Accelerating strategic turnaround; focused on
driving traffic, reducing SG&A, generating free cash flow and
lowering debt
Fred’s Inc. (“Fred’s” or “Company”) (NASDAQ:FRED) today reported
financial results for the third quarter and nine months
ended October 28, 2017.
For the third quarter ended October 28, 2017, Fred’s
recorded a net loss of approximately $51.8
million or $1.38 per share, which included the following
charges totaling $45.0 million, or $0.96 per share
after tax:
- $20.1
million or $0.53 per share for a valuation allowance
against the Company's deferred tax asset resulting from the pretax
loss recorded during the third quarter;
- $17.1 million or $0.30 per share after
tax for a write down of unproductive inventory;
- $5.2 million or $0.09 per share after
tax for professional and legal advisory fees incurred in connection
with the development and implementation of the Company's turnaround
strategy; and
- $2.6 million or $0.04 per share after
tax for asset impairment for the sale of corporate airplane.
Fred’s third quarter loss compares to a net loss of $38.4
million or $1.05 per share for the third quarter of
2016.
Commenting on today’s results, Michael K. Bloom, Chief
Executive Officer, said, “We recognize that our EPS results are
below expectations; however, the management team, working closely
with the Board of Directors, is taking the actions necessary to
ensure Fred’s achieves profitability and growth over the long-term.
Our third quarter EPS and EBITDA, excluding non-operating charges,
was negatively impacted by a more aggressive inventory reduction
and timing of shipments for higher margin seasonal merchandise,
which led to inventory levels nearly $50 million below the prior
year, as well as investments in our overall pricing strategy to
ensure we remain competitive in the market. While these initiatives
impacted our gross margins, our cash flow plan remains on track as
we streamline our business for the benefit of the Company’s
long-term success.”
Mr. Bloom continued, “In the third quarter, we furthered our
efforts to turn around the Company, and we are encouraged by our
positive front store comp sales in both October and November. We
are focused on driving traffic, reducing SG&A, generating free
cash flow and lowering our debt. We are aggressively executing our
turnaround strategy to accomplish these goals, and we are seeing
traction in both front store and pharmacy. We have witnessed a
complete turnaround in our tobacco business, significantly enhanced
cosmetics and successfully rolled out beer to approximately 150
stores and wine to approximately 50 stores. We have also kicked off
a reduced price endcap test, which is showing promising results,
and we intend to roll it out to all stores. We are not yet at the
point of presenting positive quarterly comp sales and traffic
improvement; however, we are improving month-by-month as our
initiatives are yielding results. We recognize that there is more
work to be done, but we are encouraged by the traction our
initiatives are gaining and look forward to capitalizing on that
momentum in the coming quarters.”
Third Quarter 2017
Net sales for the third quarter were $493.6 million, down
4.5% from $516.6 million in the same period last year
mainly driven by the closure or 39 underperforming stores earlier
in 2017. Comparable store sales for the third quarter declined 0.8%
versus a decrease of 3.8% in the third quarter last year.
Comparable store sales in the third quarter of 2017 included a
negative 36 BPS impact as a result of the sale of low productive
discontinued inventory versus the third quarter of 2016.
Gross profit for the third quarter of 2017 decreased
to $94.6 million from $111.2 million in the
prior-year period, primarily explained by a decrease in sales
resulting from the closure of 39 underperforming stores and an
increase in the promotional activity to drive traffic and decrease
inventory balances. Gross margin for the quarter decreased 230
basis points to 19.2% from 21.5% in the same quarter last year,
reflecting the contribution of incremental sales of low margin
specialty drugs and tobacco products, and a shift in timing of
shipments to our stores of high margin seasonal items.
Fred’s recorded a LIFO reserve increase of $1.5
million in the third quarter of 2017 compared with an increase
of $2.1 million in the same quarter last year.
Selling, general and administrative (“SG&A”) expenses for
the quarter, including depreciation and amortization, decreased to
$144.4 million or 29.3% of sales from $155.3 million or 30.0% of
sales in the prior-year quarter. The decrease in expenses was
primarily driven by our increased focus on expense controls, the
closure of 39 underperforming stores in early 2017, and the change
in asset impairments recorded in the third quarter of 2017 versus
the third quarter of 2016.
For the third quarter of 2017, operating loss, which is
equivalent to earnings before interest and taxes, or EBIT, a
non-GAAP financial measure, was a loss of $49.8
million compared with operating loss of $44.1
million in the same quarter last year.
