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Increased promotional environment and competitive activity in the discount retail industry hampered April sales results at discount retailer Fred’s Inc. (FRED - Analyst Report). Comparable-store sales declined 2.3% in the month compared with an increase of 1.2% in the year-ago period. 

Total sales for the month declined 1.6% year over year to $150.0 million. Although weather improved during the month and shoppers returned to the stores. However, higher inventory due to lower sales for the first three months of the calendar year led to delayed spring sales for the company

Total sales for the first three months of fiscal 2014 decreased 0.6% year over year to $498.5 million. Comps slipped 1.9% versus a 1.3% decrease for the year-ago period. The year-to-date results were negatively impacted by ice-storms which hit the Southeast region of America and resulted in unseasonably 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.

The competitive activity offset the company’s marketing strategies. However, reconfiguration departments like hometown, auto and hardware performed well during the month. 

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

Lower Outlook for First-Quarter Fiscal 2014

Management expects these headwinds to mar results for first-quarter fiscal 2014. 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 maintained its sales guidance and expects total sales to be flat versus an increase of 2% in the previous year. Comparable-store sales are expected to be flat to down 2%, compared with a decline of 1.3% in the previous year. Earnings per share forecast was lowered to 18–22 cents from 23–27 cents announced previously.

The Zacks Consensus Estimate is pegged at 20 cents for the first quarter of fiscal 2014.

Other Stocks to Consider

Fred's currently carries a Zacks Rank #4 (Sell). Other stocks in the broader consumer staples sector which look attractive at current levels include Pinnacle Foods Inc. (PF - Snapshot Report), The Hain Celestial Group Inc. (HAIN - Analyst Report) and Inventure Foods Inc. (SNAK - Snapshot Report). All these stocks sport a Zacks Rank #2 (Buy).

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