Fred's Reports Third Quarter 2012 Results

Fred's Reports Third Quarter 2012 Results

MEMPHIS, Tenn.--(BUSINESS WIRE)-- Fred's, Inc. (NAS: FRED) today reported financial results for the third quarter and nine months ended October 27, 2012.

For the third quarter ended October 27, 2012, Fred's net income totaled $6.6 million or $0.18 per diluted share compared with net income of $9.0 million or $0.24 per diluted share in the year-earlier period. As previously announced, the decline in net income for the quarter reflected the impact of a shift in layaway sales, unfavorable LIFO expense charges in the quarter and higher operating expenses. Fred's net income for the first nine months of 2012 totaled $23.1 million or $0.63 per diluted share compared with $23.6 million or $0.61 per diluted share in the prior year.


Fred's total sales for the third quarter of fiscal 2012 increased 1% to $450.6 million from $444.4 million for the same period last year. Comparable store sales for the quarter declined 2.5% compared with an increase of 1.5% in the third quarter last year. Fred's total sales for the first nine months of fiscal 2012 increased 3% to $1.422 billion from $1.381 billion for the same period last year. Comparable store sales for the first nine months of 2012 decreased 0.8% compared with a 0.7% increase for the same period last year.

Commenting on the results, Bruce A. Efird, Chief Executive Officer, said, "We were gratified to see general merchandise sales and traffic improve during the final month of the quarter in response to our increased marketing initiatives. The third quarter reflected the intensely challenging retail climate we face and the effects of the brand-to-generic shift on pharmacy sales throughout the quarter. Despite this negative impact on top-line sales, our pharmacy department produced strong results for the quarter, with growth in comparable prescription counts and increased gross margins.

"Management supports the Board's decision to issue a special dividend payable in December, which recognizes the quality and strength of our balance sheet and cash flows," Efird continued. "Our stores are ready and well stocked and our merchandising and marketing plans are in place to deliver great values for our customers in the holiday season ahead. In short, we believe Fred's remains well positioned for a solid finish to 2012, and that the Company will continue to generate momentum in the upcoming fiscal year."

Fred's gross profit for the third quarter of 2012 increased 2% to $138.1 million from $136.0 million in the prior-year period. Gross margin for the quarter increased to 30.7% compared with 30.6% compared with the same quarter last year. Gross profit for the first nine months of 2012 increased 4% to $417.7 million from $400.8 million in the prior-year period. Gross margin for the nine-month period increased to 29.4% compared with 29.0% in the prior-year period. The improvement for the quarter and year-to-date period was driven by a higher pharmacy department gross margin that was partially offset by increased LIFO charges on pharmacy department inventory, as well as promotional markdowns and shrinkage.

Selling, general and administrative expenses for the quarter, including depreciation and amortization, deleveraged 90 basis points to 28.5% of sales from 27.6% of sales in the prior-year quarter. For the first nine months of 2012, selling general and administrative expenses deleveraged 90 basis points to 27.2% from 26.3% of sales in the first nine months of 2011. The deleveraging in the quarter and year-to-date periods was primarily attributable to higher depreciation and amortization, as well as labor and occupancy costs associated with new store and pharmacy growth.

Operating income for the third quarter of 2012 was $10.1 million or 2.2% of sales compared with $13.6 million or 3.0% of sales in the prior-year period. For the first nine months of 2012, operating income was $30.6 million or 2.2% of sales from $37.0 million or 2.7% of sales in the first nine months of 2011.

Through the first nine months of the year, the Company opened 27 new locations, comprising 14 new stores and 13 new Xpress pharmacies. Fred's also closed 13 stores during the year and converted six Xpress pharmacies to full size stores.

Guidance for the fourth quarter reflects an extra week, which is the result of the 53rd week in fiscal year 2012. In the fourth quarter of 2012, the Company expects total sales to increase in the range of 9.0% to 11.0%, or 2% to 4% excluding the extra week. Comparable store sales are expected to increase 6% to 8%, or negative 2% to flat excluding the extra week, compared with an increase of 0.1% in the fourth quarter last year.

Fourth quarter 2012 earnings per diluted share are forecasted to increase 19% to 38% to the range of $0.31 to $0.36 compared with earnings per diluted share of $0.26 during the same quarter last year. The extra week in the quarter is expected to add $0.02 earnings per share. Based on results for the first nine months of 2012 and this outlook, the Company now expects total earnings per diluted share for 2012 to be in the range of $0.94 to $0.99.

Currently, Fred's, Inc. operates 708 discount general merchandise stores, including 21 franchised Fred's stores, in the southeastern United States. For more information about the Company, visit Fred's website at www.fredsinc.com.

