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Fred’s Inc. (FRED - Analyst Report) is set to report fiscal 2013 first-quarter earnings on May 30. In the last quarter, the company posted a negative earnings surprise of 5.6%. Let’s see how things are shaping up for this announcement.

Growth Factors This Past Quarter

In the fourth quarter of fiscal 2012, the company’s earnings of 18 cents missed the company’s guidance range of 31 cents to 36 cents and the year-ago figures by 30.7%, primarily due to tough retail environment and higher operating expenses.

Sales increased 7% year over year on the back of higher merchandise sales and improved consumer traffic as a result of improved marketing initiatives. Margins improved on the back of higher gross margin in the pharmacy department, partially offset by increased charges on general merchandise margin due to sales mix shift.

However, the retail environment worsened in the beginning of the first quarter of fiscal 2013. Sales at Fred’s were partly hampered due to poor weather conditions and negative impact of the ongoing shift from branded to generic drugs.

Higher taxes, weak job prospects and lower discretionary spending could mark soft sales for April. Moreover, a tightening fiscal policy is hampering consumer confidence. However, weather improved in April and Fred’s quickly resumed its momentum.

Fred’s asserted that it is well on track to achieve its growth targets in the first quarter of fiscal 2013. While announcing its March sales, the company has revealed that it expects tough retail conditions to continue across the markets in fiscal 2013. Comparable 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 to record earnings within the range of 26 cents–30 cents per share in the quarter.

For fiscal 2013, however, Fred’s expects earnings to drop 77 cents – 88 cents per share compared with fiscal 2012. However, excluding the impact of favorable income tax adjustment of 12 cents per share on the 2012 results, earnings per share is expected to increase 12% to 28% in the year.

We, however, are not optimistic about the outlook provided by Fred’s. A tough retail environment and declining comparable store sales over the past several months remain a concern.

Earnings Whispers?

Our proven model does not conclusively show that Fred’s will beat earnings estimates this quarter. That is because a stock needs to have both a positive Earnings ESP (Read: Zacks Earnings ESP: A Better Method) and a Zacks Rank #1, #2 or #3 for this to happen. That is not the case here as you will see below.

Zacks ESP: Both the Most Accurate estimate and the Zacks Consensus Estimate stand at 28 cents. Hence, the difference is 0.00%.

Zacks Rank #3 (Hold): Fred’s’ Zacks Rank #3 (Hold) lowers the predictive power of ESP because the Zacks Rank #3 when combined with 0.0% ESP makes surprise prediction difficult. We caution against stocks with Zacks Ranks #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Our model states that a stock needs to have both a positive earnings ESP and a Zacks Rank #1, #2 or #3 to beat earnings estimates. You could, therefore, consider these other stocks instead:

  • Flower Foods Inc. (FLO - Snapshot Report), Earnings ESP of +2.86% and a Zacks Rank #1 (Strong Buy)
  • Harris Teeter Supermarkets Inc. , Earnings ESP of +1.47% and a Zacks Rank #2 (Buy)
  • Roundy's Inc. (RNDY - Snapshot Report), Earnings ESP of +3.03% and a Zacks Rank #2 (Buy)

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