Fred’s initiatives pay off in 2016 fiscal Q4

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Fred’s initiatives pay off in 2016 fiscal Q4

By Brian Berk - 04/06/2017

MEMPHIS, TENN. — Fred’s Pharmacy recorded a net loss of approximately $22.5 million or $0.60 per share for its 2016 fiscal fourth quarter ended Jan. 28, compared with a net loss of $3.9 million or $0.11 per share for the fourth quarter of 2015. However, much of the loss was attributed to one-time or non-continuing items on a year-over-basis, including nearly half the total net loss — 10.2 million — on a pretax basis or $0.17 per share after tax for professional and legal advisory fees incurred in connection with the proposed acquisition of 865 Rite Aid stores and the development and implementation of the company’s growth strategy.

“Over the last several months we have started to recognize the positive impact of the initiatives we began implementing in 2016. We are now seeing bottom-line improvement driven by sequential growth in retail pharmacy adjusted script comps, sequential progress in sales trends in our specialty pharmacy business, front store margin expansion and strong holiday seasonal category sales,” said CEO Michael K. Bloom. “We are pleased to report that our comprehensive strategy and plan to improve our performance is on target. Notably, we have rolled out a series of initiatives that will continue to lay the foundation for Fred’s Pharmacy’s success. We are upgrading talent; investing in technology; diversifying our specialty pharmacy portfolio; improving the patient and customer experience; increasing supply chain efficiencies; expanding margins; and optimizing assets to improve performance and cash flow.”

During its 2016 fourth quarter, Fred’s net sales for 2016’s fourth quarter decreased 4.5% to $529.7 million from $554.6 million for the fourth quarter last year. Comparable- store sales for the quarter decreased 3.6% versus a 1.7% increase in comparable store sales in the fourth quarter of last year. Comparable store sales in the fourth quarter of 2016 included a negative 2.6% impact as a result of the sale of low productive discontinued inventory versus the fourth quarter of 2015.

Fred’s gross profit for the fourth quarter of 2016 decreased 2.5% to $129.6 million from $132.9 million in the prior year period. Gross profit margin for the quarter increased 50 basis points to 24.5% from 24.0% in the same quarter last year. The margin includes a $3.1 million benefit on a pretax basis or $0.05 per share after tax resulting from the successful sale of discontinued inventory above estimated marked down cost.’

Fred’s also announced full-year fiscal 2016 results. For its 2016 fiscal year, Fred’s net loss totaled $66.5 million or $1.80 per share compared with a net loss of $7.4 million or $0.20 per share for fiscal year 2015. Gross profit for fiscal year 2016 decreased 6.2% to $510.3 million from $544.2 million the year before. Gross margin for fiscal year 2016 decreased 130 basis points to 24.0% of sales compared with 25.3% in the prior-year period. Most of the decrease was related to inventory write-downs during 2016 associated with store closures and discontinued unproductive inventory.

“While we are pleased with the progress we’ve made in such a short time, we encountered headwinds that contributed to particularly challenging second and third quarters. We began to reap the benefits of our strategic initiatives in the fourth quarter as evidenced by our strong sequential improvement. We expect the positive trends we experienced in the fourth quarter to continue. Looking at the organization as a whole, we expect to see continued sequential bottom-line improvement in 2017 as the initiatives underway take hold. We are keenly focused on positioning the company for long-term growth and enhancing value for our shareholders.”

Fred’s also announced results for its just-completed month of March 2017. Fred’s total sales for the month decreased 2.7% to $208.6 million from $214.3 million in March 2016. Comparable store sales for March decreased 0.5% versus an increase of 1.8% in the year-earlier month. The March 2017 comparable store sales reflected the benefit of tax refunds, which were delayed from February to March, but were offset by a later Easter (April 16 this year versus March 27 last year), shifting holiday sales into April.

Regarding the proposed Walgreens Boots Alliance-Rite Aid proposed merger that would result in Fred’s buying 865 divested stores for $950 million, and a commitment to purchase up to 1,200 Rite Aid stores should it be required as a closing condition by the Federal Trade Commission, Fred’s issued the following statement:

“The proposed acquisition of the stores, which are based in highly attractive markets, is a transformative event that will add substantial scale to the company and transform Fred’s Pharmacy, the largest regional pharmacy player, into an even stronger competitor and the third-largest drugstore chain in the nation. The transaction will accelerate the company’s healthcare growth strategy, generating considerable benefits for our customers, patients, payers, supplier partners, team members and shareholders.”