Fred's ‘pleased’ with Q2 performance

MEMPHIS, Tenn. — Fred's experienced growth in sales, customer traffic, average ticket and gross margin for the second quarter ended Aug. 3.

The company’s net income for the quarter was $3.3 million, or $0.09 per diluted share, compared with net income of $6.1 million, or $0.17 per diluted share, in the year-earlier period. However, the prior-year quarter included a benefit of approximately $4 million, or $0.11 per diluted share, for favorable tax credits.

Adjusting to exclude those favorable tax credits, Fred's net income for the quarter increased 63% from the second quarter last year, while earnings per diluted share increased 50%.

Total sales for the quarter increased 2% to $482.2 million from $470.8 million for the same period last year. Comparable store sales for the quarter increased 2.2% compared with a decline of 1% in the second quarter last year.

"We are pleased by the company's performance during the second quarter, which was highlighted by a strong increase in both operating income and net income, excluding last year's tax benefits,” said Bruce A. Efird, CEO. “We also were pleased with the progress of the first phase of our reconfiguration plan as the penetration of stores with pharmacies increased from 50% to 52% and we experienced strong comparable sales performance in our expanded Hometown Auto & Hardware departments.”

Fred’s anticipates that the competitive climate will be intense and the operating environment challenging in the second half of the year. Efird said that discretionary spending for lower-income consumers — a key customer segment for Fred's — is expected to remain under pressure.

“The programs we put in place earlier this year, combined with our pharmacy expansion and the aggressive general merchandising initiatives we have planned in the back half of the year, are designed to meet these economic and competitive challenges,” added Efird. “We remain confident that our earnings for the year will fall in the middle to the upper end of the range we earlier projected, with earnings in the second half increasing 14% to 28% over the same period last year and earnings for the full year increasing 17% to 25% over 2012, excluding the tax benefit recorded last year."

Fred's gross profit for the quarter increased 3% to $136 million from $131.8 million in the prior-year period. Gross margin for the quarter increased 20 basis points to 28.2% compared with 28% in the same quarter last year. Improvements were driven by an increased pharmacy department gross margin, specifically reflecting the impact of the brand-to-generic mix shift, and better shrinkage control.

During the quarter, Fred's opened two new stores and one new Xpress location and closed 21 locations. Currently, Fred's operates 697 discount general merchandise stores, including 21 franchised Fred's stores, in the southeastern United States.