Continuing to build momentum; improvements in
comparable store sales trends and gross margin demonstrate the plan
is beginning to work
Strategic turnaround underway; focused on
reducing SG&A and driving free cash flow
Fred’s Inc. (NASDAQ:FRED) today reported financial results for
the second quarter and six months ended July 29, 2017.
For the second quarter ended July 29, 2017, Fred’s recorded
a net loss of approximately $29.5 million or $0.78
per share, which included the following charges totaling $30.1
million, or $0.63 per share after tax:
- $11.3
million or $0.30 per share after tax for a valuation
allowance against the Company's deferred tax asset resulting from
the pretax loss recorded during the second quarter;
- $15.2 million or $0.26 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 growth strategy;
and other professional and legal advisory fees;
- $2.8
million or $0.05 per share after tax for asset
impairments and other expenses pertaining to the planned closure of
13 stores and certain pharmacy departments, as part of Fred’s
ongoing asset management of its overall chain; and
- $0.8 million or $0.02 per share after
tax for other non-recurring charges.
Fred’s second quarter loss compares to a net loss of $6.9
million or $0.18 per share for the second quarter of
2016.
Commenting on today’s results, Michael K. Bloom, Chief
Executive Officer, said, “Our overall comparable store sales
represent the best quarterly performance in the past year. In
addition, EPS and EBITDA, excluding non-operating charges, improved
over the prior year period. We are starting to gain momentum and
are seeing progress across the business.”
Mr. Bloom continued, “Our Retail Pharmacy business continues to
improve, delivering flat comp scripts year-to-date adjusted for 90
days, and increases in our Generic Dispensing Rate and our overall
gross profit dollars per script. In Specialty Pharmacy, we continue
to drive sales growth through geographic expansion into new markets
and diversification within our existing therapies. Despite ongoing
headwinds in Consumables in the Front Store, we experienced a 60
basis point improvement in comparable sales in our General
Merchandise division over the same quarter last year.”
Mr. Bloom concluded, “While we are encouraged by our progress
and performance trends, we recognize there is more work to be done.
Our work over the past few quarters, including investing in
technology, people and processes, was integral to stabilizing our
infrastructure and creating a foundation to build upon. Our
turnaround strategy is now expanded to focus on reducing SG&A
and driving free cash flow. By lowering our SG&A to be more in
line with our peers and embracing our roots of succeeding in small
to mid-sized rural markets where we have a track-record of
generating free cash flow, we are well-positioned to grow our
bottom line and enhance shareholder value.”
Second Quarter 2017
Net sales for the second quarter were $507.8 million, down
4.1% from $529.5 million in the same period last year.
Comparable store sales for the second quarter declined 0.3% versus
a decrease of 2.0% in the second quarter last year. Comparable
store sales in the second quarter of 2017 included a negative 0.8%
impact as a result of the sale of low productive discontinued
inventory versus the second quarter of 2016.
Gross profit for the second quarter of 2017 decreased
to $126.0 million from $128.1 million in the
prior-year period, primarily explained by a decrease in sales
resulting from the closure of 39 underperforming stores. Gross
profit margin for the quarter increased 60 basis points to 24.8%
from 24.2% in the same quarter last year, reflecting the benefit of
key turnaround initiatives intended to drive profitability and cash
flow.
Fred’s recorded a LIFO reserve reduction of $0.3
million in the second quarter of 2017 compared with an
increase of $0.2 million in the same quarter last
year.
Selling, general and administrative (“SG&A”) expenses for
the quarter, including depreciation and amortization, increased to
30.3% of sales from 26.3% of sales in the prior-year quarter. The
increase in expenses was primarily related to the bank fees,
financing termination fees, professional and legal advisory fees
incurred in connection with the proposed acquisition of Rite
Aid stores as well as advertising expense increases.
For the second quarter of 2017, operating loss, which is
equivalent to earnings before interest and taxes, or EBIT, a
non-GAAP financial measure, increased to a loss of $28.1
million or 5.5% of sales compared with operating loss
of $10.9 million in the same quarter last year.
In the second quarter of 2017, EBITDA, a non-GAAP financial
measure that further excludes depreciation and amortization from
EBIT, declined to a loss of $16.8 million. Second quarter
EBITDA included charges totaling $18.6 million, including:
- $15.2 million or $0.26 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 growth strategy;
and other professional and legal advisory fees;
- $2.6 million or $0.04 per share after
tax for asset impairments and other expenses pertaining to the
planned closure of 13 stores and certain pharmacy departments, as
part of Fred’s ongoing asset management of its overall chain;
and
- $0.8 million or $0.02 per share after
tax for other non-recurring charges.
