Fred’s Q3 brings focus on raising comps

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Fred’s Q3 brings focus on raising comps

By David Salazar - 12/13/2018
With its third-quarter results, Fred’s saw its gross profits improve, even as comparable-store sales and net sales declined. The Memphis-based chain posted net sales of $306.4 million — down 5.5% from its previous-year third quarter — with comps down 5.3% from the prior-year period, when they were down 1%. Gross profit grew to $77 million in the third quarter, up from $70 million in the prior year.

The company posted a net loss from continuing operations of $30.8 million, or $0.83 per share — an improvement over the $50.4 million net loss ($1.34 per share) the company saw in the third quarter of 2017.

Fred’s interim CEO and CFO Joe Anto said the company has managed to reduce its debt load, with its ABL balance down to $51.9 million as of Dec. 12 from $153.4 million at the outset of its fiscal year. He also said the company would continue to explore options for its remaining pharmacy business — Fred’s has sold its specialty pharmacy business to a CVS Health subsidiary, and Walgreens has purchased files and inventory from 185 Fred’s pharmacy locations — and real estate portfolio.

For the fiscal year-to-date, Fred’s posted $964.7 million in net sales — a 5.9% decrease from the prior-year’s first nine fiscal months. The company’s YTD comps were down 4.9%, compared with a 2.3% decrease for the prior-year period. Unlike the uptick the third quarter saw, gross profit for the first nine months of Fred’s fiscal year is down 7.5%, totaling $251.3 million, compared with $272.7 million the prior year, and gross profit decreased 0.5% to 26%.

“Factors contributing to decline in gross margin were primarily related to continued pressures we are seeing in our retail pharmacy business, specifically related to prescription rebates in 2017 that did not recur in 2018, reimbursement pressure from payors, and an increase in DIR fees to PBMs,” Anto said on the conference call accompanying the release of the results.

Anto noted that the company has hired 12 new merchandising executives, including naming Michael O’Young senior vice president of merchandising. In addition, he said the company already is working to address the decline in comps.

“With regards to front store, we believe the negative trend we are seeing in comp sales is directly correlated to out-of-stocks we are seeing throughout the chain,” he said. “We are focused on getting back-end staff for the right items in our stores while optimizing overall inventory levels. We believe the correction of out-of-stock issue will have a positive impact on comp sales and margin as we enter 2019.”

Anto said that Fred's has begun introducing private-label items, with plans to add nearly 200 items by the end of the fiscal year, though he acknowledged there still is work ahead for the company.

“There is still much work to be done with regards to our operations," he said. "We are continuing to execute against our turnaround plan, with a focus on bringing in talent, optimizing our cost structure and improving the front-store business."