FRED

Fred's, Inc. (FRED)

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Fred's (FRED)

Q2 2013 Earnings Call

August 29, 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

Rick A. Chambers - Executive Vice President of Pharmacy Operation

Analysts

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

Dutch Fox - FBR Capital Markets & Co., Research Division

David G. Magee - SunTrust Robinson Humphrey, 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

John R. Lawrence - Stephens Inc., Research Division

Matthew Siler - Deutsche Bank AG, Research Division

Presentation

Operator

Good day, everyone, and welcome to the Fred's Inc. Second Quarter Conference Call. Today's call is being recorded.

For opening remarks and introductions, I'll turn the call to Pat Watson. Pat, please go ahead.

Pat Watson

Thank you, and 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 6 months of the year that ended on August 3, 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, 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 believed accurate as of today's date, August 29, 2013. Because of the time-sensitive nature of these 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 thanks to all of you for joining us this morning for our discussion of second quarter results for fiscal 2013. With me 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 second quarter fiscal of 2013 increased 2% to $482.2 million from $470.8 million for the same period last year. On a comparable store basis, second quarter sales increased 2.2% compared with a decrease of 1% in the same period last year.

The quarterly sales mix comparison was as follows. Household goods were 22.6%, decreased from 23.4% last year. Apparel and linens were 5.7%, decreased from 6.2%. Health and beauty were 7%, decreased from 7.4%. Paper and chemical were 8.8%, decreased from 9%. Food and tobacco were 7.8%, increased from 16.5%. Pharmaceuticals were 36.4%, increased from 35.7%. And franchise were 1.7%, decreased from 1.8%.

For the quarter, comparable store customer traffic increased 1.6% over last year, while the average customer ticket increased 0.6% to $20.39.

For the first 6 months of 2013, total sales increased 1% to $983.7 million from $971.3 million in the year-earlier period. Comparable store sales for the year-to-date period in 2013 increased 0.5% compared with a decrease of 0.5% in the prior year period.

The year-to-date sales mix comparison was as follows. Household goods were 22.6%, decreased from 23.4% last year. Apparel and linens were 6.1%, decreased from 6.5%. Health and beauty were 7.2%, decreased from 7.4%. Paper and chemical were 8.6%, decreased from 8.8%. Food and tobacco were 8.7% -- or 17.7%, increased from 16.4%. Pharmaceuticals were 36.1%, decreased from 35.7% -- or increased from 35.7%. And franchise, 1.7%, decreased from 1.8%.

On a year-to-date basis, comparable store customer traffic increased 0.3% over last year, while the average customer ticket increased 0.2% to $20.81.

Sales per selling square foot for the trailing 12 months was $209 compared with $204 in the same quarter last year.

Now as I move into net income and earnings per share, I will remind you that the second quarter of 2012 included the benefit of approximately $4 million or $0.11 per diluted share of favorable tax credits related to a state income tax settlement as well as adjustments for other tax-related assumptions and estimates. For comparison purposes, net income and earnings per share numbers in my commentary will be presented including this -- including and excluding this favorable tax credit.

Net income for the second quarter of 2013 decreased to $3.3 million from $6.1 million last year. Excluding the favorable tax credit, quarterly net income increased 63% to $3.3 million from $2 million last year. For the second quarter of 2013, Fred's earnings per diluted share decreased to $0.09 per share compared with $0.17 per diluted share in the same quarter last year. Again excluding the tax credit, quarterly earnings per diluted share increased 50% to $0.09 as compared to $0.06 in the same quarter last year.

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