First Six Months Ended July 29, 2017
For the first six months ended July 29, 2017, Fred’s
recorded a net loss of approximately $66.0
million or $1.76 per share, which included the following
charges totaling $75.0 million, or $1.55 per share after tax:
- $25.8 million or $0.69 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 six months of 2017;
- $32.1 million or $0.55 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 growth strategy;
- $16.3 million or $0.29 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;
and
- $0.8 million or $0.02 per share after
tax for other non-recurring charges.
Fred’s loss for the first six months ended July 29, 2017
compares to a net loss of $5.7 million or $0.15 per share for the
first six months of 2016.
Net sales for the first six months of 2017 were $1.04
billion, down 3.6% from $1.08 billion in the same period
last year. Comparable store sales for the first six months of 2017
declined 0.8% versus a decrease of 0.6% in the same period a year
ago. Comparable store sales for the first six months of 2017
included a negative 1.1% impact as a result of the sale of low
productive discontinued inventory versus the same period a year
ago.
Gross profit for the first six months decreased to $258.9
million from $269.5 million in the same period a
year ago, primarily explained by a decrease in sales resulting from
the closure of 39 underperforming stores. Gross profit margin for
the first six months decreased 10 basis points to 24.9% from 25.0%
in the same period last year, reflecting the growth in low margin
specialty pharmacy sales.
Fred’s recorded a LIFO reserve reduction of $1.3 million in
the first six months of 2017 compared with an increase of $1.1
million in the same period last year.
Selling, general and administrative expenses for the first six
months of 2017, including depreciation and amortization, increased
to 30.9% of sales from 25.8% of sales in the same period last year.
The increase in expenses was primarily related to the bank fees,
financing termination fees, professional and legal advisory fees
incurred in connection with the proposed acquisition of Rite Aid
stores and expenses associated with lease liability impairment,
asset impairments and other expenses pertaining to the closure of
underperforming stores.
For the first six months of 2017, operating loss, which is
equivalent to earnings before interest and taxes, or EBIT, a
non-GAAP financial measure, increased to a loss of $62.3
million or 6.0% of sales compared with operating loss
of $8.5 million in the same period last year.
In the first six months of 2017, EBITDA, a non-GAAP financial
measure that further excludes depreciation and amortization from
EBIT, declined to a loss of $39.4 million. EBITDA for the
first six months of 2017 included charges totaling $49.0 million,
including:
- $32.1 million or $0.55 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 growth strategy; and other professional and legal
advisory fees;
- $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; and
- $0.8 million or $0.02 per share after
tax for other non-recurring charges.
Additionally, in a separate press release, Fred’s announced that
it has appointed Heath Freeman as Chairman of the Board of
Directors, succeeding Tom Tashjian, who will be retiring from the
Board. These changes are effective immediately.
Webcast Information
A public, listen-only simulcast and replay of Fred’s second
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 October 5, 2017.
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 Pharmacy
Tracing its history back to an original store in Coldwater,
Mississippi, opened in 1947, today Fred’s Pharmacy is headquartered
in Memphis, Tennessee, and operates 600 pharmacy and general
merchandise stores, which includes 14 franchised Fred’s Pharmacy
locations and an additional three specialty pharmacy-only
locations. With a unique store format and strategy that combines
the best elements of a healthcare-focused drug store with a
value-focused retailer, Fred’s Pharmacy stores offer more than
12,000 frequently purchased items that address the healthcare and
everyday needs of its customers and patients. This includes
nationally recognized brands, proprietary Fred’s Pharmacy label
products, and a full range of value-priced selections. The Company
has two distribution centers, one in Memphis, Tennessee,
and Dublin, Georgia.
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, those associated with the
Company's announced strategic plan, 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. 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 July
29, 2017
13 WeeksEndedJuly 30,2016
26 Weeks Ended July
29, 2017
26 WeeksEndedJuly 30,2016
Net loss
$ (29.5 ) $ (6.9 )
$
(66.0 ) $ (5.7 ) Interest expense
1.4 0.6
2.7 1.1 Income tax provision / (benefit)
-
(4.6 )
1.0 (3.9 )
Operating loss / EBIT
(28.1 ) (10.9 )
(62.3
) (8.5 ) Depreciation and amortization
11.3
11.8
22.9 23.3
EBITDA
$ (16.8 )
$ 0.9
$ (39.4 ) $
14.8
FRED'S, INC.
