Outside of its home state of
Tennessee, you’re not likely to hear the name Fred’s ((FRED - Analyst Report)) tossed around too
often when referring to grocery stores or pharmacies. When I
Googled “FRED”, I got everything from Barney Rubble’s ole pal to a sheik French
jeweler; Fred’s was on page 6 for me.
To be fair, they operate over 700
stores across the southeastern part of the US and I know that they have their
loyal following. Heck, there are plenty of lesser known companies that are
thriving! But for Fred’s, it’s a matter
of the revenue and EPS numbers that just aren’t adding up and competition from
the likes of Walmart ((WMT - Analyst Report)), Walgreens ((WAG - Analyst Report)) and others that are making matters worse.
FRED is a Zacks Rank #5 and is
ranked as a “sell” overall. Even though
the stock yields a 1.8% dividend, this might not be the place you want to park
your investment dollars.
Last month, Fred’s posted
fourth-quarter fiscal 2012 (quarter ended Feb 2013) earnings of 18 cents per
share, missing the Zacks Consensus Estimate by a penny and was the second miss
in a row after a 14.3% miss in Q32012.
Earnings declined 30.7% from the
prior-year quarter due to the ongoing tough retail environment, challenging
results in general merchandise departments and higher operating expenses.
Sales also missed the Zacks
Consensus Estimate of $534.0 million but increased 7% year over year to $533.4
million. However, excluding the extra week in the current quarter, comparable
store sales declined 3% compared to an increase of 0.1% in the same quarter
last year, while comparable store customer traffic decreased 2.8% from last
Growth Outlook Weak
expects tough retail conditions to continue across the markets in fiscal 2013. Fred’s
forecasts its total sales to increase 1% to down 1% in Q1of fiscal 2013,
store sales, including one extra week, are expected to decrease by 1% to 3% in
the first quarter due to weak sales in March. The company expects earnings to
remain within a range of 26 to30 cents per share in the quarter, compared with
the Zacks Consensus for 27cents. Keep in mind that estimates have dropped from
31 cents just 60 day ago.
full fiscal year 2013, Fred’s expects lower earnings of 77 to 88 cents per
share compared to the Zacks Consensus for 82 cents, which again has come down
substantially from $1.01 just 60 days ago.
When you exclude the impact of favorable income tax adjustment (12 cents per
share) on 2012 results, earnings per share is expected to increase by 12% to
28% for the current year.
Worth the Risk?
When you back up and look at analyst
momentum, it looks decidedly bearish, with almost every analysts notching down their
estimates for all reporting periods over the last 60 days and only 1 moving their
Zacks ESPs (which are a great
predictor of earnings beats when coupled with the Zacks Rank) are all flat,
which is not a good sign for those of you looking for a positive surprise when
FRED reports next on May 16th.
With a P/E of 16.50, FRED is not the
cheapest on valuation, especially when you consider a 1.6% anticipated sales
growth and 11% expectations for earnings.
If you are looking for a diversified
retailer, it might not be a bad idea to check out Sears Holdings (SHLD - Analyst Report), they
are a Zacks Rank #1 or even Costco (COST - Analyst Report), with a Zacks Rank #2.
In a tight margin industry that’s
supplying a strained consumer; I would opt for the best in breed, not the long
shot, come-back kid. Let’s see if the
numbers improve at their next report and decide at that point if the stock is
turning a corner before putting our hard earned dollars into this trade.
A Levy is one of the most highly sought after traders in the world and
a former member of three major stock exchanges. That is why you will
frequently see him appear on Fox Business, CNBC and Bloomberg providing
his timely insights to other investors. He has written and published
two tomes, “Your Options Handbook” and “The Bloomberg Visual Guide to Options”. You can discover more of his insights and recommendations through his two portfolio recommendation services:
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