'Every Cloud Has A Silver Lining' - the saying seems to ring true for discount retailer Fred's Inc.FRED at the moment. The company is finally on growth track after a torrid few months. The move came on the back of the expansion agreement Fred's announced under which it plans to more than double its footprint in the Eastern and Western Unites States, consequently attracting investor attention. The news was of great interest to investors and the share price soared almost 82% on Dec 20, 2016. The change brought about by this event aided Fred's shares rebound, as it has been growing by over 100% since the past one month, outperforming the Zacks categorized Retail-Discount & Variety industry by a staggering margin which witnessed a decline of 1.5%, in the same time frame.
The tables turned on Dec 20, 2016 when the company announced that it had entered into an agreement with Rite Aid Corporation RAD and Walgreens Boots Alliance, Inc. WBA to buy 865 stores located in the Eastern and Western Unites States along with certain assets that are required for store operations. The deal is worth $950 million in cash. The takeover of these stores in key market areas, will position Fred's as the third-largest drugstore chain in the U.S. The company operated 647 discount general merchandise stores and three specialty pharmacy-only locations in 15 states in the southeastern United States including 18 franchised locations as of Oct 29, 2016. The newly added stores will more than double Fred's store count and boost urban presence post takeover.
However, we observed that Fred's share price had declined almost 31.9% till Dec 19, 2016, just before the announcment of the deal, and had also underperformed the Zacks categorized Retail-Discount & Variety industry which had witnessed a gain of 5.6%. Fred's had been going through difficult times since the past five months, evident from its lower comps mainly due to weak performance of the front store categories as well as shift of preference towards online shopping. Moreover, the company's margins have been under pressure due to lower average selling price in the specialty pharmacy department
The takeover might aid Fred's to counter its difficulties and hence it is prudent for investors to hold the Zacks Rank #3 (Hold) company for now.
A better-ranked stock in the same sector is Burlington Stores Inc. BURL . Burlington Stores sports a Zacks Rank #1 (Strong Buy) and has an expected earnings growth rate of 19.9%. You can see the complete list of today's Zacks #1 Rank stocks here.
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