FRED
$5.39
Fred's
Earnings Details
2nd Quarter July 2017
Wednesday, September 6, 2017 7:00:03 AM
Tweet Share Watch
Summary

Fred's Beats

Fred's (FRED) reported a 2nd Quarter July 2017 loss of $0.15 per share on revenue of $507.8 million. The consensus estimate was a loss of $0.18 per share on revenue of $507.4 million. The Earnings Whisper number was for a loss of $0.20 per share. Revenue fell 4.1% compared to the same quarter a year ago.

Fred' Inc, and subsidiaries sells general merchandise through its retail discount stores and full service pharmacies.

Results
Reported Earnings
($0.15)
Earnings Whisper
($0.20)
Consensus Estimate
($0.18)
Reported Revenue
$507.8 Mil
Revenue Estimate
$507.4 Mil
Growth
Earnings Growth
Revenue Growth
Power Rating
Grade
Earnings Release

Fred’s Pharmacy Reports Second Quarter 2017 Results

Strategic turnaround underway; focused on reducing SG&A and driving free cash flow

Fred’s Inc. (FRED) today reported financial results for the second quarter and six months ended July 29, 2017.

For the second quarter ended July 29, 2017, Fred’s recorded a net loss of approximately $29.5 million or $0.78 per share, which included the following charges totaling $30.1 million, or $0.63 per share after tax:

$11.3 million or $0.30 per share after tax for a valuation allowance against the Company’s deferred tax asset resulting from the pretax loss recorded during the second quarter;

$15.2 million or $0.26 per share after tax for bank fees, financing termination fees, prior period deferred expenses recognized in the current quarter for certain contract terminations and amendments, and other professional and legal advisory fees incurred in connection with the proposed acquisition of Rite Aid stores; the development and implementation of the Company’s growth strategy; and other professional and legal advisory fees;

$2.8 million or $0.05 per share after tax for asset impairments and other expenses pertaining to the planned closure of 13 stores and certain pharmacy departments, as part of Fred’s ongoing asset management of its overall chain; and

$0.8 million or $0.02 per share after tax for other non-recurring charges.

Fred’s second quarter loss compares to a net loss of $6.9 million or $0.18 per share for the second quarter of 2016.

Commenting on today’s results, Michael K. Bloom, Chief Executive Officer, said, "Our overall comparable store sales represent the best quarterly performance in the past year. In addition, EPS and EBITDA, excluding non-operating charges, improved over the prior year period. We are starting to gain momentum and are seeing progress across the business."

Mr. Bloom continued, "Our Retail Pharmacy business continues to improve, delivering flat comp scripts year-to-date adjusted for 90 days, and increases in our Generic Dispensing Rate and our overall gross profit dollars per script. In Specialty Pharmacy, we continue to drive sales growth through geographic expansion into new markets and diversification within our existing therapies. Despite ongoing headwinds in Consumables in the Front Store, we experienced a 60 basis point improvement in comparable sales in our General Merchandise division over the same quarter last year."

Mr. Bloom concluded, "While we are encouraged by our progress and performance trends, we recognize there is more work to be done. Our work over the past few quarters, including investing in technology, people and processes, was integral to stabilizing our infrastructure and creating a foundation to build upon. Our turnaround strategy is now expanded to focus on reducing SG&A and driving free cash flow. By lowering our SG&A to be more in line with our peers and embracing our roots of succeeding in small to mid-sized rural markets where we have a track-record of generating free cash flow, we are well-positioned to grow our bottom line and enhance shareholder value."

Second Quarter 2017

Net sales for the second quarter were $507.8 million, down 4.1% from $529.5 million in the same period last year. Comparable store sales for the second quarter declined 0.3% versus a decrease of 2.0% in the second quarter last year. Comparable store sales in the second quarter of 2017 included a negative 0.8% impact as a result of the sale of low productive discontinued inventory versus the second quarter of 2016.

Gross profit for the second quarter of 2017 decreased to $126.0 million from $128.1 million in the prior-year period, primarily explained by a decrease in sales resulting from the closure of 39 underperforming stores. Gross profit margin for the quarter increased 60 basis points to 24.8% from 24.2% in the same quarter last year, reflecting the benefit of key turnaround initiatives intended to drive profitability and cash flow.

Fred’s recorded a LIFO reserve reduction of $0.3 million in the second quarter of 2017 compared with an increase of $0.2 million in the same quarter last year.

