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Fred's sees sales, comps dip as it continues to right its ship

Memphis-based retailer Fred’s swung to a net loss in its second quarter as it looked to button up its expenses and continued to explore and execute transactions — all aimed at reducing its debt load, building up its cash flow and generating positive EBITDA.

For the quarter ended Aug. 4, the company saw net sales decline 4.3% to $419.7 million, alongside a comparable-store sales slide of 3.5%. Gross profit decreased to $100.5 million, with selling, general and administrative expenses totaling $121.9 million in the quarter — down from the year-ago period. The company’s net loss from continuing operations was $22.9 million, or $0.62 per share — an improvement over the $28.9 million net loss the company posted in Q2 2017.

“We are continuing to make progress against our two main goals of eliminating our debt balance and returning to profitability by Q4 of this year,” Fred’s interim CEO and CFO Joe Anto said. “While there is still much work to be done, we are moving in the right direction and are excited about the momentum we have at the Company.”

The results come shortly after the announcement that Fred’s would be selling the prescription files and inventory from 185 of its locations to Walgreens for $165 million, and several months after it announced that it was exploring options for the retail pharmacy side of the business. With the Walgreens transaction, Fred’s will still operate roughly 163 pharmacies in its stores.

“This transaction will be transformative for the company and should allow us to almost entirely eliminate our ABL Facility balance, enabling us to focus on returning our remaining business to profitability,” Anto said on a call with analysts. “We expect to close this transaction enrolling closings over the course of the fourth quarter and we'll continue to evaluate strategic opportunities for the remainder of our retail pharmacy business.”

Fred’s attributed its comps drop to a “significant reduction in circular marketing,” and noted that its August marketing saw programs consistent with prior levels to improve on the front-store trend it saw in Q2.

For the six months ended Aug. 6, Fred’s saw net sales down 5.1% to $856.8 million, compared with $902.7 million in the comparable period in 2017. Comps decreased 3.8% for the first six months of 2018 as gross profit dipped to $212.1 million (compared with $251.3 million in the prior-year period. SG&A expenses for the first half of the year were $245.2 million — roughly 28.6% of sales and down from the $256 million they made up in the first half of 2017. Adjusted EBITDA was -$11.1 million for the first six months of the year, compared with $8 million in the first six months of 2017.

“We have made significant strides in recent months in right-sizing our cost structure and working towards reducing our debt. We remain confident that over the balance of 2018 we will be able to stabilize our revenues and improve our free cash flow, setting us up to enter 2019 with significant momentum,” said Fred’s chairman Heath Freeman.
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