Fred’s hires firm to court pharmacy buyers

Memphis-based company Fred’s has hired PJ Solomon & Co. to assess the value of its pharmacy script portfolio and engage with potential buyers, the company announced alongside its Q1 2018 results Thursday.

“That process is well underway and we will provide updates as appropriate,” Fred’s interim CEO Joe Anto told analysts on a call Thursday. “Additionally, we are engaged in sale processes for various properties within our real estate portfolio and expect to have multiple transactions closed over the course of this fiscal year.”

These strategic transactions — which follow the company’s sale of its specialty pharmacy business, EntrustRx, to a CVS Health subsidiary earlier this year — are efforts the company has undertaken as part of what Anto called a “reset” after it posted a net loss of $139.3 million for fiscal year 2017. The company’s two main goals, Anto said, are eliminating its debt balance — largely accrued in the scrapped plan to acquire Rite Aid stores that would have been divested had Walgreens successfully purchased Rite Aid last year — and generating positive EBITDA and free cashflow by Q4 of this fiscal year.

For the quarter, Fred’s posted a 5.1% decline in net sales compared with last year’s Q1, bringing in $437.1 million. Comparable-store sales dipped 3.9% for the quarter — an improvement over the 4.2% decline comps saw in Q1 2017. The company’s gross profit dropped to $11.6 million, compared with $128.6 million a year ago, and gross margin as a percent of sales decreased 220 basis points to 25.5%, compared with 27.7% in Q1 2017. Fred’s posted a net loss of $19.9 million, which was an improvement on the net loss of $37.8 million it posted in the year-ago period.

Fred’s said that eating into its gross profit were direct and indirect remuneration fee increases for 2018, as well as prescription rebates from 2017 that did not recur this year and a shift in sales mix.

Fred’s saw selling, general and administrative expenses comprise 29.7% of sales — down 560 basis points from the 35.3% of sales it made up in the year-ago period. Anto noted that this reflects, in part, a decrease in the headcount at its headquarters, which currently totals roughly 274 people, compared with 440 people at the same time last year. Among those no longer in the headcount is former CEO Mike Bloom, who departed the company in April. Alongside decreasing its expenses, Anto noted that the company also has made strides in paying down its debt, with its asset-backed loan borrowings standing at $135 million as of June 12 — down from $162 million at the end of Q1 on May 5. The company’s available liquidity currently stands at $60 million.

“We expect our ABL balance to continue to decrease over the coming weeks, as we collect all remaining receivables associated with the specialty pharmacy business,” he said. “We continue to explore other strategic transactions and expect to generate additional cash proceeds which should meaningfully reduce our debt balance.”