A public, listen-only simulcast and replay of Fred's third quarter 2012 conference call may be accessed at the Company's web site or at www.earnings.com. 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 run until December 20, 2012.

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.These risks and uncertainties include, but are not limited to, those associated with the Company's announced strategic plan, 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; 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; costs and delays in acquiring or developing new store sites; and other contingencies discussed in the Company's Securities and Exchange Commission filings.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

October 27,

2012

13 Weeks Ended

October 29,

2011

Percent

Change

Net sales

$

450,574

$

444,378

1.4

%

Operating income

$

10,120

$

13,559

(25.4

)%

Net income

$

6,561

$

9,032

(27.4

)%

Net income per share:

Basic

$

0.18

$

0.24

(25.0

)%

Diluted

$

0.18

$

0.24

(25.0

)%

Average shares outstanding:

Basic

36,443

37,618

Diluted

36,583

37,669

39 Weeks Ended

October 27,

2012

39 Weeks Ended

October 29,

2011

Percent

Change

Net sales

$

1,421,895

$

1,381,467

2.9

%

Operating income

$

30,587

$

36,950

(17.2

)%

Net income

$

23,073

$

23,632

(2.4

)%

Net income per share:

Basic

$

0.63

$

0.61

3.3

%

Diluted

$

0.63

$

0.61

3.3

%

Average shares outstanding:

Basic

36,626

38,617

Diluted

36,761

38,704

FRED'S, INC.

Unaudited Fiscal 2012 Third Quarter Results

(in thousands, except per share amounts)

13 Weeks Ended

October 27,

2012

% of

Total

13 Weeks Ended

October 29,

2011

% of

Total

Net sales

$

450,574

100.0

%

$

444,378

100.0

%

Cost of goods sold

312,441

69.3

%

308,412

69.4

%

Gross profit

138,133

30.7

%

135,966

30.6

%

Depreciation & amortization

9,880

2.2

%

8,463

1.9

%

Selling, general and administrative expenses

118,133

26.3

%

113,944

25.7

%

Operating income

10,120

2.2

%

13,559

3.0

%

Interest expense, net

129

0.0

%

100

0.0

%

Income before income taxes

9,991

2.2

%

13,459

3.0

%

Provision for income taxes

3,430

0.7

%

4,427

1.0

%

Net income

$

6,561

1.5

%

$

9,032

2.0

%

Net income per share:

Basic

$

0.18

$

0.24

Diluted

$

0.18

$

0.24

Weighted average shares outstanding:

Basic

36,443

37,618

Diluted

36,583

37,669

Unaudited Fiscal 2012 Nine-month Results

(in thousands, except per share amounts)

39 Weeks Ended

October 27,

2012

% of

Total

39 Weeks Ended

October 29,

2011

% of

Total

Net sales

$

1,421,895

100.0

%

$

1,381,467

100.0

%

Cost of goods sold

1,004,162

70.6

%

980,628

71.0

%

Gross profit

417,733

29.4

%

400,839

29.0

%

Depreciation & amortization

28,718

2.0

%

24,312

1.7

%

Selling, general and administrative expenses

358,428

25.2

%

339,577

24.6

%

Operating income

30,587

2.2

%

36,950

2.7

%

Interest expense, net

402

0.1

%

263

0.0

%

Income before income taxes

30,185

2.1

%

36,687

2.7

%

Provision for income taxes

7,112

0.5

%

13,055

1.0

%

Net income

$

23,073

1.6

%

$

23,632

1.7

%

Net income per share:

Basic

$

0.63

$

0.61

Diluted

$

0.63

$

0.61

Weighted average shares outstanding:

Basic

36,626

38,617

Diluted

36,761

38,704

FRED'S, INC.

Unaudited Balance Sheet

(in thousands)

October 27,

2012

October 29,

2011

ASSETS:

Cash and cash equivalents

$

16,119

$

19,978

Inventories

392,523

377,451

Receivables

30,584

32,158

Other non-trade receivables

36,252

30,132

Prepaid expenses and other current assets

11,515

14,271

Total current assets

486,993

473,990

Property and equipment, net

158,143

160,958

Intangibles

37,601

26,068

Other non-current assets

3,386

3,331

Total assets

$

686,123

$

664,347

LIABILITIES AND SHAREHOLDERS' EQUITY:

Accounts payable

$

153,526

$

150,742

Current portion of indebtedness

1,281

362

Accrued expenses and other

43,220

44,449

Deferred income taxes

24,870

24,019

Total current liabilities

222,897

219,572

Long-term portion of indebtedness

5,438

7,024

Deferred income taxes

6,541

2,134

Other non-current liabilities

18,074

20,834