FRED
$10.85
Fred's
$.01
.09%
Earnings Details
3rd Quarter October 2016
Thursday, December 08, 2016 4:05:03 PM
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Summary

Fred's Misses

Fred's (FRED) reported a 3rd Quarter October 2016 loss of $0.27 per share on revenue of $516.6 million. The consensus estimate was a loss of $0.17 per share. The Earnings Whisper number was for a loss of $0.18 per share. Revenue fell 4.5% 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
($0.27)
Earnings Whisper
($0.18)
Consensus Estimate
($0.17)
Reported Revenue
$516.6 Mil
Revenue Estimate
Growth
Earnings Growth
Revenue Growth
Power Rating
Grade
Earnings Release

Fred’s Announces Third Quarter 2016 Results, November Sales

Fred’s, Inc. (or "the Company") (FRED) today reported financial results for the third quarter and nine months ended October 29, 2016.

For the third quarter ended October 29, 2016, net loss totaled $38.4 million or $1.05 per share, compared with net income of $1.4 million or $0.04 per share for the third quarter of last year. The Company recorded charges totaling $38.0 million, or $0.78 per share after tax during the quarter, primarily related to inventory write-downs, as well as the closing of 40 stores scheduled to occur in the first half of 2017. These charges include:

$13.0 million on a pretax basis or $0.23 per share after tax for the write down of unproductive inventory;

$7.4 million on a pretax basis or $0.13 per share after tax for fixed asset impairments and inventory write-downs related to the closing of 40 underperforming stores;

$3.1 million on a pretax basis or $0.05 per share after tax for fixed asset impairments related to the upcoming relocation of the corporate headquarters;

$2.2 million on a pretax basis or $0.04 per share after tax for consulting fees incurred in connection with the development and implementation of the Company’s growth strategy;

$1.3 million on a pretax basis or $0.03 per share after tax for other non-recurring items; and

$11.0 million or $0.30 per share after tax for a valuation allowance against the Company’s deferred tax asset resulting from the pretax loss created primarily by the above-mentioned charges in the third quarter.

Net income for the third quarter of 2015 included expenses totaling approximately $2.8 million on a pretax basis or $0.05 per share after tax for estimated claims against the Company related to a previously reported data security breach and $1.6 million on a pretax basis or $0.03 per share after tax for consulting fees and other non-recurring charges.

For the first nine months of 2016, Fred’s net loss totaled $44.1 million or ($1.20) per share compared with a net loss of $3.5 million or ($0.09) per share for the same period last year. In addition to charges incurred in the third quarter, Fred’s net loss for 2016 included expenses related to prior periods of $0.4 million on a pretax basis or $0.01 per share after tax.

Net sales for the third quarter were $516.6 million, down 4.5% from $541.0 million in the same period of last year, while total sales for the first nine months of 2016 were flat at $1.596 billion compared with the prior-year period. Comparable store sales for the third quarter declined 3.8% versus an increase of 2.7% in the third quarter last year, while comparable store sales for the first nine months of 2016 decreased 1.7% versus an increase of 1.5% in the prior-year period.

The Company also reported sales for the four-week fiscal month ended November 26, 2016. Fred’s total sales for the month decreased 3.6% to $159.7 million from $165.7 million in November 2015. Comparable store sales for November declined 2.9% versus an increase of 1.7% in the year-earlier month. The decline in November 2016 comparable store sales reflected continued challenges in both front store and pharmacy sales.

Michael Bloom, Chief Executive Officer, commented, "We continue to address and improve several key areas of our business, including a heightened focus on positioning Fred’s as a leading healthcare-focused company. These ongoing initiatives are designed to strengthen all aspects of our operations as we seek to create a more dynamic platform to grow our business while maximizing returns on invested capital and, in turn, shareholder value. We look forward to providing additional updates in the months and quarters ahead."

Fred’s gross profit for the third quarter of 2016 decreased to $111.2 million from $142.3 million in the prior-year period, primarily explained by inventory impairment charges, pharmacy reimbursement pressures, and the decline in year-over-year sales. Gross margin for the quarter decreased 480 basis points to 21.5% from 26.3% in the same quarter last year. Gross profit for the first nine months of 2016 decreased 7.4% to $380.7 million from $411.3 million in the prior-year period. Gross margin for the first nine months of 2016 deleveraged 190 basis points to 23.9% from 25.8% in the prior-year period. Fred’s recorded LIFO adjustments of $2.1 million in the third quarter of 2016 compared with $0.03 million in the same quarter last year. In the first nine months of 2016, Fred’s recorded LIFO adjustments of $3.2 million compared with $3.6 million last year.

