Fred's, Inc. (FRED)

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Fred’s Inc. (FRED)

Q2 2009 Earnings Call

August 27, 2009 10:00 am ET


Pat Watson – Corporate Communications

Jerry A. Shore – Chief Financial Officer

Michael J. Hayes – Chairman

Bruce A. Efird – Chief Executive Officer

Rick A. Chambers – Executive Vice President of Pharmacy Operations

Dennis Keith Curtis – Executive Vice President and General Merchandise Manager

David B. Mueller – Senior Vice President of Sales and Marketing


Mark Miller - William Blair & Company, LLC

Paul Trussell - J.P. Morgan

David Magee - Suntrust Robinson Humphrey

Jillian Caruthers - Johnson Rice & Company

Patrick McKeever - MKM Partners LLC

John Lawrence - Morgan Keegan & Company

Andrew Wolf - BB&T Capital Markets



Good day and welcome to the Fred’s second 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 second fiscal quarter and first half of 2009 ended August 1, 2009.

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, 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 understandings that are believed accurate as of today’s date, August 27, 2009. 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 consent of the company is prohibited.

With that announcement 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 thanks. And thanks to all of you for joining us this morning for our discussion of second quarter results for fiscal 2009. With me this morning and available for questions are Michael Hayes, Chairman, Bruce Efird, Chief Executive Officer, Rick Chambers, EVP of Pharmacy Operations, Keith Curtis, EVP and General Merchandise Manager and Dave Mueller, Senior Vice President of Sales and Marketing.

As the company reported in its press release this morning, Fred’s total sales for the second quarter of fiscal 2009 declined 3% to $434.2 million from $447.1 million for the same period last year. Included in the sales for last year are those 74 stores and 23 pharmacies that were closed during 2008. Excluding those stores closed last year, total sales from ongoing stores were flat in the second quarter 2009 with the year earlier period. And on a comparable store basis second quarter sales declined 1.3% compared with a 4.9% increase in the same period last year. Within the quarter, comparable store sales were a positive 0.2% in the first two months of the quarter but negative 4.6 in July.

The sales mix for the period was 23.6% household goods, 16.7% food and tobacco, 7.5% health and beauty aids, 9.5% paper and chemical, 7.8% apparel and linen, 32.8% pharmacy and 2.1% franchise. This compares with the following mix in the same quarter of last year, 25.5% household goods, 15.3% food and tobacco, 7.9% health and beauty aids, 9.3% paper and chemical, 9.1% apparel and linen, 30.7% pharmacy and 2.2% franchise. And for the quarter, comparable store customer traffic decreased 0.4% from last year while the average customer ticket decreased 0.9% to $18.68.

For the first six months of 2009, total sales declined 2% to $892.6 million from $911.4 million in the year earlier period. Again excluding those stores closed last year, total sales from ongoing stores increased 2% in the first half of 2009 versus the year earlier period. And comparable store sales for the year-to-date period in 2009 increased 0.8% versus a 3.5% increase in the prior year period.

The sales mix for the year-to-date period was 23.5% for household goods, 16.4% food and tobacco, 7.7% health and beauty aids, 9.3% paper and chemical, 7.8% apparel, 33.1% pharmacy and 2.2% franchise. And this compares with the following mix in the same period last year, 24.9% household goods, 15.4% food and tobacco, 8.1% health and beauty aids, 9.2% paper and chemical, 8.9% apparel, 31.3% pharmacy and 2.2% franchise. And on the year-to-date basis, comparable store customer traffic increased 0.6% over last year while the average customer ticket increased 0.2% to $19.05.

For the second quarter of 2009, Fred’s net income increased to $4.2 million or $0.11 per diluted share from $1.0 million or $0.03 per diluted share in the same quarter of last year. Included in the results of the second quarter are expenses of $864,000 or $0.02 per diluted share relating to tax audits of the years 2004 through 2007. These audits were completed and settled during the second quarter. Excluding the effects of these tax audits and the year earlier net cost of $4.7 million on a pretax basis or $3.1 million on an after tax basis incurred with the company’s store closing program, net income increased 23% to $5.1 million or $0.13 per diluted share from $4.2 million or $0.10 per diluted share in the second quarter last year. The adjusted earnings per diluted share increased 30% quarter over quarter.

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