Fred's looks to grow through Diplomat Specialty partnership and Drug and Dollar concept pharmacy

MEMPHIS, Tenn. — Any trickle-down of an improving economy hasn't trickled down to Fred's consumer base, Bruce Efird, Fred's CEO, told analysts Tuesday morning in discussing the discounter's third-quarter results. "During the third quarter we continue to see generally weak economic conditions throughout the Southeast which are clearly weighing heavily on our customers and influencing how they shop for their basic needs," he said. "It's more evident that things are not getting better for our core customers." 

Fred's is preparing for a highly promotional fourth quarter as retailers fight it out for the customer's holiday dollar. "We're seeing our largest competitors ramping up advertising at record rates to capture traffic and anticipate fourth quarter holiday promotional activity to intensify to levels even greater than last year," Efird said, especially as more retailers attempt to turn back the clocks on Black Friday with deals on Thanksgiving Day. 

But pharmacy continues to be seen as a growth catalyst for the company — 36.4% of Fred's sales are comprised of prescription medicines, the Memphis-based retailer stated. In the past quarter Fred's opened two 8,000 square-foot GetWell Drug and Dollar concept stores with four more pilot openings planned by year's end. One of the stores is located in Middleton, Tenn., 80 miles east of Memphis. 

"The thesis behind it is to drive a growth vehicle in the future for smaller communities where we have either an Xpress Pharmacy or an opportunity to buy a pharmacy, and the community's not large enough to support the 16,000 square-foot Fred's store," Efird said. "We're nine weeks into this. What we've seen thus far, we're pleased with the overall performance of the total combination of general merchandise and pharmacy."

The smaller footprint will serve as Fred's growth engine going forward. 

Fred's has also realized its share of former Walgreens patients out of that retailer's now-ended dispute with Express Scripts. "We've seen a nice lift in our script comps … and to date have not really seen any loss at all in that [Express Scripts] patient demographic," commented Rick Chambers, Fred's EVP pharmacy operations. 

"Approximately 38% of our pharmacies overlap with a Walgreens pharmacy," Efird added.

Fred's also spoke to its recent specialty pharmacy partnership with Diplomat Specialty Pharmacy. "They'll be able to help us with back-end clinical services, support, patient outreach, patient education, all those plug-ins that are required to manage this high-touch patient," Chambers said. "It will definitely, we believe, open up some other drug therapies for us that we've not had access to in the past."

In addition to pharmacy initiatives, Fred's recently launched its Fred's Smart Card loyalty program, which now boasts 1.2 million active members and represents 8% of Fred's overall sales. Fred's loyalty consumer delivers a marketbasket 50% larger than non-loyalty transactions, Efird said. "The information gained from the Smart Card allows us to email and promote directly to these valuable customers, directing the promotion to what the consumer is most likely to purchase."

Fred's total sales for the third quarter ended Oct. 27 of fiscal 2012 increased 1% to $450.6 million. Comparable store sales for the quarter declined 2.5% compared with an increase of 1.5% in the third quarter last year. 

Through the first nine months of the year, the Company opened 27 new locations, comprising 14 new stores and 13 new Xpress pharmacies. Fred's also closed 13 stores during the year and converted six Xpress pharmacies to full size stores.