Company Also Reports August Sales
Fred's, Inc. (NASDAQ: FRED) today reported financial results for
the second quarter and six months ended July 30, 2016.
For the second quarter ended July 30, 2016, Fred's net loss
totaled $6.9 million or ($0.18) per share compared with a net loss
of $4.9 million or ($0.13) per share for the second quarter of last
year. For the first six months of 2016, Fred's net loss totaled
$5.7 million or ($0.15) per share compared with a net loss of $4.9
million or ($0.13) per share for the same period last year.
Total sales for the second quarter declined 3.0% compared with
the second quarter of last year, while total sales for the first
half of 2016 increased 2.3% compared with the prior-year period.
Comparable store sales for the second quarter declined 2.0% versus
an increase of 0.9% in the second quarter last year, while
comparable store sales for the first half of 2016 decreased 0.6%
versus an increase of 0.7% in the prior-year period.
Separately, the Company also reported sales for the four-week
fiscal month ended August 27, 2016. Fred's total sales for the
month declined 3.5% to $159.6 million from $165.3 million in August
2015. Comparable store sales for August declined 3% versus an
increase of 1.2% in the year-earlier month.
Commenting on the results, Michael K. Bloom, Chief Executive
Officer, said, "Looking at the quarter, we are disappointed with
the Company's performance, as comparable store sales were down in
front store, retail pharmacy and specialty pharmacy. The
deleveraging impact of lower-than-plan sales, combined with a
decline in gross margin rate for the pharmacy division – driven by
generic deflation, reimbursement pressures and unexpected direct
and indirect remuneration (DIR) fees – accounted for the quarter's
net loss and the revision in guidance for 2016 that we provide
later in this release. While we did see progress on initiatives in
the front store delivering improved gross margins and operating
profit, the headwinds in pharmacy and competitive pressures in the
front store were deeper than anticipated. There are some new
initiatives that we will be launching in the back half of 2016 that
will help set the stage to combat these headwinds. We remain
confident that the ongoing plan will result in improved company
performance over the long term.
"Retail sales in the front store and pharmacy departments were
pressured less in August than in July, but still experienced
unfavorable sales trends in categories such as food, beverage,
paper and household chemicals," Bloom continued. "Specialty
pharmacy comparable sales continued to be affected by the
industry-wide slowdown in demand for specialty Hepatitis C drugs
and the lag of onboarding new sales people.
"We are at an inflection point as a company," added Bloom. "Our
key areas of focus will be to optimize our store fleet and supply
chain, focus on markets where we can win, make additional
investments in marketing and technology, all to enable growth with
discipline. We will take this next 6-12 months to catch up on
needed competitive and structural strategies. We can be the best in
the rural markets we serve; we know who our customers are and what
they need; and we can deliver access to pharmacy and healthcare
services as well as a broad, value-based assortment of products.
These new areas of focus will help us achieve our goal of
generating returns in excess of our cost of capital."
Fred's gross profit for the second quarter of 2016 decreased
2.9% to $128.1 million from $131.9 million in the prior-year
period. Gross margin for the quarter remained flat at 24.2%
compared to the same quarter last year. Gross profit for the first
half of 2016 increased 0.2% to $269.5 million from $269.0 million
in the prior-year period. Gross margin for the first half of 2016
deleveraged 50 basis points to 25.0% from 25.5% in the prior-year
period. Fred's recorded LIFO adjustment of $0.2 million in the
second quarter of 2016, compared with $2.9 million in the same
quarter last year. In the first half Fred's recorded LIFO
adjustment of $1.1 million compared with $3.3 million last year.
During the second quarter, Fred's recorded an unusually high amount
of DIR charges in the amount of $4.0 million compared with $2.0
million last year. On a year-to-date basis, DIR fees totaled $4.5
million in 2016 versus $3.4 million last year.
Selling, general and administrative expenses for the quarter,
including depreciation and amortization, increased 70 basis points
to 26.3% of sales from 25.6% of sales in the prior-year quarter.
The deleveraging in expenses for the second quarter was primarily
caused by a decrease in sales volume in 2016, partially offset by a
decrease in insurance expense as well as a decrease in labor
expense mostly due to implementation of pharmacy labor optimization
initiatives. Selling, general and administrative expenses for the
first half of 2016, including depreciation and amortization,
decreased or leveraged 40 basis points to 25.8% of sales from 26.2%
of sales in the prior-year period, mainly driven by the growth in
specialty pharmacy sales.
