) second-quarter fiscal 2013 earnings of 9 cents increased 50%
year over year from 6 cents (favorable tax credits related to a
state income tax settlement as well as adjustments for other tax
related assumptions) in the year ago period. Earnings were at the
higher end of the company's expected range of 6 cents to 9 cents.
Improved margins and cost savings made up for the soft revenues
to boost earnings. Earnings were, however, in line with the Zacks
Revenues and Margin Performance
Total sales increased only 2.0% year over year to $482.2
million, missing the Zacks Consensus Estimate of $483.0 million.
Sales were also at the bottom end of Fred's top line growth
expectations of 2%-4%. Categories like tobacco, consumables,
paper, pet, beverage and lawn and garden reported modest sales in
Fred's' comparable store sales climbed 2.2% during the quarter
better than a % decline a year ago. Comparable sales improved on
the back of higher customer traffic and average ticket during the
quarter. Comps in expanded Hometown Auto & Hardware
departments improved during the quarter. Comparable stores were
better than management's expectation of flat year-over-year comps
during the quarter.
Gross profits grew 3% to $136.0 million while gross margin
expanded 20 basis points (bps) to 28.2% from the year-ago
quarter. The improvement in gross margin primarily results from
higher pharmacy department margins on generic prescriptions.
Penetration of stores with pharmacies increased from 50% to
Disciplined cost management led to lower selling, general and
administrative (SG&A) expenses. SG&A expense margin
leveraged 20 bps to 27.1% in the quarter. During the quarter,
Fred's closed 21 stores and opened three locations, one being at
a new Xpress pharmacy location and the other two store
Operating income soared 55.0% to $5.2 million in the quarter
while margins inflated 40 bps to 1.1% due to prudent expense
Third quarter of fiscal 2013
For the third quarter of fiscal 2013, Fred's forecasts its
total sales to increase in the range of 1% to 3%, while it
expects comparable store sales to be flat to up to 2% in the
third quarter better than a decline of 2.5% a year ago. The
company expects earnings to remain within a range of 19 cents-23
cents per share in the quarter, up 6%-8% from the year-ago
Fiscal 2013 Outlook Retained
Management expects competitive climate to be intense and the
operating environment to be challenging in the second half of the
year. Discretionary spending is expected to remain low,
especially of the lower income consumers which comprise Fred's
principal customers. For the fiscal 2013, Fred's continues to
expect earnings in the range of 81 cents-86 cents per share,
representing a growth of 17% to 25% over the year-ago level.
Management is well on track to improve its pharmacy department
growth, expand its specialty drug program and roll out its
expanded auto and hardware program. However, the company
continues to expect tough retail conditions to continue across
the markets in fiscal 2013.
The Zacks Consensus Estimate is pegged at 22 cents per share
for the third quarter and 85 cents for fiscal 2013.
Fred's currently carries a Zacks Rank #3 (Hold). Other stocks
in the retail and wholesale sector worth considering include
Micheal Kors Inc.
Columbia Sports Inc.
). While Hanesbrands and Micheal Korscarry a Zacks Rank #1
(Strong Buy), Columbia Sports carries a Zacks Rank #2 (Buy).
COLUMBIA SPORTS (COLM): Free Stock Analysis
FREDS INC (FRED): Free Stock Analysis Report
HANESBRANDS INC (HBI): Free Stock Analysis
MICHAEL KORS (KORS): Free Stock Analysis
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