Selling, general and administrative ("SG&A") expenses for the quarter, including depreciation and amortization, increased to 30.3% of sales from 26.3% of sales in the prior-year quarter. The increase in expenses was primarily related to the bank fees, financing termination fees, professional and legal advisory fees incurred in connection with the proposed acquisition of Rite Aid stores as well as advertising expense increases.

For the second quarter of 2017, operating loss, which is equivalent to earnings before interest and taxes, or EBIT, a non-GAAP financial measure, increased to a loss of $28.1 million or 5.5% of sales compared with operating loss of $10.9 million in the same quarter last year.

In the second quarter of 2017, EBITDA, a non-GAAP financial measure that further excludes depreciation and amortization from EBIT, declined to a loss of $16.8 million. Second quarter EBITDA included charges totaling $18.6 million, including:

$15.2 million or $0.26 per share after tax for bank fees, financing termination fees, prior period deferred expenses recognized in the current quarter for certain contract terminations and amendments, and other professional and legal advisory fees incurred in connection with the proposed acquisition of Rite Aid stores; the development and implementation of the Company’s growth strategy; and other professional and legal advisory fees;

$2.6 million or $0.04 per share after tax for asset impairments and other expenses pertaining to the planned closure of 13 stores and certain pharmacy departments, as part of Fred’s ongoing asset management of its overall chain; and

$0.8 million or $0.02 per share after tax for other non-recurring charges.

First Six Months Ended July 29, 2017

For the first six months ended July 29, 2017, Fred’s recorded a net loss of approximately $66.0 million or $1.76 per share, which included the following charges totaling $75.0 million, or $1.55 per share after tax:

$25.8 million or $0.69 per share after tax for a valuation allowance against the Company’s deferred tax asset resulting from the pretax loss created primarily by the following charges in the first six months of 2017;

$32.1 million or $0.55 per share after tax for bank fees, financing termination fees, other professional and legal advisory fees incurred in connection with the proposed acquisition of Rite Aid stores and the development and implementation of the Company’s growth strategy;

$16.3 million or $0.29 per share after tax for lease liability impairment, asset impairments and other expenses pertaining to the closure of 39 underperforming stores and the planned closure of 13 stores and certain pharmacy departments, as part of Fred’s ongoing asset management of its overall chain; and

$0.8 million or $0.02 per share after tax for other non-recurring charges.

Fred’s loss for the first six months ended July 29, 2017 compares to a net loss of $5.7 million or $0.15 per share for the first six months of 2016.

Net sales for the first six months of 2017 were $1.04 billion, down 3.6% from $1.08 billion in the same period last year. Comparable store sales for the first six months of 2017 declined 0.8% versus a decrease of 0.6% in the same period a year ago. Comparable store sales for the first six months of 2017 included a negative 1.1% impact as a result of the sale of low productive discontinued inventory versus the same period a year ago.

Gross profit for the first six months decreased to $258.9 million from $269.5 million in the same period a year ago, primarily explained by a decrease in sales resulting from the closure of 39 underperforming stores. Gross profit margin for the first six months decreased 10 basis points to 24.9% from 25.0% in the same period last year, reflecting the growth in low margin specialty pharmacy sales.

Fred’s recorded a LIFO reserve reduction of $1.3 million in the first six months of 2017 compared with an increase of $1.1 million in the same period last year.

Selling, general and administrative expenses for the first six months of 2017, including depreciation and amortization, increased to 30.9% of sales from 25.8% of sales in the same period last year. The increase in expenses was primarily related to the bank fees, financing termination fees, professional and legal advisory fees incurred in connection with the proposed acquisition of Rite Aid stores and expenses associated with lease liability impairment, asset impairments and other expenses pertaining to the closure of underperforming stores.

For the first six months of 2017, operating loss, which is equivalent to earnings before interest and taxes, or EBIT, a non-GAAP financial measure, increased to a loss of $62.3 million or 6.0% of sales compared with operating loss of $8.5 million in the same period last year.

In the first six months of 2017, EBITDA, a non-GAAP financial measure that further excludes depreciation and amortization from EBIT, declined to a loss of $39.4 million. EBITDA for the first six months of 2017 included charges totaling $49.0 million, including:

$32.1 million or $0.55 per share after tax for bank fees, financing termination fees, prior period deferred expenses recognized in the current quarter for certain contract terminations and amendments, and other professional and legal advisory fees incurred in connection with the proposed acquisition of Rite Aid stores; the development and implementation of the Company’s growth strategy; and other professional and legal advisory fees;

$16.1 million or $0.28 per share after tax for asset impairments and other expenses pertaining to the closure of 39 underperforming stores and the planned closure of 13 stores and certain pharmacy departments, as part of Fred’s ongoing asset management of its overall chain; and

$0.8 million or $0.02 per share after tax for other non-recurring charges.