For the second quarter of 2016, operating income, which is
equivalent to earnings before interest and taxes, or EBIT, a
non-GAAP financial measure, decreased to a loss of $10.9 million or
(2.1%) of sales compared with a loss of $7.8 million or (1.4%) of
sales in the prior-year period. For the first half of 2016,
operating income/EBIT decreased to a loss of $8.5 million or (0.8%)
of sales compared with a loss of $7.7 million or (0.7%) of
sales.
For the second quarter of 2016, adjusted EBITDA, a non-GAAP
financial measure that further excludes depreciation and
amortization, LIFO expense and stock-based compensation, and
non-recurring items, if any, from EBIT, decreased 76% to $1.8
million or 0.3% of sales compared with adjusted EBITDA of $7.3
million or 1.3% of sales in the year-earlier quarter. Adjusted
EBITDA for the first six months decreased 8% to $17.4 million or
1.6% of sales in 2016 compared with $18.9 million or 1.8% of sales
last year.
The Company provides the following guidance for the second half
of 2016, all excluding any further impact from future expenses
related to the 2015 data security incident:
- Based on recent sales trends and our
near-term outlook, we expect changes in both total sales and
comparable store sales to range from negative 1% to a positive 1%
for the second half of the year.
- As we initiate additional competitive
strategies, we may see a loss per diluted share for the second half
of the year in the range of ($0.18) to ($0.23), with the third
quarter loss deeper than the fourth quarter loss.
- In the second half of the year,
adjusted EBITDA, which excludes the impact of LIFO, stock-based
compensation and non-recurring items, if any, is expected to be in
the range of $18 million to $21 million dollars versus an adjusted
EBITDA of $34.3 million dollars in the prior-year 2nd half.
Fred's, Inc. and subsidiaries operate 651 discount general
merchandise stores and three specialty pharmacy-only locations in
15 states in the southeastern United States. Included in the store
count are 18 franchised locations. Also, there are 372 full service
pharmacy departments located within Fred's stores, including four
franchised locations. For more information about the Company, visit
Fred's website at www.fredsinc.com.
A public, listen-only simulcast and replay of Fred's second
quarter 2016 conference call may be accessed at the Company's web
site. The simulcast will begin at approximately 10:00 a.m. Eastern
Time today; a replay of the call will be available beginning at
approximately 1:00 p.m. Eastern Time and will continue until
September 6, 2016.
Comments in this news release that are not
historical facts are forward-looking statements that involve risks
and uncertainties that could cause actual results to differ
materially from those projected in the forward-looking statements.
A reader can identify forward-looking statements because they are
not limited to historical facts or they use such words as
"outlook," "guidance," "may," "should," "could," "believe,"
"anticipate," "plan," "expect," "estimate," "forecast," "goal,"
"intend," "committed," "continue," or "will likely result" and
similar expressions that concern the Company's strategy, plans,
intentions or beliefs about future occurrences or results. These
risks and uncertainties include, but are not limited to, those
associated with the Company's announced strategic plan, the
ultimate terms of the reworked pharmacy distribution agreement,
lease buyouts and the underlying assumptions and projections upon
which they are based, as well as risks that intended results may
not be achieved or may not occur as quickly as expected; the
success of announced acquisition activities and future growth
trends in businesses acquired; general economic trends; changes in
consumer demand or purchase patterns; delays or interruptions in
the flow of merchandise between the Company's distribution centers
and its stores or between the Company's suppliers and same; a
disruption in the Company's data processing services;
cyber-security threats; costs and delays in acquiring or developing
new store sites; and the factors listed under "Risk Factors" in the
Company's most recent Annual Report on Form 10-K and any subsequent
quarterly filings on Form 10-Q filed with the Securities and
Exchange Commission. Forward-looking statements speak only as of
the date made. Fred's undertakes no obligation to release revisions
to these forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unforeseen events, except as required to be reported under the
rules and regulations of the Securities and Exchange
Commission.
FRED'S, INC.
