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Analyst Blog

On Jul 12, 2013, we upgraded specialty retailer Fred’s Inc. (FRED - Analyst Report) to Neutral, despite sluggish first-quarter of fiscal 2014 results based on its strategic turnaround initiatives to improve its same-store sales.

Why the Upgrade?

After suffering from declining same-store sales for several months, Fred’s embarked on a 3-year reconfiguration plan in early June as a turnaround effort.

As part of this plan, Fred’s increased its focus on higher margin categories and moved away from the lower-margin consumable categories. Moreover, Fred’s is remodeling and refreshing its store layouts and allocating space to highlight the key revenue-generating categories.

Moreover, keeping in view the substantial contribution of the pharmacy department in its operating income, Fred’s is expanding the presence of pharmacy in all its stores.

The initiatives are already bearing fruit as the company posted decent total sales and comparable sales for the month of Jun 2013. Comparable store sales for the month climbed 4.5%, much better than the 4.0% fall in the year-ago month.

After several months of negative same-store sales, the decent June results came as a relief to the investors and most of the estimates were revised upward over the last 30 days. As a result, the Zacks Consensus Estimate for fiscal 2013 went up by 0.2% to 84 cents over the last 30 days. For fiscal 2014, the same went up by 2% to $1.01 over the same period. 

Other Stocks to Consider

Fred’s carries a Zacks Rank #2 (Buy). Other diversified retailers worth considering include Restoration Hardware (RH - Snapshot Report), Dollar Tree, Inc. (DLTR - Analyst Report) and Ross Stores (ROST - Analyst Report). While Restoration Hardware carries a Zacks Rank #1 (Strong Buy), Dollar Tree and Ross Stores carry a Zacks Rank #2 (Buy).

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