Selling, general and administrative expenses for the quarter, including depreciation and amortization, increased 410 basis points to 30.0% of sales from 25.9% of sales in the prior-year quarter. The deleveraging in expenses for the third quarter was primarily caused by a decrease in sales volume in 2016 combined with fixed asset impairment charges and consulting fees resulting from the Company’s initiatives. Selling, general and administrative expenses for the first nine months of 2016, including depreciation and amortization, increased or deleveraged 110 basis points to 27.2% of sales from 26.1% of sales in the prior-year period, driven primarily by impairment charges recorded in the third quarter of 2016.

For the third quarter of 2016, operating loss, which is equivalent to earnings before interest and taxes, or EBIT, a non-GAAP financial measure, decreased to a loss of $44.1 million or (8.5%) of sales compared with operating income of $2.4 million or 0.4% of sales in the prior-year period. For the first nine months of 2016, operating income decreased to a loss of $52.5 million or (3.3%) of sales compared with a loss of $5.3 million or (0.3%) of sales.

For the third quarter of 2016, EBITDA a non-GAAP financial measure that further excludes depreciation and amortization from EBIT, declined to a loss of $32.1 million or (6.2%) of sales compared with EBITDA of $13.8 million or 2.5% of sales in the year-earlier quarter. EBITDA for the first nine months decreased to a loss of $17.2 million or (1.1%) of sales in 2016 compared with EBITDA of $28.5 million or 1.8% of sales last year.

Fred’s, Inc. and subsidiaries operate 647 discount general merchandise stores and three specialty pharmacy-only locations in 15 states in the southeastern United States. Included in the store count are 18 franchised locations. Also, there are 370 full service pharmacy departments located within Fred’s stores, including four franchised locations. For more information about the Company, visit Fred’s website at www.fredsinc.com.

A public, listen-only simulcast and replay of Fred’s third quarter 2016 conference call may be accessed at the Company’s web site. The simulcast will begin at approximately 4:30 p.m. Eastern Time today; a replay of the call will be available beginning at approximately 7:30 p.m. Eastern Time and will continue until January 8, 2016.

