FRED

Fred's, Inc. (FRED)

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Exchange: NASDAQ
Industry: Consumer Services
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Fred's (FRED)

Q4 2012 Earnings Call

March 28, 2013 10:00 am ET

Executives

Pat Watson

Jerry A. Shore - Chief Administative Officer, Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Bruce A. Efird - Chief Executive Officer, President and Director

Alan C. Crockett - Chief Merchandising Officer and Executive Vice President of GMM

Rick A. Chambers - Executive Vice President of Pharmacy Operation

Analysts

Andrew P. Wolf - BB&T Capital Markets, Research Division

Jill R. Caruthers - Johnson Rice & Company, L.L.C., Research Division

Paul Trussell - Deutsche Bank AG, Research Division

Lynda Guthmann

Presentation

Operator

Good day, and welcome to the Fred's Fourth Quarter Conference Call. Today's call is being recorded. At this time, for opening remarks, I would like to turn the call over to Mr. Pat Watson. Please go ahead, sir.

Pat Watson

Good morning, everyone. This is Pat Watson with Corporate Communications. Thank you for joining Fred's to review the company's financial and operating results for the fourth fiscal quarter and year ended February 2, 2013. 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 today and the company's annual report on Form 10-K 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 believed accurate as of today's date, March 28, 2013. Because of the time-sensitive nature of this information, it is Fred's policy to limit the archive 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 Shore, the company's Chief Financial Officer. Good morning, Jerry.

Jerry A. Shore

Good morning, Pat, and good morning to everyone on the call. Thank you for joining us for our discussion of the fourth quarter and fiscal 2012 results. With me this morning and available for questions are Michael Hayes, Chairman; Bruce Efird, Chief Executive Officer; Rick Chambers, EVP of Pharmacy Operations; and Alan Crockett, EVP and Chief Merchandising Officer. As the company reported in its press release earlier this morning, for the fourth quarter of 2012, total sales increased 7% to $533.4 million compared with $497.6 million in the same quarter last year, and comparable store sales increased 4.8%. Total sales for 2012 increased 4% to a record $1.955 billion versus $1.879 billion for the 52-week fiscal 2011. Comparable store sales increased 1.1% for the year.

I will remind you that the fourth quarter consisted of 14 weeks compared to 13 weeks last year. The 2012 year had 53 weeks compared with 52 weeks last year. Adjusting these results for 13- and 52-week periods, we eliminated the week ended February 2, 2013. On the adjusted basis, the fourth quarter comparable store sales decreased 2.8% compared with an increase of 0.1% in the same quarter of last year. On an adjusted basis, comparable store sales for the year decreased 1.4% versus an increase of 0.5% for fiscal 2011.

The sales mix comparison for the fourth quarter was as follows: household goods were 23.2% this fourth quarter, which decreased from 24.7% last year; apparel and linens, 6.3% this quarter, decreased from 7.2%; health and beauty, 7.5%, increased from 7.1%; paper and chemical, 8.5%, increased from 8.2%; food and tobacco, 16.7%, increased from 16.2%; pharmaceuticals, 36.2%, increased from 34.6%; and franchise, 1.6%, decreased from 2.0%. For the quarter, comparable store customer traffic decreased 2.8% from last year, while the average customer transaction was approximately flat at $20.84.

The sales mix comparison for the full year was as follows: household goods were 22.6% for the year, which decreased from 23.3% last year; apparel and linens, 6.3% this year, decreased from 6.9%; health and beauty, 7.5%, increased from 7.4%; paper and chemical, 8.8%, increased from 8.7%; food and tobacco, 16.7%, decreased from 16.8%; pharmaceuticals, 36.3%, increased from 34.9%; and franchise, 1.8%, decreased from 2.0%. For the full year, comparable store customer traffic decreased 2%, while the average customer ticket increased 0.6% to $20.40.

Sales per average selling square foot in 2012 increased to $204 per square foot from $199 last year. For the fourth quarter of 2012, Fred's net income was $6.6 million compared with net income of $9.8 million in the year-earlier period. Earnings per diluted share were $0.18, down from $0.26 per share in the same quarter last year. For 2012, Fred's net income was $29.6 million compared with net income of $33.4 million last year, with earnings per diluted share of $0.81 from $0.87 last year. The earnings impact as a result of the 14th and 53rd week was $1 million or $0.03 per share. Also, the settlement with the state of Tennessee of an outstanding tax matter in the second quarter 2012, as well as other tax-related assumptions and estimates, had a favorable impact on earnings per diluted share of $0.12 during the year. Excluding this favorable tax credit, earnings per share would have been $0.18 for the fourth quarter and $0.69 for the year. EBIT, or earnings before interest and taxes, for the fourth quarter of 2012 totaled $8.5 million or 1.6% of sales, down from $14.2 million or 2.9% of sales in the same quarter last year. EBIT for the full year of 2012 was $39.1 million or 2% of sales from $51.2 million or 2.7% of sales in the prior year.

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