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Fred's' Q3 Earnings Match Estimates, Revenues Strong

Fred's, Inc. 's FRED shares shot up almost 5% in response to the better-than-expected revenues for the third quarter. Further, the company's comparable store sales increased year over year as well as sequentially, which boosted investors' confidence.

Fred's third-quarter earnings of 10 cents were in line with the Zacks Consensus Estimate. The results, however, compared favourably with a loss of 14 cents incurred a year ago, mainly on the back of higher revenues.

Fred's Inc. (FRED) - Earnings Surprise | FindTheCompany

Revenues Strong; Margins Sluggish

Third-quarter sales increased 14% year over year to $541 million from $476.2 million and surpassed the Zacks Consensus Estimate of $534 million by 1.3%.

Comparable store sales increased 2.7%, better than the 0.9% rise in the prior quarter and a 0.3% uptick a year ago driven by higher customer transactions at the company stores, offsetting decrease in traffic. Excluding sales of $16.2 million from the stores closed in late 2014, revenues increased 18%. The company's robust sales figures prove that management's sales and profit-driving initiatives along with the EntrustRx acquisition in April, this year, bore fruit.

In the third quarter, specialty pharmacy sales continued to grow and accounted for 12% of the total sales growth. Halloween sales were also strong.

Adjusted gross margin declined 70 basis points (bps) to 26.4% of sales, reflecting increase in the company's profitable, but lower-margin specialty pharmacy sales, despite a sales-mix shift and continued headwinds in the pharmacy department.

Selling, general and administrative (SG&A) expenses decreased 390 bps to 29.2% of sales due to lower occupancy costs and lower expense related to the growth of specialty pharmacy.

The company reported an operating income of $5.8 million as against a loss of $9.8 million suffered in the prior-year period.

During the third quarter, the company opened three specialty pharmacy locations. At the end of the third quarter, there were 579 company-owned full-sized stores, 60 company-owned Express pharmacy locations and 19 franchise stores, for a total of 658 discount general merchandise stores, which include 374 retail pharmacy departments.

Fourth-Quarter Outlook

For the fourth quarter, Fred's expects total sales to increase in the range of 13% to 15% on a year-over-year basis. The company expects strong comps performance in general merchandize during the holiday season and continued growth in retail and specialty pharmacy sales.

Comparable store sales are expected to be up 1% to 3% compared with flat comps in the comparable quarter last year. Earnings per share are forecasted in the range of 13 cents to 17 cents as against a loss of 22 cents incurred a year ago.

Fred's currently carries a Zacks Rank #4 (Sell). The company seems to be turning around after sluggish comps and intense competition in the discount retailing sector affected its results over the past few quarters. Sales and profitability initiatives are yielding results and third-quarter comps have improved. However, we are concerned about the declining margins.

Stocks to Consider

A better-ranked stock in the same sector is Ross Stores Inc. ROST carrying a Zacks Rank #2 (Buy). In the broader retail sector both The Kroger Co. KR and J Sainsbury plc JSAIY , carrying the same Zacks Rank, are worth a look.

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ROSS STORES (ROST): Free Stock Analysis Report

FREDS INC (FRED): Free Stock Analysis Report

SAINSBURY(J)ADR (JSAIY): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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