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 ultimate terms of the reworked pharmacy distribution agreement, lease buyouts and the underlying assumptions and projections upon which they are based, as well as risks that intended results may not be achieved or may not occur as quickly as expected; 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. Fred’s 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 Income to Adjusted EBITDA
A Non-GAAP Financial Measure
(In thousands)
13 Weeks
13 Weeks
39 Weeks
39 Weeks
Ended
Ended
Ended
Ended
October 29,
October 31,
October 29,
October 31,
2016
2015
2016
2015
Net income (loss)
$ (38.4 )
$
1.4
$ (44.1 )
$
(3.5 )
Interest expense
0.5
0.4
1.8
1.1
Provision for income taxes (benefit)
(6.2 )
0.6
(10.2 )
(2.9 )
Operating income (loss) / EBIT
(44.1 )
2.4
(52.5 )
(5.3 )
Depreciation and amortization
12.0
11.4
35.3
33.8
EBITDA
$ (32.1 )
$
13.8
$ (17.2 )
$
28.5
------------------------------------ -------------------- -------------------- ==================== ===== ==================== -------------------- -------------------- ==================== ===== -------------------- -------------------- ==================== ===== ==================== -------------------- -------------------- ==================== ====== ====================
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.
FRED’S, INC.
Unaudited Financial Highlights
(In thousands, except per share amounts)
13 Weeks
13 Weeks
Percent
Ended
Ended
Change
October 29,
October 31,
2016
2015
Net sales
$
516,645
$
540,996
(4.5 )%
Operating income (loss)
$
(44,062 )
$
2,409
(1,929.1 )%
Net income (loss)
$
(38,393 )
$
1,436
(2,773.6 )%
Net income (loss) per share, basic and diluted
$
(1.05 )
$
0.04
(2,725.0 )%
Average shares outstanding:
Basic
36,810
37,108
Diluted
36,810
37,111
39 Weeks
39 Weeks
Percent
Ended
Ended
Change
October 29,
October 31,
2016
2015
Net sales
$ 1,595,696
$ 1,596,126
0.0 %
Operating loss
$
(52,542 )
$
(5,294 )
(892.5 )%
Net loss
$
(44,065 )
$
(3,470 )
(1,169.9 )%
Net loss per share, basic and diluted
$
(1.20 )
$
(0.09 )
(1,233.3 )%
Average shares outstanding:
Basic
36,768
36,654
Diluted
36,768
36,654
FRED’S, INC.
Unaudited Fiscal 2016 Third Quarter Results
(In thousands, except per share amounts)
13 Weeks
% of
13 Weeks
% of
Ended
Total
Ended
Total
October 29,
October 31,
2016
2015
Net sales
$
516,645
100.0 %
$
540,996
100.0 %
Cost of goods sold
405,439
78.5 %
398,733
73.7 %
Gross profit
111,206
21.5 %
142,263
26.3 %
Depreciation & amortization
12,002
2.3 %
11,397
2.1 %
Selling, general and administrative expenses
143,266
27.7 %
128,457
23.8 %
Operating income (loss)
(44,062 )
(8.5 )%
2,409
0.4 %
Interest expense, net
560
0.1 %
352
0.0 %
Income (loss) before income taxes
(44,622 )
(8.6 )%
2,057
0.4 %
Provision (benefit) for income taxes
(6,229 )
(1.2 )%
621
0.1 %
Net income (loss)
$
(38,393 )
(7.4 )%
$
1,436
0.3 %
Net income (loss) per share, basic and diluted
$
(1.05 )
$
0.04
Weighted average shares outstanding:
Basic
36,810
37,108
Diluted
36,810
37,111
39 Weeks
% of
39 Weeks
% of
Ended
Total
Ended
Total
October 29,
October 31,
2016
2015
Net sales
$ 1,595,696
100.0 %
$ 1,596,126
100.0 %
Cost of goods sold
1,215,030
76.1 %
1,184,855
74.2 %
Gross profit
380,666
23.9 %
411,271
25.8 %
Depreciation & amortization
35,326
2.2 %
33,787
2.1 %
Selling, general and administrative expenses
397,882
25.0 %
382,778
24.0 %
Operating loss
(52,542 )
(3.3 )%
(5,294 )
(0.3 )%
Interest expense, net
1,685
0.1 %
1,063
0.1 %
Loss before income taxes
(54,227 )
(3.4 )%
(6,357 )
(0.4 )%
Income tax benefit
(10,162 )
(0.6 )%
(2,887 )
(0.2 )%
Net loss
$
(44,065 )
(2.8 )%
$
(3,470 )
(0.2 )%
Net loss per share, basic and diluted
$
(1.20 )
$
(0.09 )
Weighted average shares outstanding:
Basic
36,768
36,654
Diluted
36,768
36,654
FRED’S, INC.
Unaudited Balance Sheet
(In thousands)
October 29,
October 31,
2016
2015
ASSETS:
Cash and cash equivalents
$
5,692
$
6,643
Inventories
366,575
369,915
Receivables
52,740
54,576
Other non-trade receivables
36,959
41,116
Prepaid expenses and other current assets
12,634
12,303
Total current assets
474,600
484,553
Property and equipment, net
133,360
138,937
Goodwill
41,490
44,472
Other intangible assets, net
90,377
96,391
Other non-current assets
1,050
2,903
Total assets
$
740,877
$
767,256
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Accounts payable
$
214,818
$
246,886
Current portion of indebtedness
59
628
Accrued expenses and other
71,071
60,319
Total current liabilities
285,948
307,833
Long-term portion of indebtedness
77,234
14,188
Deferred income taxes
-
7,293
Other non-current liabilities
21,797
28,182
Total liabilities
384,979
357,496
Shareholders’ equity
355,898
409,760
Total liabilities and shareholders’ equity
$
740,877
$
767,256

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SOURCE: Fred’s, Inc.

Fred’s, Inc.
Rick Hans, 901-362-3733, Ext. 2232
Executive Vice President and Chief Financial Officer