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Bad weather in February marred the sales results at discount retailer Fred’s Inc. (FRED - Analyst Report). Comparable store sales declined 2.2% in Feb 2014 compared with a decline of 1.5% in the year-ago period. 

Total sales for the month declined 1.0% year over to $157.5 million. Extreme cold weather during the month and snowfall across the southeast region resulted in frequent shutdown of shops and reduced operating hours at the stores. This also disrupted consumer shopping trend and overshadowed the positive effect of Fred’s’ reconfiguration plan.

However, reconfiguration departments like pharmacy, pet, auto and hardware performed well during the month. Fred’s also opened two pharmacy stores in the month. 

Fred’s embarked on a 3-year reconfiguration plan in fiscal 2012, to enhance its focus on higher-margin categories and move away from the lower-margin consumable categories. The company is remodeling and refreshing its store layouts and allocating space to highlight the key revenue-generating categories.

Fred’s is geared to increase pharmacy departments in all its stores, keeping in view its substantial contribution to the overall profit. As part of this strategy, Fred’s plans to convert 150 to 200 stores in 2014 and take up the pharmacy penetration up to 60% by  2014-end. The company also plans to implement its reconfiguration plan in 60 to 80 stores with the Hometown Auto & Hardware department and seasonal expansions.

Fourth-Quarter Fiscal 2013 Guidance

Fred’s is scheduled to report fiscal fourth-quarter 2013 earnings on Mar 27, 2014. Fred’s lowered its fourth-quarter earnings guidance during the January sales conference call. Earnings are now expected in the range of 13 cents to 16 cents versus 18 cents to 23 cents as announced previously.

For fiscal 2013, Fred’s continues to expect earnings in the range of 81 cents–86 cents per share, representing 17% to 25% growth over the year-ago level.

The Zacks Consensus Estimate is pegged at 14 cents per share for the fourth quarter and 75 cents for fiscal 2013.

Other Stocks to Consider

Fred's currently carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the retail sector include Constellation Brands Inc. (STZ - Analyst Report), Diamond Foods Inc. (DMND - Analyst Report) and The Hain Celestial Group (HAIN - Analyst Report). All these stocks carry a Zacks Rank #2 (Buy).

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