Following disappointing quarter, new Fred's CEO focuses on future

8/30/2016

MEMPHIS, Tenn. - Fred's Super Dollar on Tuesday reported a decline in total sales of 3% for the second quarter ended July 30, though the company posted total sales increases of 2.3% for the first half of 2016 as compared to the year-ago period.


"Looking at the quarter, we are disappointed with the company's performance, as comparable store sales were down in front store, retail pharmacy and specialty pharmacy," stated Michael Bloom, who was named CEO of Fred's earlier this morning. "The deleveraging impact of lower-than-plan sales, combined with a decline in gross margin rate for the pharmacy division – driven by generic deflation, reimbursement pressures and unexpected direct and indirect remuneration fees – accounted for the quarter's net loss and [today's] revision in guidance for 2016," he said. "While we did see progress on initiatives in the front store delivering improved gross margins and operating profit, the headwinds in pharmacy and competitive pressures in the front store were deeper than anticipated."


Bloom noted that Fred's has new initiatives that will launched in the back half of 2016 that will help set the stage to combat these headwinds. "We remain confident that the ongoing plan will result in improved company performance over the long term," he said.


Comparable store sales for the second quarter declined 2% versus an increase of 0.9% in the second quarter last year, while comparable store sales for the first half of 2016 decreased 0.6% versus an increase of 0.7% in the prior-year period.


The sales decline contribued to a net loss of $6.9 million, or ($0.18) per share, for the second quarter ended July 30. For the first six months of 2016, Fred's net loss totaled $5.7 million or ($0.15) per share.


Separately, Fred's also reported sales for the four-week fiscal month ended August 27, 2016. Fred's total sales for the month declined 3.5% to $159.6 million from $165.3 million in August 2015. Comparable store sales for August declined 3% versus an increase of 1.2% in the year-earlier month.


"Retail sales in the front store and pharmacy departments were pressured less in August than in July, but still experienced unfavorable sales trends in categories such as food, beverage, paper and household chemicals," Bloom added. "Specialty pharmacy comparable sales continued to be affected by the industry-wide slowdown in demand for specialty Hepatitis C drugs and the lag of onboarding new sales people."


Over the course of the next year, Fred's will be repositioning its business in pursuit of growth, Bloom noted. "We are at an inflection point as a company," he said. "Our key areas of focus will be to optimize our store fleet and supply chain, focus on markets where we can win, make additional investments in marketing and technology, all to enable growth with discipline. We will take this next 6-12 months to catch up on needed competitive and structural strategies. We can be the best in the rural markets we serve; we know who our customers are and what they need; and we can deliver access to pharmacy and healthcare services as well as a broad, value-based assortment of products. These new areas of focus will help us achieve our goal of generating returns in excess of our cost of capital."


Fred's gross profit for the second quarter of 2016 decreased 2.9% to $128.1 million from $131.9 million in the prior-year period. Gross margin for the quarter remained flat at 24.2% compared to the same quarter last year. Gross profit for the first half of 2016 increased 0.2% to $269.5 million from $269.0 million in the prior-year period. Gross margin for the first half of 2016 deleveraged 50 basis points to 25.0% from 25.5% in the prior-year period.


Based on recent sales trends and Fred's near-term outlook, the company expect changes in both total sales and comparable store sales to range from negative 1% to a positive 1% for the second half of the year.

 


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