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Unseasonable cold weather that continued through March and the calendar shift of Easter marred the sales results at discount retailer Fred’s Inc. (FRED - Analyst Report). Comparable store sales declined 1.2% in Mar 2014, which was better compared to a  decline of 3.0% in the year-ago period as bad weather was offset by positive effects of reconfiguration plan of Fred’s.

Total sales for the month increased only 1.0% year over year to $191.2 million. Ice storms that affected the Southeast region of America resulted in extreme cold weather during January and February. The after-effect continued well into March, which disrupted shopping trends and offset the positive effect of Fred’s’ reconfiguration plan.

However, reconfiguration of departments like pharmacy, auto and hardware performed well during the month. Fred’s also opened one pharmacy store and closed two stores without pharmacies in the month. 

Fred’s expects the weather conditions to improve during April as its stores are well prepared for the spring season and Easter holiday. Fred’s plans to reconfigure approximately 70 stores during the month of April.

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 of 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 Results

On Mar 27, Fred’s announced its fourth-quarter fiscal 2013 earnings results. Although fourth-quarter earnings of 17 cents exceeded the guidance range of 13 to 16 cents, we want to remind investors that the range was lowered following soft comps announced by the company for the month of January.

Moreover, sales slipped 7.2% year over year and missed the Zacks Consensus Estimate by 1%. Lower-than-expected sales resulted from store closings following extreme weather conditions, especially in January. The company also saw soft margins in the quarter due to merchandise markdown and weak sales.

Bleak Outlook for First-Quarter Fiscal 2014

Management expects these headwinds to continue into the first quarter. In fact, harsh weather heavily affected general merchandise sales during the months of February and March as well – the first two months of the first quarter. Again, lower fourth-quarter 2013 sales raised the inventory levels which the company was unable to clear, in turn delaying spring selling.

For first-quarter fiscal 2014, Fred’s expects total sales to be flat compared to an increase of 2% in the previous year. Comparable-store sales are expected to be flat to down 2%, compared to a decline of 1.3% in the previous year. Earnings per share are forecasted in the range of 23 to 27 cents for the first quarter, lower than 31 cents reported in the year-ago quarter.

The Zacks Consensus Estimate is pegged at 25 cents for the first quarter of fiscal 2014.

Other Stocks to Consider

Fred's currently carries a Zacks Rank #4 (Sell). Some better-ranked stock in the consumer staples sector worth considering are Supervalu Inc. (SVU - Analyst Report), Diamond Foods Inc. (DMND - Analyst Report) and Inventure Foods Inc. (SNAK - Snapshot Report). All the stocks carry a Zacks Rank #2 (Buy).

Read the Full Research Report on FRED
Read the Full Research Report on SVU
Read the Full Research Report on DMND
Read the Full Research Report on SNAK


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