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DIR fees, 4 big factors bring down Fred's July sales, expected Q2 earnings


MEMPHIS, Tenn. — Fred’s on Thursday reported sales for the four-week period ending July 30. The company’s total sales were $154 million, a 7% drop from the $165.6 million the company brought in for the same period in 2015. Comparable-store sales also dropped 4.6%, compared to a 0.7% increase in July 2015. 


Total sales for Q2 were down 3.4% to $527.7 million, and comps for the quarter dropped 2%, compared to a 0.9% increase in the same period in 2015. For the first half of the fiscal year, sales rose 2.1% over last year to $1.077 billion, but comps declined 0.6% for the first half of the year. 


Fred’s CEO Jerry Shore said that he was “disappointed with the company’s performance in the month of July,” attributing the sales miss to four big factors. First, government assistance funds were delivered Aug. 1 this year, shifting their spending from fiscal July last year to fiscal August this year, which Shore had a negative impact on comps of 1.6%. Another factor that brought sales down this year was Independence Day, which fell on a Monday, the busiest day of the week for Fred’s pharmacy (last year it was on a Saturday, the slowest day of the week) and had an estimated negative impact on comps of 2.3%. 


The other two factors bringing down sales according to Shore were sales trends in food, beverage, paper and household chemicals that were worse than expected, as well as a slowing of demand for Hepatitis C drugs across the industry, affecting specialty pharmacy sales. These four factors, along with unexpected direct and indirect remuneration fees (DIR fees) assessed during the second quarter mean that the company anticipates reporting a loss of about $0.18 to $0.24 per share. 


“We have initiatives underway that will be implemented during the third and fourth quarters of this year to address recent trends in general merchandise and pharmacy. These include new front store businesses, enhancements to our product mix, and an enhanced pharmacy marketing campaign,” Shore said, adding that the company would be investing heavily in its specialty pharmacy sales force. “Additionally, we are reviewing our pharmacy reimbursement strategy to manage the forward magnitude of DIR fees. We will have more to say about our outlook and expectations for future performance on Aug. 30, when we announce second quarter results and provide updated guidance for the remainder of 2016.”


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