Unaudited Financial Highlights
(In thousands, except per share
amounts)
13 Weeks Ended July
29, 2017
13 WeeksEndedJuly 30,2016
Net sales
$ 507,837 $ 529,503 Operating loss
(28,103 ) (10,908 ) Net loss
(29,517 )
(6,928 ) Net loss per share, basic and diluted
$
(0.78 ) $ (0.18 ) Average shares outstanding: Basic
37,461 36,760 Diluted
37,461 36,760
26 Weeks Ended July
29, 2017
26 WeeksEndedJuly 30,2016
Net sales
$ 1,040,157 $ 1,079,051 Operating loss
(62,275 ) (8,480 ) Net loss
(65,978 )
(5,672 ) Net loss per share, basic and diluted
$
(1.76 ) $ (0.15 ) Average shares outstanding: Basic
37,408 36,747 Diluted
37,408 36,747
FRED'S, INC. Unaudited
Fiscal 2017 Second Quarter Results
(In thousands, except per share
amounts)
13 Weeks Ended July
29, 2017
% of Total
13 WeeksEndedJuly 30,2016
% ofTotal
Net sales
$ 507,837 100.0 % $ 529,503
100.0 % Cost of goods sold
381,838 75.2
% 401,365 75.8 % Gross profit
125,999
24.8 % 128,138 24.2 % Depreciation & amortization
11,296 2.2 % 11,761 2.2 % Selling, general and
administrative expenses
142,806 28.1
% 127,285 24.1 % Operating loss
(28,103
) (5.5 )% (10,908 ) (2.1 )% Interest expense,
net
1,437 0.3 % 610
0.1 % Loss before income taxes
(29,540 )
(5.8 )% (11,518 ) (2.2 )% Income tax benefit
(23 ) - (4,590 ) (0.9 )% Net
loss
$ (29,517 ) (5.8 )% $
(6,928 ) (1.3 )% Net loss per share,
basic and diluted
$ (0.78 ) $ (0.18 ) Weighted average shares
outstanding: Basic
37,461 36,760 Diluted
37,461
36,760
26 Weeks Ended July
29, 2017
% of Total
26 WeeksEndedJuly 30,2016
% ofTotal
Net sales
$ 1,040,157 100.0 % $
1,079,051 100.0 % Cost of goods sold
781,246
75.1 % 809,591 75.0 % Gross profit
258,911 24.9 % 269,460 25.0 % Depreciation
& amortization
22,922 2.2 % 23,324 2.2 %
Selling, general and administrative expenses
298,264
28.7 % 254,616 23.6 % Operating
loss
(62,275 ) (6.0 )% (8,480 ) (0.8 )%
Interest expense, net
2,724 0.2
% 1,125 0.1 % Loss before income taxes
(64,999 ) (6.2 )% (9,605 ) (0.9 )%
Income tax provision (benefit)
979 0.1
% (3,933 ) (0.4 )% Net loss
$ (65,978
) (6.3 )% $ (5,672 ) (0.5 )% Net loss per
share,
basic and diluted
$ (1.76 ) $ (0.15 ) Weighted average shares
outstanding: Basic
37,408 36,747 Diluted
37,408
36,747
FRED'S, INC.
Unaudited Balance Sheet
(In thousands)
July 29, 2017
July 30,2016
ASSETS: Cash and cash equivalents
$ 5,732 $ 6,181
Inventories
321,975 346,354 Receivables
50,560 50,096
Other non-trade receivables
31,686 40,035 Prepaid expenses
and other current assets
10,624 10,428 Total
current assets
420,577 453,094 Property and equipment, net
124,682 138,649 Goodwill
41,490 41,490 Other
intangible assets, net
74,922 95,518 Other non-current
assets
1,115 1,630 Total assets
$
662,786 $ 730,381 LIABILITIES AND SHAREHOLDERS'
EQUITY: Accounts payable
$ 125,738 $ 145,390 Current
portion of indebtedness
62 58 Accrued expenses and other
95,753 58,839 Total current liabilities
221,553 204,287 Long-term portion of indebtedness
138,660 105,223 Deferred income taxes
2,960
5,381 Other non-current liabilities
28,944
19,694 Total liabilities
392,117 334,585 Shareholders'
equity
270,669 395,796 Total liabilities and
shareholders' equity
$ 662,786 $ 730,381
View source
version on businesswire.com: http://www.businesswire.com/news/home/20170906005641/en/
Fred’s PharmacyJason Jenne, 901-238-2787Executive Vice
President, Chief Financial Officer and SecretaryorJoele Frank,
Wilkinson Brimmer KatcherEd Trissel / Dan Moore212-355-4449
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