) second quarter 2012 adjusted earnings of 13 cents per share
missed the Zacks Consensus Estimate of 18 cents per share by 5
cents. Earnings exclude the favorable impact from certain tax
adjustments, store closings and product transitioning. However,
reported earnings were flat year over year.
Earnings were below management's guidance range of 15 cents to 17
cents per share, owing to a decline in comparable stores sales.
The company reported second quarter 2012 GAAP diluted earnings per
share (including $4.0 million of income tax settlement with the
state of Tennessee and other items) of 17 cents, which exceeded the
prior-year quarter earnings of 13 cents by 31%.
Total sales increased 4% year over year to $470.8 million, in line
with the company's guidance, driven by strong sales in the pharmacy
department, higher gross margin and contributions from latest
acquisitions and new stores. Sales for the second quarter of fiscal
2012 also beat the Zacks Consensus Estimate of $468 million.
Fred's comparable store sales slipped 1.0% during the quarter
compared with a 0.4% drop in the year-ago quarter, owing to the
conversion of branded drugs to generic drugs in the pharmaceutical
Fred's completed 13 pharmacy acquisitions during the second quarter
2012, including six new stores and seven incremental acquisitions.
The company has also opened two cold start pharmacies during the
first two quarters of 2012.
During the second quarter, Fred's opened three new stores and two
Xpress pharmacies. Fred's also closed down 14 stores during the
quarter. At the end of the second quarter, Fred's has a total of
698 stores and 332 pharmacies.
At the end of July 28, 2012, Fred's cash and cash equivalents
increased to $23 million from $7.8 million as of April 28, 2012.
The company used cash to finance share repurchase programs and
Management expects tough retail conditions to continue for the rest
of fiscal 2012. The company also expects the conversion of
branded drugs to generic drugs to negatively impact comparable
store sales. The company intends to achieve sales growth by
investing in brand building and aggressively pursuing pharmacy
For the third quarter of 2012, Fred's forecasts its total sales to
increase 2% to 4%. Comparable store sales are expected to dip 1% to
3% for the third of quarter 2012. The company expects earnings to
remain within the range of 22 cents to 26 cents per share in the
third quarter of 2012.
Based on the results of the previous two quarters of 2012, Fred's
expects its 2012 earnings to be in the range of 97 cents to $1.04
per share, down from the previous guidance of 98 cents to $1.04 per
share. The company expects full year 2012 effective tax rate in the
range of 36.5% to 37.5%. The company intends to open 25 to 30 new
stores and 25 to 30 new pharmacies during fiscal 2012.
We currently have a Neutral recommendation on Fred's Inc. The stock
carries a Zacks #3 Rank (short-term 'Hold' rating).
We are positive about Fred's initiative of revamping its stores and
upgrading stocks to attract more traffic. Also, continued sluggish
economy is likely to compel consumer spending to shift from
high-end products to low priced goods, which would benefit the
However, we prefer to stay on the sidelines as the company has been
experiencing low comparable store sales growth for the past several
months. Also, the absence of international exposure deprives Fred's
of the benefits of high growth opportunities in the developing
nations like China, Brazil, India, Mexico, Russia and Southeast
Based in Memphis, Tennessee, Fred's Inc. sells frequently purchased
items, like household goods, apparel, food, tobacco, and healthcare
and paper products through company owned discount general
merchandise stores, franchised "Fred's" stores.
FREDS INC (FRED): Free Stock Analysis Report
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