In the third quarter of 2017, EBITDA, a non-GAAP financial
measure that further excludes depreciation and amortization from
EBIT, was a loss of $38.8 million. Third quarter EBITDA
included charges totaling $24.9 million, including:
- $17.1 million or $0.30 per share after
tax for the write down of unproductive inventory;
- $5.2 million or $0.09 per share
after tax for professional and legal advisory fees incurred in
connection with the development and implementation of the Company's
turnaround strategy; and
- $2.6 million or $0.04 per share after
tax for asset impairment for the sale of corporate airplane.
First Nine Months Ended October 28, 2017
For the first nine months ended October 28, 2017, Fred’s
recorded a net loss of approximately $117.8
million or $3.14 per share, which included the following
charges totaling $120.0 million, or $2.51 per share
after tax:
- $45.9
million or $1.23 per share after tax for a valuation
allowance against the Company's deferred tax asset resulting from
the pretax loss created primarily by the following charges in the
first nine months of 2017;
- $37.3
million or $0.64 per share after tax for bank fees,
financing termination fees, other professional and legal advisory
fees incurred in connection with the proposed acquisition
of Rite Aid stores and the development and implementation
of the Company's turnaround strategy;
- $17.1 million or $0.30 per share after
tax for a write down of unproductive inventory;
- $16.3
million or $0.28 per share after tax for lease
liability impairment, asset impairments and other expenses
pertaining to the closure of 39 underperforming stores and the
planned closure of 13 stores and certain pharmacy departments, as
part of Fred’s ongoing asset management of its overall chain;
- $2.6 million or $0.05 per share after
tax for asset impairment for the sale of corporate airplane;
and
- $0.8
million or $0.01 per share after tax for other
non-recurring charges.
Fred’s loss for the first nine months ended October 28,
2017 compares to a net loss of $44.1 million or
$1.20 per share for the first nine months of 2016.
Net sales for the first nine months were $1.534 billion, down
3.9% from $1.596 billion in the same period last year mainly driven
by the closure or 39 underperforming stores earlier in 2017.
Comparable store sales for the first nine months declined 0.8%
versus a decrease of 1.7% in the first nine months last year.
Comparable store sales in the first nine months of 2017 included a
negative 87 BPS impact as a result of the sale of low productive
discontinued inventory versus the same period in 2016.
Gross profit for the first nine months decreased to $353.5
million from $380.7 million in the prior-year period, primarily
explained by a decrease in sales resulting from the closure of 39
underperforming stores and an increase in promotional activity to
drive traffic and decrease inventory balances. Gross margin for the
first nine months decreased 80 basis points to 23.1% from 23.9% in
the same period last year, reflecting the contribution of
incremental sales of low margin specialty drugs and tobacco
products, and a shift in timing of shipments to our stores of high
margin seasonal items.
Fred’s recorded a LIFO reserve increase of $0.3 million in the
first nine months of 2017 compared with an increase of $3.2 million
in the same period last year.
SG&A expenses, including depreciation and amortization,
increased to $465.6 million or 30.4% of sales from $433.2 million
or 27.2% of sales in the prior-year period. The increase in
expenses was primarily driven by professional, bank and legal
advisory fees recorded in 2017 in connection with the proposed
acquisition or Rite Aid stores and the development and
implementation of the Company's turnaround strategy; offset
somewhat by our increased focus on expense controls and the closure
of 39 underperforming stores in early 2017.
For the first nine months of 2017, operating loss, which is
equivalent to earnings before interest and taxes, or EBIT, a
non-GAAP financial measure, was a loss of $112.0 million compared
with operating loss of $52.5 million in the same period last
year.
In the first nine months of 2017, EBITDA, a non-GAAP financial
measure that further excludes depreciation and amortization from
EBIT, was a loss of $78.1 million. EBITDA included charges totaling
$73.9 million, including:
- $37.3
million or $0.64 per share after tax for bank fees,
financing termination fees, prior period deferred expenses
recognized in the current quarter for certain contract terminations
and amendments, and other professional and legal advisory fees
incurred in connection with the proposed acquisition of Rite
Aid stores; the development and implementation of the
Company's turnaround strategy; and other professional and legal
advisory fees;
- $17.1 million or $0.30 per share after
tax for the write down of unproductive inventory;
- $16.1
million or $0.28 per share after tax for asset
impairments and other expenses pertaining to the closure of 39
underperforming stores and the planned closure of 13 stores and
certain pharmacy departments, as part of Fred’s ongoing asset
management of its overall chain;
- $2.6 million or $0.05 per share after
tax for asset impairment for the sale of corporate airplane,
and
- $0.8
million or $0.01 per share after tax for other
non-recurring charges.
