Fred's, Inc. (FRED)

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Fred's (FRED)

Q1 2013 Earnings Call

May 30, 2013 10:00 am ET


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

Rick A. Chambers - Executive Vice President of Pharmacy Operation


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

John R. Lawrence - Stephens Inc., Research Division

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

Michael Richardson - Sidoti & Company, LLC

Patrick McKeever - MKM Partners LLC, Research Division



Good day, and welcome to the Fred's first 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 first fiscal quarter that ended on May 4, 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 [ph] cause or contribute to such differences have been described in the news release issued earlier today in 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 understanding that are believed accurate as of today's date, May 30, 2013. 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 expressed 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 this morning for our discussion of first quarter fiscal 2013 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, Fred's total sales for the first quarter of fiscal 2013 increased 0.2% to $501.5 million from $500.5 million in the same period last year. On a comparable store basis, sales decreased 1.3% compared with a decrease of 0.4% last year. The quarterly sales mix comparison to last year was as follows: Household goods were 22.7% in the first quarter, a decrease from 23.4% last year; apparel and linens were 6.5% this quarter, decreased from 6.7%; health and beauty were 7.4%, no change from last year; paper and chemical were 8.4%, decreased from 8.6%; food and tobacco were 17.6%, increased from 16.3%; pharmaceuticals were 35.7%, decreased from 35.8%; and franchise were 1.7%, decreased from 1.8%.

For the quarter, comparable store customer traffic decreased 1.3% from last year, while the average customer ticket remained flat at $21.22. Sales per square foot for the trailing 12 months improved to $203 compared with $201 per foot during the prior 12-month period. Fred's net income in the first quarter was $11.4 million or $0.31 per diluted share compared with $10.5 million or $0.28 per share in the first quarter of 2012. Earnings per share increased 11% over the same quarter last year. EBIT or earnings before interest and taxes totaled $17.8 million compared with $17.1 million in the prior year quarter. Operating margin improved to 3.5% of sales compared with 3.4% last year.

EBITDA during the quarter totaled $28.1 million or 5.6% of sales compared with $26.5 million or 5.3% of sales last year. Gross profit for the first quarter of 2013 increased 2% to $151 million compared with $147.8 million last year. Gross margin for the first quarter increased 60 basis points to 30.1% from 29.5% last year. The improvement in gross margin primarily results from higher pharmacy department margins on generic prescriptions, as well as shrink improvement in the quarter, which more than offset unfavorable general merchandise markdowns and unfavorable LIFO charges on pharmacy inventory.

Selling, general and administrative expenses were $133.2 million compared with $130.7 million last year. Expenses as a percent of sales were 26.6% compared with 26.1% in the same period last year. The deleverage of 50 basis points is attributed to investments in costs associated with new pharmacies, expenses incurred in the quarter for 20 closing stores that began going-out-of-business sale in late April and increased occupancy costs from the growth in new stores and pharmacies. Depreciation and amortization expense in the first quarter was $10.3 million or 2.1% of sales as compared to $9.4 million or 1.9% of sales in the same period last year. For the first quarter, interest expense was $135,000 compared to $137,000 last year and in the first quarter the tax rate was 35.3% compared with 38.4% last year. In the prior year, federal tax credits were not yet approved resulting in the higher than normal tax rate.

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