Fred's delivers on remodel initiative, but sales lag

MEMPHIS — Regional discounter Fred's made good on its promise of a year ago to further expand a new merchandising initiative, but an intensely competitive market made fourth-quarter sales tough to come by.

Fred's on Wednesday said sales for its fourth-quarter ended Jan. 28 increased a scant 2% to $498 million from $486 million, and same-store sales increased 0.1%. Profit grew 14% to $9.8 million, compared with $8.6 million the prior year. Earnings per share increased 23% to 27 cents, compared with 22 cents, and benefitted from a favorable adjustment to the income tax rate which added two cents a share. Fred's CEO Bruce Efird characterized the results as solid in light of the ongoing challenges in the economy and an extremely competitive climate.

"During 2011, we focused on our key strategic goals (of) building customer traffic, increasing market share, and accelerating growth," Efird said. "Both customer traffic and market share increased for the year, and new store openings were up 70% for 2011 with the opening of 26 new stores and 24 pharmacies."

Many of those came during the fourth quarter when Fred's opened 16 new stores and seven express pharmacy stores as part of its 2011 operating plan. One franchise store closed in the quarter. The company also upgraded 205 existing stores with elements of a merchandising scheme known as Core 5, bringing the two-year total of upgrades to 413 of the company's 700 stores.

Core 5 is program begun at the start of 2010 which requires moderate changes to store layouts and space allocations to highlight such key trip-generating categories as home, celebration, pet, pharmacy and paper products and household chemicals. Fred's believes it has a competitive advantage in these areas versus smaller box competitors and by improving customer traffic it can increase sales in higher margin, discretionary categories.

"Recognizing that the current economic backdrop may not improve significantly in our core markets, our team has developed enhanced merchandising plans and expanded product areas to reinforce the Super Dollar and Core 5 programs for 2012," Efird said.

"We are planning to continue our accelerated pharmacy expansion program and leverage the benefits of our pharmacy customers into all areas of our store."

As a result, Efird said the company in the coming year expects to improve its operating margin and produce double-digit earnings per share growth, even though first quarter same-store sales are expected to be flat with the prior year, while total sales are projected to grow between 3% and 5%. Those gains are forecast to produce earnings per share growth in the range of 26 cents to 28 cents compared with 24 cents the prior year. For the full year, total earnings per diluted share are expected to be in the range of 96 cents to $1.04, representing an increase of 10% to 20% over last year.

Fred's total sales for fiscal 2011 increased 2% to $1.88 billion from $1.84 billion for the same period last year. Comparable-store sales for fiscal 2011 increased 0.5% on top of an increase of 2.2% for the same period last year. Gross margins were flat at 27.7% while expenses as a percentage of sales declined 10 basis points to 24.8%.