Fred’s posts net loss in Q2, names new chairman

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Fred’s posts net loss in Q2, names new chairman

By David Salazar - 09/06/2017

MEMPHIS, Tenn. — Fred’s Pharmacy on Wednesday posted its financial results for its second quarter and the six-month period, both of which ended July 29 and saw the company posting net losses, as well as a dip in net sales. The company also appointed a new chairman, naming Heath Freeman to the position as Tom Tashjian retires, effective immediately.

For the second quarter, Fred’s saw a net loss of $29.5 million, which included a total of $30.1 million in charges after tax. About $11.3 million came from a valuation allowance against the company’s deferred tax asset resulting from its pretax loss in the second quarter; $2.8 million came from asset impairments and other expenses from the planned closure of 13 stores and pharmacy departments; $800,000 from other non-recurring charges; and $15.2 million from financing termination fees, prior period deferred expenses and other fees that the company incurred from its proposed acquisition of Rite Aid stores, as well as its growth strategy implementation and other legal and professional advisory fees.

The company’s net loss was larger than the $6.9 million loss it posted in Q2 2016, and the company saw a 4.1% drop in net sales, which $507.8 million. Its gross profit dropped from $128.1 million in 2016’s second quarter to $126 million this year. Comparable-store sales saw a much smaller decline than the year-ago period, only dipping 0.3%, compared with 2% last year. This year’s Q2 comps saw the negative 0.8% impact resulting from the sale of low productive discontinued inventory, the company said. Its operating loss of $28.1 million was equal to about 5.5% of its sales, compared with an operating loss of $10 million in the comparable period last year. The company’s earnings before interests, taxes, depreciation and amortization swung to a loss of $16.8 million.

“Our overall comparable store sales represent the best quarterly performance in the past year,” CEO Mike Bloom said. “In addition, EPS and EBITDA, excluding non-operating charges, improved over the prior year period. We are starting to gain momentum and are seeing progress across the business.”

Bloom said that the company’s pharmacy segment has been improving, showing flat comp scripts in the year-to-day period, and increases in its generic dispensing rate and overall gross profit dollars per script. Its specialty division also is seeing sales growth as part of its expansion into new markets and the continued diversification of offered therapies. He said that the company’s general merchandise has seen a 60-basis-point improvement in comps compared with Q2 2016, in spite of continued difficulties in the consumables category.

For the six-month period, Fred’s saw a net loss of $66 million, compared with a net loss of $5.7 million in the first six months of 2016. Net sales in the first half of the year declined 3.6% to $1.04 billion, with comps declining 0.8% compared with a 0.6% decrease in the year-ago period. The comps for the six-month period included the negative 1.1% impact resulting from the sale of low productive discontinued inventory.

The company’s gross profit for the first six months of 2017 declined to $258.9 million, compared with the $269.5 million it brought in during the same period last year, which it said was the result of decreased sales from the closing of 39 underperforming stores. The company posted an operating loss of 6% of sales, totaling $62.3 million, compared with an $8.5 million operating loss in the first half of 2016.

As it continues with its efforts toward profitability, Fred’s also named a new chairman of its board of directors, onboarding founding member and president of Fred’s investor Alden Global Capital Heath Freeman to the position. He also is vice chairman of MediaNews Group, the nation’s second-largest newspaper business by circulation.

“Heath brings significant retail, turnaround, and financial expertise and we determined that as chairman, Heath will bring invaluable insights and experience as the Company continues to execute its turnaround strategy,” Bloom said. “Additionally, as president of Alden, the company’s largest investor, Heath brings a strong shareholder perspective to the role of Chairman. I am confident that under his leadership, coupled with the oversight of our high-quality and experienced Board, we will be well positioned to drive Fred’s long-term success.”

Freeman sits on the boar of private equities fitness business SLT Group and co-founded third-wave coffee company City of Saints Coffee Roasters in 2013. Before Alden, which he joined in 2007, Freeman was an investment analyst with Smith Management. He began his career as an analyst at boutique investment bank Peter J Solomon Co.

“I am pleased to assume the role of Chairman of the Fred’s Board,” Freeman said. “Fred’s has a strong platform and I look forward to continuing to work together with our Board members to support the management team as it executes the Company’s strategy to drive free cash flow and generate value for all shareholders.”

Freeman replaces retiring chairman Tom Tashjian. 

“On behalf of the board of directors, I want to thank Tom for his dedicated service and many contributions to Fred’s over the past 16 years,” Bloom said. ”Our board and management team have significantly benefited from Tom’s exemplary leadership and we wish him the best in his well-deserved retirement.”


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