Unaudited Financial Highlights
(In thousands, except per share amounts)
13 Weeks
Ended
July 30,
2016
13 Weeks
Ended
August 1,
2015
Percent
Change
Net sales
$ 529,503 $ 546,083 (3.0 %) Operating loss
$ (10,908 ) $ (7,778 ) (40.2 %) Net loss
$ (6,928 ) $ (4,877 ) (42.1 %) Net loss per
share, basic and diluted
$ (0.18 ) $ (0.13 )
(38.5 %) Average shares outstanding: Basic
36,760 36,676
Diluted
36,760 36,676
26 Weeks
Ended
July 30,
2016
26 Weeks
Ended
August 1,
2015
Percent
Change
Net sales
$ 1,079,051 $ 1,055,130 2.3 % Operating
loss
$ (8,480 ) $ (7,703 ) (10.1 %) Net loss
$ (5,672 ) $ (4,906 ) (15.6 %) Net loss per
share, basic and diluted
$ (0.15 ) $ (0.13 )
(15.4 %) Average shares outstanding: Basic
36,747 36,586
Diluted
36,747 36,586
FRED'S, INC.
Unaudited Fiscal 2016 Second Quarter Results
(In thousands, except per share
amounts)
13 Weeks
Ended
July 30,
2016
% of
Total
13 Weeks
Ended
August 1,
2015
% of
Total
Net sales
$ 529,503 100.0 % $ 546,083
100.0 % Cost of goods sold
401,365 75.8
% 414,166 75.8 % Gross profit
128,138
24.2 % 131,917 24.2 % Depreciation & amortization
11,761 2.2 % 11,508 2.1 % Selling, general and
administrative expenses
127,285 24.1
% 128,187 23.5 % Operating loss
(10,908
) (2.1 %) (7,778 ) (1.4 %) Interest expense,
net
610 0.1 % 449
0.1 % Loss before income taxes
(11,518 ) (2.2
%) (8,227 ) (1.5 %) Income tax benefit
(4,590
) (0.9 %) (3,350 ) (0.6 %) Net loss
$ (6,928 ) (1.3 %) $ (4,877 )
0.9 % Net loss per share,
basic and diluted
$ (0.18 ) $ (0.13 ) Weighted average shares
outstanding: Basic
36,760 36,676 Diluted
36,760
36,676
26 Weeks
Ended
July 30,
2016
% of
Total
26 Weeks
Ended
August 1,
2015
% of
Total
Net sales
$ 1,079,051 100.0 % $
1,055,130 100.0 % Cost of goods sold
809,591 75.0
% 786,122 74.5 % Gross profit
269,460 25.0
% 269,008 25.5 % Depreciation & amortization
23,324 2.2 % 22,390 2.1 % Selling, general and
administrative expenses
254,616 23.6 % 254,321
24.1 % Operating loss
(8,480 ) (0.8 %)
(7,703 ) (0.7 %) Interest expense, net
1,125 0.1
% 711 0.1 % Loss before income taxes
(9,605 )
(0.9 %) (8,414 ) (0.8 %) Income tax benefit
(3,933 ) (0.4 %) (3,508 ) (0.3 %) Net
loss
$ (5,672 ) (0.5 %) $ (4,906
) (0.5 %) Net loss per share,
basic and diluted
$ (0.15 ) $ (0.13 ) Weighted average shares
outstanding: Basic
36,747 36,586 Diluted
36,747
36,586
FRED'S, INC.
Unaudited Balance Sheet
(In thousands)
July 30,
2016
August 1,
2015
ASSETS: Cash and cash equivalents
$ 6,181 $ 6,964
Inventories
346,354 323,591 Receivables
50,096 58,123
Other non-trade receivables
40,035 41,227 Prepaid expenses
and other current assets
10,428 11,146 Total
current assets
453,094 441,051 Property and equipment, net
138,649 140,310 Goodwill
41,490 44,472 Other
intangible assets, net
95,633 95,580 Other non-current
assets
1,515 8,741 Total assets
$
730,381 $ 730,154 LIABILITIES AND SHAREHOLDERS'
EQUITY: Accounts payable
$ 145,390 $ 161,370 Current
portion of indebtedness
58 636 Accrued expenses and other
58,839 53,781 Total current liabilities
204,287 215,787 Long-term portion of indebtedness
105,223 68,034 Deferred income taxes
5,381 13,386
Other non-current liabilities
19,694 23,323
Total liabilities
334,585 320,530 Shareholders' equity
395,796 409,624 Total liabilities and
shareholders' equity
$ 730,381 $ 730,154
View source
version on businesswire.com: http://www.businesswire.com/news/home/20160830005689/en/
Fred's, Inc.Rick Hans, 901-362-3733, Ext. 2232Executive Vice
President and Chief Financial Officer
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