Additionally, in a separate press release, Fred’s announced that it has appointed Heath Freeman as Chairman of the Board of Directors, succeeding Tom Tashjian, who will be retiring from the Board. These changes are effective immediately.

Webcast Information

A public, listen-only simulcast and replay of Fred’s second quarter 2017 conference call may be accessed at the Company’s web site. The simulcast will begin at 8:00 a.m. Eastern Time today; a replay of the call will be available beginning two hours after the conclusion of the live call and will remain available through October 5, 2017.

Non-GAAP Financial Measures

The Company’s management believes that the disclosure of operating income (EBIT) and EBITDA provides useful information to investors because the measures present an alternative and more relevant method for measuring the Company’s results of operations and financial condition, and, when viewed together with the Company’s GAAP results and the accompanying reconciliations, provides a more complete understanding of the factors and trends affecting the Company than the GAAP results alone. Additionally, EBITDA is a common alternative measure of financial performance used by investors, financial analysts, and rating agencies. These groups use EBITDA, along with other measures, to estimate the value of a company and to compare the operating performance of a company to others in its industry. A reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measure appears in the financial tables attached to this news release.

About Fred’s Pharmacy

Tracing its history back to an original store in Coldwater, Mississippi, opened in 1947, today Fred’s Pharmacy is headquartered in Memphis, Tennessee, and operates 600 pharmacy and general merchandise stores, which includes 14 franchised Fred’s Pharmacy locations and an additional three specialty pharmacy-only locations. With a unique store format and strategy that combines the best elements of a healthcare-focused drug store with a value-focused retailer, Fred’s Pharmacy stores offer more than 12,000 frequently purchased items that address the healthcare and everyday needs of its customers and patients. This includes nationally recognized brands, proprietary Fred’s Pharmacy label products, and a full range of value-priced selections. The Company has two distribution centers, one in Memphis, Tennessee, and Dublin, Georgia.

For more information about the Company, visit Fred’s website at www.fredsinc.com.

Forward Looking Statements

Comments in this news release that are not historical facts are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. A reader can identify forward-looking statements because they are not limited to historical facts or they use such words as "outlook," "guidance," "may," "should," "could," "believe," "anticipate," "plan," "expect," "estimate," "forecast," "goal," "intend," "committed," "continue," or "will likely result" and similar expressions that concern the Company’s strategy, plans, intentions or beliefs about future occurrences or results. These risks and uncertainties include, but are not limited to, those associated with the Company’s announced strategic plan, the success of announced acquisition activities and future growth trends in businesses acquired; general economic trends; changes in consumer demand or purchase patterns; delays or interruptions in the flow of merchandise between the Company’s distribution centers and its stores or between the Company’s suppliers and same; a disruption in the Company’s data processing services; cyber-security threats; costs and delays in acquiring or developing new store sites; and the factors listed under "Risk Factors" in the Company’s most recent Annual Report on Form 10-K and any subsequent quarterly filings on Form 10-Q filed with the Securities and Exchange Commission. Forward-looking statements speak only as of the date made. The Company undertakes no obligation to release revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unforeseen events, except as required to be reported under the rules and regulations of the Securities and Exchange Commission.

