This prompted analysts to revise their estimates higher for both 2012 and 2013, sending the stock to a Zacks #2 Rank (Buy).

On top of strong earnings growth, Fred's offers investors a dividend that yields a solid 1.6%. And valuation looks attractive with shares trading well below the industry median on both a price to earnings and price to book value basis.

Company Description

Fred's, Inc. operates 700 discount general merchandise stores, including 21 franchised Fred's stores, in the southeast; 325 locations offer in-store pharmacies.

The company targets low to middle income consumers in small to medium sized towns. It was founded in 1947 and is headquartered in Memphis, Tennessee.

Fourth Quarter Results

Fred's reported better than expected results for the fourth quarter on March 21. Earnings per share came in at 27 cents, beating the Zacks Consensus Estimate by 3 cents. It was a 14% increase over the same quarter in 2010.

Total sales rose 2% to $497.6 million, in-line with the Zacks Consensus Estimate. Same-store sales inched up 0.1% on top of a 2.3% increase in the same quarter last year.

Despite fears of rising food costs negatively affecting profit margins at retailers, gross profit held steady at 27.7% of total sales. Meanwhile, selling, general and administrative expenses declined 10 basis points to 24.8% of total sales as the company leveraged its fixed expenses.

These factors led to a 4% increase in operating income year-over-year. Earnings per share was boosted in part by a 6% lower share count.

Estimates Rising

Following solid Q4 results, management provided initital 2012 earnings guidance of $0.96-$1.04 on sales growth of 5-7%. This prompted analysts to revise their estimates higher for both 2012 and 2013, sending the stock to a Zacks #2 Rank (Buy).

The 2012 Zacks Consensus Estimate is now $0.99, within guidance, and representing 14% growth over 2011 EPS. The 2013 consensus estimate is currently $1.10, corresponding with 11% growth.

Dividend

In addition to solid earnings growth, the company pays a dividend that yields 1.6%. After holding its dividend steady for more than 6 years, the company raised it during the depths of the Great Recession in early 2009. And it has hiked its dividend 3 times since then.

Reasonable Valuation

The valuation picture looks reasonable for this discount retailer. Shares trade at 14.6x 12-month forward earnings, well below the industry median of 17.8x and its 10-year median of 16.5x.

Its price to book ratio of 1.3 is also well below the industry multiple of 3.2.

The Bottom Line

With rising estimates, strong growth, a solid 1.6% yield and reasonable valuation, Fred's offers investors attractive total return potential.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor.