FRED

Fred's, Inc. (FRED)

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Fred’s, Inc. (FRED)

F3Q08 Earnings Call

November 26, 2008 11:00 am ET

Executives

Pat Watson - Corporate Communications

Jerry A. Shore - Chief Financial Officer, Executive Vice President

Bruce A. Efird - President

Rick A. Chambers - Executive Vice President - Pharmacy Operations

Michael J. Hayes - Chairman of the Board, Chief Executive Officer

Dennis K. Curtis - Executive Vice President, General Merchandise Manager

Analysts

Paul Trussell - J.P. Morgan

Mark Miller - William Blair & Company, LLC

David Magee - SunTrust Robinson Humphrey

Joan Storms - Wedbush Morgan Securities, Inc.

John Lawrence - Morgan, Keegan & Company, Inc.

Jillian Caruthers - Johnson Rice & Company

Patrick McKeever - MKM Partners LLC

Andrew Wolf - BB&T Capital Markets

Presentation

Operator

Welcome to the Fred’s third quarter conference call. This call is being recorded. At this time for opening remarks I’d like to turn the call over to Mr. Pat Watson.

Pat Watson

This is Pat Watson with Corporate communications. Thank you for joining Fred’s this morning to review the company’s financial and operating results for the third quarter and first nine months of fiscal year 2008 which ended on November 1, 2008.

Before we begin I would like to remind everyone that management’s comments in this conference call that are not based on historical facts are forward-looking statements. These statements are made in reliance on the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to uncertainties and risks. It should be noted that the company’s future results may differ materially from those anticipated and discussed in the forward-looking statements. Some of the factors that could cause or contribute to such differences have been described in the news release issued earlier this morning and the company’s annual report on Form 10K and in other filings with the Securities and Exchange Commission. We refer you to these sources for more information.

Lastly I would like to point out that management’s remarks during this conference call are based on information and understandings that are believed accurate as of today’s date. Because of the time sensitive nature of this information it is Fred’s policy to limit the archived replay of this conference call webcast to a period of 30 days. This call is the property of Fred’s. Any distribution, transmission, broadcast or rebroadcast of this call for commercial purposes in any form without the express written consent of the company is prohibited.

With those announcements, I’ll turn the call over to Jerry Shores, the company’s Chief Financial Officer.

Jerry A. Shore

Thanks to all of you for joining us this morning for our discussion of the third quarter results for fiscal 2008. With me this morning and available for questions are Michael Hayes, Chief Executive Officer, Bruce Efird, President, Keith Curtis, Executive Vice President and General Merchandise Manager, and Rick Chambers, EVP of Pharmacy Operations.

As the company reported in its press release this morning, total sales for the third quarter were $418 million compared with $419.9 million last year, a 0.4% decrease. These sales reflect the company’s previously-announced program to close 75 underperforming stores and 22 underperforming pharmacies in 2008. Excluding these stores closed, total sales from ongoing stores increased 4% in the third quarter. On a comparable store basis sales increased 1.4% for the quarter versus 1.1% in the same period last year.

The sales mix for the period was 21.7% household goods, 16.4% food and tobacco, 8.2% health and beauty aids, 9.9% paper and chemical, 7.7% apparel, 33.7% pharmacy and 2.4% franchise. This compares with the following mix in the same quarter last year: 22.4% household goods, 14.8% food and tobacco, 8.2% health and beauty aids, 9.2% paper and chemical, 9.2% apparel, 33.9% pharmacy and 2.3% franchise.

For the quarter comparable store customer traffic increased approximately 1.9% over last year while the average customer ticket decreased 0.5% to $18.58.

For the first nine months of 2008 total sales increased to $1.329 billion compared to $1.287 billion in the year earlier period reflecting a 3% increase in total sales and a 2.9% increase in comparable store sales. Again, these sales results include the closing of 74 underperforming stores and 22 underperforming pharmacies in 2008. Excluding these closed stores, total sales from ongoing stores increased 6% in the year-to-date period.

The sales mix for the year-to-date period was 23.9% household goods, 15.7% food and tobacco, 8.1% health and beauty aids, 9.4% paper and chemical, 8.6% apparel, 32.0% pharmacy and 2.3% franchise. This compares to the following mix for the same period last year: 23.1% household goods, 14.4% food and tobacco, 8.2% health and beauty aids, 9.1% paper and chemical, 9.9% apparel, 33.2% pharmacy and 2.1% franchise.

On a year-to-date basis comparable store customer traffic increased 2.4% while the average customer ticket increased approximately 0.5% to $18.80.

For the third quarter Fred’s net income was $6.1 million or $0.15 per diluted share compared with net income of $4.6 million or $0.12 per diluted share in the year earlier period representing an increase of 32% in net income and 25% in earnings per share. For the first three quarters of 2008 net income was $14.4 million or $0.36 per diluted share versus net income of $15.1 million or $0.38 per diluted share in the first three quarters of 2007 representing a decrease of 5%.

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