FRED’S, INC.
Reconciliation of Unaudited Net Loss to EBITDA
A Non-GAAP Financial Measure
(In thousands)
13 Weeks
13 Weeks
26 Weeks
26 Weeks
Ended
Ended
Ended
Ended
July 29,
July 30,
July 29,
July 30,
2017
2016
2017
2016
Net loss
$ (29.5 )
$
(6.9 )
$ (66.0 )
$
(5.7 )
Interest expense
1.4
0.6
2.7
1.1
Income tax provision / (benefit)
-
(4.6 )
1.0
(3.9 )
Operating loss / EBIT
(28.1 )
(10.9 )
(62.3 )
(8.5 )
Depreciation and amortization
11.3
11.8
22.9
23.3
EBITDA
$ (16.8 )
$
0.9
$ (39.4 )
$
14.8
FRED’S, INC.
Unaudited Financial Highlights
(In thousands, except per share amounts)
13 Weeks
13 Weeks
Ended
Ended
July 29,
July 30,
2017
2016
Net sales
$
507,837
$
529,503
Operating loss
(28,103 )
(10,908 )
Net loss
(29,517 )
(6,928 )
Net loss per share, basic and diluted
$
(0.78 )
$
(0.18 )
Average shares outstanding:
Basic
37,461
36,760
Diluted
37,461
36,760
26 Weeks
26 Weeks
Ended
Ended
July 29,
July 30,
2017
2016
Net sales
$ 1,040,157
$ 1,079,051
Operating loss
(62,275 )
(8,480 )
Net loss
(65,978 )
(5,672 )
Net loss per share, basic and diluted
$
(1.76 )
$
(0.15 )
Average shares outstanding:
Basic
37,408
36,747
Diluted
37,408
36,747
FRED’S, INC.
Unaudited Fiscal 2017 Second Quarter Results
(In thousands, except per share amounts)
13 Weeks
% of
13 Weeks
% of
Ended
Total
Ended
Total
July 29,
July 30,
2017
2016
Net sales
$
507,837
100.0 %
$
529,503
100.0 %
Cost of goods sold
381,838
75.2 %
401,365
75.8 %
Gross profit
125,999
24.8 %
128,138
24.2 %
Depreciation & amortization
11,296
2.2 %
11,761
2.2 %
Selling, general and administrative expenses
142,806
28.1 %
127,285
24.1 %
Operating loss
(28,103 )
(5.5 )%
(10,908 )
(2.1 )%
Interest expense, net
1,437
0.3 %
610
0.1 %
Loss before income taxes
(29,540 )
(5.8 )%
(11,518 )
(2.2 )%
Income tax benefit
(23 )
-
(4,590 )
(0.9 )%
Net loss
$
(29,517 )
(5.8 )%
$
(6,928 )
(1.3 )%
Net loss per share,
$
(0.78 )
$
(0.18 )
basic and diluted
Weighted average shares outstanding:
Basic
37,461
36,760
Diluted
37,461
36,760
26 Weeks
% of
26 Weeks
% of
Ended
Total
Ended
Total
July 29,
July 30,
2017
2016
Net sales
$ 1,040,157
100.0 %
$ 1,079,051
100.0 %
Cost of goods sold
781,246
75.1 %
809,591
75.0 %
Gross profit
258,911
24.9 %
269,460
25.0 %
Depreciation & amortization
22,922
2.2 %
23,324
2.2 %
Selling, general and administrative expenses
298,264
28.7 %
254,616
23.6 %
Operating loss
(62,275 )
(6.0 )%
(8,480 )
(0.8 )%
Interest expense, net
2,724
0.2 %
1,125
0.1 %
Loss before income taxes
(64,999 )
(6.2 )%
(9,605 )
(0.9 )%
Income tax provision (benefit)
979
0.1 %
(3,933 )
(0.4 )%
Net loss
$
(65,978 )
(6.3 )%
$
(5,672 )
(0.5 )%
Net loss per share,
$
(1.76 )
$
(0.15 )
basic and diluted
Weighted average shares outstanding:
Basic
37,408
36,747
Diluted
37,408
36,747
FRED’S, INC.
Unaudited Balance Sheet
(In thousands)
July 29,
July 30,
2017
2016
ASSETS:
Cash and cash equivalents
$
5,732
$
6,181
Inventories
321,975
346,354
Receivables
50,560
50,096
Other non-trade receivables
31,686
40,035
Prepaid expenses and other current assets
10,624
10,428
Total current assets
420,577
453,094
Property and equipment, net
124,682
138,649
Goodwill
41,490
41,490
Other intangible assets, net
74,922
95,518
Other non-current assets
1,115
1,630
Total assets
$ 662,786
$
730,381
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Accounts payable
$ 125,738
$
145,390
Current portion of indebtedness
62
58
Accrued expenses and other
95,753
58,839
Total current liabilities
221,553
204,287
Long-term portion of indebtedness
138,660
105,223
Deferred income taxes
2,960
5,381
Other non-current liabilities
28,944
19,694
Total liabilities
392,117
334,585
Shareholders’ equity
270,669
395,796
Total liabilities and shareholders’ equity
$ 662,786
$
730,381

http://cts.businesswire.com/ct/CT?id=bwnews&sty=20170906005641r1&sid=cmtx6&distro=nx&

View source version on businesswire.com: http://www.businesswire.com/news/home/20170906005641/en/

SOURCE: Fred’s Inc.

Fred’s Pharmacy
Jason Jenne, 901-238-2787
Executive Vice President, Chief Financial Officer and Secretary
or
Joele Frank, Wilkinson Brimmer Katcher
Ed Trissel / Dan Moore
212-355-4449