Fred’s mulls putting specialty business on auction block amid Q3, YTD losses

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Fred’s mulls putting specialty business on auction block amid Q3, YTD losses

By David Salazar - 12/06/2017

In its third quarter, Fred’s reported a $51.8 million loss — an increase over the $38.4 million loss it reported in Q3 2016. As it works to pay off its debt, the company canceled its quarterly dividend and said it is exploring strategic alternatives for non-core businesses, including its specialty pharmacy business and real estate. It’s also updating its share repurchase program.

The Memphis-based company noted that the Q3 loss reflected the $17.1 million impact of an unproductive inventory write-down, the $5.2 million impact of advisory fees associated with its turnaround strategy and $2.6 million from asset impairment for the sale of its corporate airplane, among other factors.

Fred’s CEO Mike Bloom noted that the company also was impacted by its aggressive inventory reduction, as well as the timing of shipments of high-margin seasonal merchandise — leading to inventory levels almost $50 million below its prior-year period. He said that the company’s board of directors was working to ensure the company’s profitability and growth.

“In the third quarter, we furthered our efforts to turn around the Company, and we are encouraged by our positive front store comp sales in both October and November,” he said. “We are aggressively executing our turnaround strategy to accomplish these goals, and we are seeing traction in both front store and pharmacy. We have witnessed a complete turnaround in our tobacco business, significantly enhanced cosmetics and successfully rolled out beer to approximately 150 stores and wine to approximately 50 stores. We have also kicked off a reduced price endcap test, which is showing promising results, and we intend to roll it out to all stores.”

Bloom noted that Fred’s is not yet in a place where it’s displaying positive quarterly comparable-store sales and improved store traffic. For the quarter, Fred’s posted $493.6 million in net sales, down 4.5% from last year’s third quarter. The company said this dip was driven by the closure of 39 underperforming stores being closed earlier in the year. Comps dipped 0.8%, compared with a 3.8% drop in the prior-year period. Comps saw the negative 36-basis-point impact of discontinuing low productive discontinued inventory, Fred’s said. Gross profit dropped to $94.6 million from $111.2 million in the year-ago period, also attributed to shuttered stores. Gross margin decreased 230 basis points to 19.2% from 21.5%.

For the first nine months of 2017, Fred’s reported a net loss of roughly $117.8 million, which included the $37.3 million impact of fees incurred in relation to its proposed acquisition of Rite Aid stores, as well as the implementation of its turnaround strategy, among other factors. Fred’s said the closure of 39 stores and planned closure of 13 stores and pharmacy departments as part of its asset management chainwide had a $16.3 million impact. The company’s net loss in the year-ago period was $44.1 million.

Fred’s also has canceled its quarterly cash dividend in an effort to retain cash flow for debt reductions and has amended its stock repurchase program to allow the repurchase of as much as 3.8 million shares of its common stock.

“We believe that we now are in a position to further enhance our strategic plan by exploring a variety of strategic initiatives and by investing in our common stock which we believe, given current share prices, represents an attractive use of funds and provides us an additional opportunity to build long-term value for our shareholders,” Bloom said.