cents. The fiscal year earnings were also within the guidance of 84 to 88 cents per share.

The fiscal year sales also surged 2% to $1.88 billion, in line with the Zacks Consensus Estimate. Comparable store sales also increased 0.5%, but were lower than the increase of 2.2% in 2010.

Margin Performance

Gross profits climbed 2% to $137.7 million, while gross margin remained flat at 27.7% in the fourth quarter of 2011. The improved profit was the result of promotional markdowns and higher pharmacy department gross margin. However, the shift in the general merchandise mix toward more basic and consumable products overshadowed the increase.

Selling, general and administrative expense margin, including depreciation and amortization, improved 10 basis points to 24.8% from 24.9% in the prior-year quarter of 2010, driven by lower advertising, labor, and store occupancy costs offset by the increases in depreciation and distribution expenses.

Operating income increased 4% to $14.2 million in the quarter, while margins expanded 10 basis points to 2.9%.

Store Update

As part of the fiscal 2011 operating plan, Fred's opened 16 new stores and seven express pharmacy stores, and closed one franchise store in the quarter.

Fred's store opening shot up 70% in the year 2011 with the opening of 26 new stores (including 7 stores converted from express stores), 24 pharmacies and 17 express stores. However, the company shut down 8 stores, 2 express stores, 3 franchise and 12 pharmacy stores. Fred's also upgraded 205 existing stores in 2011 under its Core 5 program bringing the total number  of stores upgraded to 413.

Other Financial Update

At the end of January 28, 2012, Fred's cash and cash equivalents increased to $27.1 million from $20.0 million as of October 29, 2011.

In February 2011, Fred's board announced plans to expand its existing stock repurchase program, by an additional 3.6 million shares or 10% of the currently outstanding shares. Fred's also increased its quarterly dividend by 20% to 6 cents per share, driven by strong cash flows and the 2012 financial plan.


Management expects tough retail conditions to continue across the markets in 2012. However, Fred's anticipates improvements in its Core 5 Program, strategic initiatives and cost reduction programs to help maintain profitability in 2012.

For the first quarter of 2012, Fred's forecasts its total sales to increase 3% to 5%, while it expects its comparable store sales to remain flat from the increase of 1% in the first quarter of last year.

The company expects its earnings to grow in the range of 8% and 17% to 26 cents - 28 cents per share in the first quarter of 2012. Fred's 2012 earnings per share is expected to increase 13% to 22% over last year, excluding the impact of the favorable income tax rate on 2011 results. Including the tax impact, Fred's expects its earnings to be in the range of 96 cents to $1.04 per share, representing a growth of 10% to 20% over last year.

Currently Fred's, which faces stiff competition from Dollar General Corporation ( DG ), Walgreen Co. ( WAG ) and Wal-Mart Stores Inc. ( WMT ), currently holds a Zacks #3 Rank (short-term Hold rating). On a long-term basis, we maintain a Neutral rating on the stock.

DOLLAR GENERAL ( DG ): Free Stock Analysis Report
FREDS INC ( FRED ): Free Stock Analysis Report
WALGREEN CO ( WAG ): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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