FRED

Fred's, Inc. (FRED)

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Industry: Consumer Services
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Fred’s Inc. (FRED)

F1Q08 Earnings Call

May 29, 2008 10:00 am ET

Executives

Pat Watson with Corporate Communications.

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

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

Bruce Efird - President

Rick Chambers - Executive Vice President - Pharmacy Operations

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

Analysts

Unidentified Analyst - William Blair & Company, L.L.C

William Keller - Ftn Midwest Securities Corp.

Jillian Caruthers - Johnson Rice & Company

John Lawrence - Morgan, Keegan & Company, Inc.

Patrick Mckeever - Mkm Partners Llc

Charles Grom - J.P. Morgan

David Magee - Suntrust Robinson Humphrey

Andrew Wolf - BB&T Capital Markets

Joan Storms - Wedbush Morgan Securities Inc.

Presentation

Operator

Good day everyone and welcome to the Fred’s First Quarter Conference Call. (Operator Instructions) At this time for opening remarks and introductions I would like to turn the call over to Mr. Pat Watson.

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 quarter of fiscal year 2008, which ended on May 3, 2008.

Before we begin, I would like to remind everyone that management’s comments in this conference call that are not based on historical fact are forward-looking statements. These statements are made in reliance on the Safe Harbor Provision 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 managements 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 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.

Jerry Shore

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

As the company reported in its press release earlier this morning, for the first quarter of fiscal 2008 total sales rose 5% to $464.3 million compared with $442.3 million last year. On a comparable store basis, sales increased 2.1% for the quarter compared with 1.9% in the first quarter last year.

The sales mix for the period was: 24.4% household goods; 15.5% food and tobacco; 8.2% health and beauty aids; 9.2% paper and chemical; 8.7% apparel and linens; 31.8% pharmacy; and 2.2% franchise and this compares with the following mix for the same quarter of last year: 23.1% household goods; 14.2% food and tobacco; 8.2% health and beauty aids; 8.8% paper and chemical; 10.4% apparel and linens; 33.2% pharmacy; and 2.1% franchise.

For the quarter comparable store average customer tickets increased approximately 4/10 of 1% to $18.87 while the customer transactions increased 1.7% for the quarter.

Gross profit for the first quarter of 2008 was $132.5 million compared with $127 million in the same period last year.

Gross margin for the first quarter was 28.5% compared to 28.7% last year. During the quarter pressures from sales mix changes, inflationary pricing, and freight cost increases were partially offset by higher margins in the pharmacy department due to the continuing shift from branded to generic drugs.

SG&A expenses for the first quarter favorably decreased to 26% of sales compared to 26.2% last year. The 20 basis point improvement in expenses as a percent of sales results primarily from controlling labor and other expenses in the stores.

Depreciation and amortization expense in the first quarter was $7.1 million as compared to $7.2 million in the same period last year. For the first quarter of 2008 net interest expense was $173,000 or less than 1% of sales as compared to a net interest income of $96,000 in the first quarter of last year.

Income tax expense increased to 37.3% of pretax income for the first quarter of 2008 compared to 33.9% last year. The increase in the tax rate resulted from the expiration of Jobs Tax Credit in the hurricane-affected areas as well as in the state of Georgia, which were available to the company in the prior year.

For the first quarter operating income increased 5% to $11.7 million or 2.5% of sales, compared to $11.2 million or also 2.5% of sales last year in the first quarter.

Fred’s net income in the first quarter decreased 3% to $7.3 million or $0.18 per diluted share compared to $7.4 million or $0.19 per diluted share in the first quarter of 2007 and as discussed just earlier, the reduction is attributed to the higher income tax rate.

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