Fred's, Inc. (FRED)

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Fred’s Inc. (FRED)

F2Q08 Earnings Call

August 28, 2008 10:00 am ET


Pat Watson - Corporate Communications.

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

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

Bruce A. Efird - President

Rick A. Chambers - Executive Vice President - Pharmacy Operations

Dennis (Keith) Curtis - Executive Vice President, General Merchandise Manager


Patrick Mckeever - Mkm Partners Llc

Mark Miller - William Blair & Company, L.L.C

Gary Giblen - Goldsmith & Harris

John Lawrence - Morgan, Keegan & Company, Inc.

Jillian Caruthers - Johnson Rice & Company

Paul Trussell - J.P. Morgan

David Magee - Suntrust Robinson Humphrey

Joan Storms - Wedbush Morgan Securities Inc.

William Keller - Ftn Midwest Securities Corp.



Welcome to the Fred’s Inc Conference Call. (Operator Instructions). At this time for opening remarks I would like to turn the call over to Pat Watson.

Pat Watson

Thank you for joining Fred’s to review the company’s financial and operating results for the second quarter and first half of fiscal year 2008, periods that ended on August 2, 2008.

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. Because of the time sensitive nature of this information, it is Fred’s policy to limit the archive replay of this conference call web cast 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

Good morning to all of you and thanks for joining us this morning for our discussion of second quarter results for second quarter 2008.

With me this morning and available for questions are Michael J. Hayes, Chief Executive Officer; Bruce Efird, President; Rick Chambers, Executive Vice President of Pharmacy Operations; and Keith Curtis, Executive Vice President and General Merchandise Manager.

As the company reported in its press release this morning, total sales for the second quarter rose 5% to $447.1 million compared with $424.6 million last year. On a comparable store basis sales increased 4.9% for the quarter versus 0.8% in the same period last year. The sales results reflect the company’s previously announced program to close 75 under performing stores and 22 under performing pharmacies in 2008. Excluding these store closures total sales from ongoing stores increased 7% in the second quarter.

The sales mix for the second quarter was 25.5% household goods, 15.3% food and tobacco, 7.9% health and beauty aid, 9.3% paper and chemical, 9.1% apparel and linen, 30.7% pharmacy and 2.2% franchise. This compares with the following mix in the same quarter last year: 23.9% household goods, 14.1% food and tobacco, 8.2% health and beauty aids, 9.2% paper and chemical, 10% apparel and linens, 32.6% pharmacy, and 2.1% franchise.

For the quarter comparable store customer traffic increased 3.4% over last year, while the average customer ticket increased 1.5% to $18.89.

For the first six months of 2008 total sales reached $911.4 million compared with $866.9 million in the year earlier period reflecting a 5% increase in total sales and a 3.5% increase in comparable store sales versus an increase of 1.3% in the prior year period.

The sales mix for the year to date period was 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. This compares with the following mix in the same period last year: 23.4% household goods, 14.2% food an tobacco, 8.2% health and beauty aids, 9% paper and chemical, 10.2% apparel and soft line, 32.9% pharmacy and 2.1% franchise.

On a year-to-date basis comparable store customer traffic increased 2.3% over last year, while the average customer ticket increased approximately 1.2% to $18.88.

For the second quarter of 2008 Fred’s had net income of $1.0 million or $0.03 per diluted share compared with net income of $3.1 million or $0.08 per diluted share in the second quarter of 2007. Included in these second quarter results are costs associated with the closing of 50 stores and one pharmacy during the quarter as part of the company’s previously announced strategic plan, which included the closing of 75 under performing stores, and 22 under performing pharmacies in 2008.

The net cost associated with these stores and pharmacy closings in the second quarter totaled $4.7 million on a pre-tax basis and also included non-cash expenses totaling $6.7 million on a pre-tax basis for the remaining lease related liability. Excluding these net costs associated with the store restructuring program, net income was $4.2 million or $0.10 per diluted share, which is an increase of 25% over the second quarter earnings per diluted share of $0.08 last year.

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