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Fred’s to explore options for retail pharmacy as it eyes turnaround

Fred’s released its fourth-quarter and full-year 2017 results Friday, posting a $22.6 million net loss for the quarter and a $139.3 million net loss for the year. The results reflect the Memphis-based company’s discontinuation of its specialty pharmacy operation as it seeks a buyer. The company also is exploring its options for its retail pharmacy business as it looks to unload the specialty pharmacy business and portions of its real estate portfolio.

In the fourth quarter, Fred’s saw net sales increase 2.1% to $477.3 million, but its comparable-store sales dip 0.9%. Though while an improvement over the prior period’s 4.8% comps decline, this was accompanied by a 280-basis-point drop in gross margin compared with Q4 of 2016. For the year, sales dipped 4.3% to $1.81 billion for the 54-week period ended Jan. 27 (one week longer than FY2016). Annual comps saw a 2.5% decrease and a 90-basis-point drop in gross margin, which sat at 25.4% for the year. The net loss, which translates to a $3.73 loss per share, is more than double the company’s fiscal 2016 net loss of $1.84 per share.

“I’ve been in situations like this before, where the results have been disappointing for too long and a significant reset is needed to get the business back on track. That’s exactly where we are today here at Fred’s,” Anto said. “Let me be clear — we are entirely dissatisfied with the results of the company the last two years.”

As a result of a difficult two years, the Joe Anto, the company’s interim CEO and CFO outlined the company’s focus on reducing its debt load and generating free cash flow and earnings before interest, taxes, depreciation and amortization by the end of this fiscal year. Strategic transactions — the sale of specialty pharmacy and real estate assets — are the first plank of the turnaround platform. He said these would generate significant proceeds as it mulls options for the retail pharmacy business.

Additionally, the company is looking to reduce its expenses and how it allocates its money, with Anto noting that the company found between $30 million and $40 million in operating cost reductions this fiscal year.

Fred’s also is focusing on talent acquisition as it whittles down the size of its operation. “We’ve reduced corporate headcounts significantly over the last six months and we expect this trend to continue as we reset the size of the organization, its culture and the type of people we need to accomplish our objectives.” CEO Mike Bloom was the most notable recent departure from the company’s C-suite.

One key hire Anto highlighted is Brent Tininenko — a former senior director of international private brands at Walmart — who will oversee Fred’s private brand initiatives. As part of a focus on revenue and margin, Anto said Fred’s is hoping to grow its private-brand penetration from 12% to more than 40% by the end of the fiscal year. It also will focus on closeouts and increased direct importing as a way of controlling its cost of goods and overall margin.

Another tactic Anto outlined is an initiative that will optimize the company’s assortment by testing new categories. He pointed to beer and wine as a successful foray into assortment changes, with plans to grow beer from 240 stores to 428 and wine from 70 stores to 279 by the end of the fiscal year.

“We are encouraged by our initial results as we are seeing that when customers purchase beer and wine the average basket is around 40% higher than a basket without beer and wine,” Anto said.

The efforts Anto outlined have the backing of Fred’s board chairman Heath Freeman.

“The new Fred’s team is confident in our ability to reset the cost structure, bring in the right talent and allocate capital wisely,” Freeman said. “We are focused on paying down debt, driving significant cash flow from operations and maximizing value for our shareholders.”
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