Fred’s exceeds analysts’ expectations

5/29/2009

MEMPHIS, Tenn. Discounter Fred’s continued to exceed expectations in light of — and perhaps because of — the recession economy when it announced its first-quarter results Thursday. That’s on account of the increased number of consumers walking through Fred’s 666 doors (traffic grew 1.6%) and the larger market baskets customers ringing at the cash register (on average $19.42, up 1.2%).

But it’s also because of Fred’s growing presence in the pharmacy business.

Fred’s is seeing a little more traction across its 284 pharmacy operations. The chain generated $152.6 million in pharmacy sales for the first quarter ended May 2, up 3.3% compared with last year’s first-quarter pharmacy sales. Pharmacy is also increasingly becoming a bigger piece of Fred’s mix — pharmacy sales accounted for 33.3% of sales for the most recent quarter, compared with a 31.8% sales share in the chain’s first quarter results last year.

“Pharmacy scripts improved with the expansion of our Prescription Plus program, which was rolled out to all of our pharmacies in the first quarter,” Fred’s CEO Bruce Efird told analysts Thursday. The chain plans to begin advertising the Prescription Plus program more extensively in September.

“Our pharmacies represent a clear differentiating competitive advantage versus our small-box discount competitors,” Efird said, despite the market challenges involved in fielding a profitable pharmacy, such as the impact on top-line sales from an increase in generic utilization. “Given this [competitive advantage], we are accelerating pharmacy growth to leverage this … as well as leverage the benefits our pharmacies bring to the front-end of our stores,” he said.

“When we have a pharmacy with a store, the general merchandise departments still run in the 11% to 12 % higher range,” added Jerry Shore, Fred’s EVP, CAO and CFO. “It is still our plan to open pharmacies when we do open our [new] stores and be more aggressive with acquisitions.”

And it’s not just small-box discounters against which Fred’s is now competing; it’s also bigger box pharmacy.

“When we get into those rural markets [with our pharmacy operations], based on our footprint and presence in those markets, we tend to compete very strongly,” Efird said, noting that in those markets Fred’s is able to hold its own against its three biggest, more traditional pharmacy competitors — Walmart, Walgreens and CVS/pharmacy.

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