In a separate press release issued today, the Company announced
the cancelation of its dividend, an update to its share repurchase
program and a review of alternatives for certain non-core assets.
The Board of Directors determined to cancel the quarterly cash
dividend in order to retain free cash flow for debt reduction,
share repurchases and other general corporate purposes.
Webcast Information
A public, listen-only simulcast and replay of Fred’s third
quarter 2017 conference call may be accessed at the Company’s web
site. The simulcast will begin at 8:00 a.m. Eastern
Time today; a replay of the call will be available beginning
two hours after the conclusion of the live call and will remain
available through January 4, 2018.
Non-GAAP Financial Measures
The Company's management believes that the disclosure of
operating income (EBIT) and EBITDA provides useful information to
investors because the measures present an alternative and more
relevant method for measuring the Company's results of operations
and financial condition, and, when viewed together with the
Company's GAAP results and the accompanying reconciliations,
provides a more complete understanding of the factors and trends
affecting the Company than the GAAP results alone. Additionally,
EBITDA is a common alternative measure of financial performance
used by investors, financial analysts, and rating agencies. These
groups use EBITDA, along with other measures, to estimate the value
of a company and to compare the operating performance of a company
to others in its industry. A reconciliation of these non-GAAP
financial measures to their most directly comparable GAAP measure
appears in the financial tables attached to this news release.
About Fred’s Inc.
Tracing its history back to an original store in Coldwater,
Mississippi, opened in 1947, today Fred’s, Inc. operates
approximately 600 general merchandise and pharmacy stores,
including 13 franchised locations, and three specialty
pharmacy-only locations. With unique store formats and strategies
that combine the best elements of a value-focused retailer with a
healthcare-focused drug store, Fred’s stores offer frequently
purchased items that address the everyday needs of its customers.
This includes nationally recognized brands, proprietary Fred’s
label products, and a full range of value-priced selections.
For more information about the Company, visit Fred’s website
at www.fredsinc.com.
Forward Looking Statements
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 (i) the competitive nature of the
industries in which we operate; (ii) the implementation of our
strategic plan, and its impact on our sales, costs and operations;
(iii) utilizing our existing and new stores and increasing our
pharmacy department presence in new and existing stores; (iv) our
reliance on a single supplier of pharmaceutical products; (v) our
pharmaceutical drug pricing; (vi) reimbursement rates and the terms
of our agreements with pharmacy benefit management companies; (vii)
our private brands; (viii) the seasonality of our business and the
impact of adverse weather conditions; (ix) operational
difficulties; (x) merchandise supply and pricing; (xi) consumer
demand and product mix; (xii) delayed openings and operating new
stores and distribution facilities; (xiii) our employees; (xiv)
risks relating to payment processing; (xv) our computer system, and
the processes supported by our information technology
infrastructure; (xvi) our ability to protect the personal
information of our customers and employees; (xvii) cyber-attacks;
(xviii) changes in governmental regulations; (xix) the outcome of
legal proceedings, including claims of product liability; (xx)
insurance costs; (xxi) tax assessments and unclaimed property
audits; (xxii) current economic conditions; (xxiii) changes in
third-party reimbursements; (xxiv) the terms of our existing and
future indebtedness; (xxv) our acquisitions and the ability to
effectively integrate businesses that we acquire; (xxvi) our
ability to pay dividends; 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. The Company 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.
Reconciliation of Unaudited Net Loss to
EBITDA
A Non-GAAP Financial Measure
(In thousands)
13 Weeks Ended
October 28,
2017
13 Weeks Ended
October 29,
2016
39 Weeks Ended
October 28,
2017
39 Weeks Ended
October 29, 2016
Net loss
$ (51,815 ) $ (38,393 )
$
(117,793 ) $ (44,065 ) Interest expense
1,647
560
4,371 1,685 Income tax provision / (benefit)
415 (6,229 )
1,394
(10,162 ) Operating loss / EBIT
(49,753 ) (44,062 )
(112,028 ) (52,542 ) Depreciation and amortization
10,970 12,002
33,892 35,326 EBITDA
$
(38,783 ) $ (32,060 )
$ (78,136
) $ (17,216 )
FRED'S, INC.
Unaudited Financial Highlights
(In thousands, except per share
amounts)
13 Weeks Ended
October 28,
2017
13 Weeks Ended
October 29,
2016
Net sales
$ 493,585 $ 516,645 Operating loss
(49,753 ) (44,062 ) Net loss
(51,815 )
(38,393 ) Net loss per share, basic and diluted
$
(1.38 ) $ (1.05 ) Average shares outstanding: Basic
37,626 36,810 Diluted
37,626 36,810
39 Weeks Ended
October 28,
2017
39 Weeks Ended
October 29,
2016
Net sales
$ 1,533,742 $ 1,595,696 Operating loss
(112,028 ) (52,542 ) Net loss
(117,793
) (44,065 ) Net loss per share, basic and diluted
$
(3.14 ) $ (1.20 ) Average shares outstanding: Basic
37,481 36,768 Diluted
37,481 36,768
FRED'S, INC.
Unaudited Fiscal 2017 Third Quarter
Results
(In thousands, except per share
amounts)
13 Weeks Ended
October 28,
2017
% of
Total
13 Weeks Ended
October 29,
2016
% of
Total
Net sales
$ 493,585 100.0 % $ 516,645
100.0 % Cost of goods sold
398,967 80.8
% 405,439 78.5 % Gross profit
94,618
19.2 % 111,206 21.5 % Depreciation & amortization
10,970 2.2 % 12,002 2.3 % Selling, general and
administrative expenses
133,401 27.1
% 143,266 27.7 % Operating loss
(49,753
) (10.1 )% (44,062 ) (8.5 )% Interest expense,
net
1,647 0.3 % 560
0.1 % Loss before income taxes
(51,400 )
(10.4 )% (44,622 ) (8.6 )% Income tax provision
(benefit)
415 0.1 %
(6,229 ) (1.2 )% Net loss
$ (51,815 )
(10.5 )% $ (38,393 ) (7.4 )%
Net loss per share,
basic and diluted
$ (1.38 ) $ (1.05 ) Weighted average shares
outstanding: Basic
37,626
36,810
Diluted
37,626
36,810
39 Weeks Ended
October 28,
2017
% of
Total
39 Weeks Ended
October 29,
2016
% of
Total
Net sales
$ 1,533,742 100.0 % $
1,595,696 100.0 % Cost of goods sold
1,180,213
76.9 % 1,215,030 76.1 % Gross profit
353,529 23.1 % 380,666 23.9 % Depreciation
& amortization
33,892 2.2 % 35,326 2.2 %
Selling, general and administrative expenses
431,665
28.2 % 397,882 25.0 % Operating
loss
(112,028 ) (7.3 )% (52,542 ) (3.3
)% Interest expense, net
4,371 0.3
% 1,685 0.1 % Loss before income taxes
(116,399 ) (7.6 )% (54,227 ) (3.4 )%
Income tax provision (benefit)
1,394
0.1 % (10,162 ) (0.6 )% Net loss
$
(117,793 ) (7.7 )% $ (44,065 ) (2.8 )%
Net loss per share,
basic and diluted
$ (3.14 ) $ (1.20 ) Weighted average shares
outstanding: Basic
37,481 36,768 Diluted
37,481
36,768
FRED'S, INC.
Unaudited Balance Sheet
(In thousands)
October 28, 2017
October 29, 2016
ASSETS: Cash and cash equivalents
$ 5,113 $ 5,692
Inventories
317,220 366,575 Receivables
56,922 52,740
Other non-trade receivables
30,597 36,959 Prepaid expenses
and other current assets
10,898 12,634 Total
current assets
420,750 474,600 Property and equipment, net
121,324 133,360 Goodwill
41,490 41,490 Other
intangible assets, net
69,972 90,377 Other non-current
assets
999 1,050 Total assets
$
654,535 $ 740,877 LIABILITIES AND SHAREHOLDERS'
EQUITY: Accounts payable
$ 152,943 $ 214,818 Current
portion of indebtedness
63 59 Accrued expenses and other
83,897 71,071 Total current liabilities
236,903 285,948 Long-term portion of indebtedness
168,196 77,234 Deferred income taxes
3,261 - Other
non-current liabilities
27,873 21,797 Total
liabilities
436,233 384,979 Shareholders' equity
218,302 355,898 Total liabilities and shareholders'
equity
$ 654,535 $ 740,877
View source
version on businesswire.com: http://www.businesswire.com/news/home/20171206005320/en/
Fred’s Inc.Jason Jenne, 901-238-2787Executive Vice President,
Chief Financial Officer and SecretaryorJoele Frank, Wilkinson
Brimmer KatcherEd Trissel / Dan Moore, 212-355-4449
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