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Discount-store operator, Fred's Inc. (FRED - Analyst Report) reported 1% year-over-year rise in total sales to $170.9 million, for the month of September 2012. However, comparable store sales declined 3.8% year over year, compared to a sales growth of 1.1% achieved in the same month last year.
As expected, September comparable store sales were significantly impacted by the shift towards generic drugs from the high priced branded drugs in the pharmacy department. The decline in September comparable store sales was also due to weak sales in the tobacco, softlines and fall seasonal goods categories. However, segments like Pet, Celebration and Party, Auto, Hardware and Food generated strong sales in the month. During September 2012, the company added one store and two express pharmacy counters. The company closed one store during the month.

Fred’s expects its October sales and third quarter results to meet expectations. The company intends to achieve sales growth by investing in brand building and aggressively pursuing pharmacy acquisitions.

For the third quarter of 2012, Fred’s forecasts its total sales to increase 2% to 4%. Comparable store sales are expected to dip 1% to 3% for the third of quarter of 2012. The company expects earnings to remain within the range of 22 cents to 26 cents per share in the third quarter of 2012.

We are positive about Fred’s initiative of revamping its stores and upgrading stocks to attract more traffic. Also, persisting sluggish economy is likely to compel consumer spending to shift from high-end products to low priced goods, which would benefit the company.

However, we prefer to stay on the sidelines as Fred’s has been experiencing weak comparable store sales for the past several months. Also, the absence of international exposure deprives Fred’s of the benefits of high growth opportunities in emerging markets like China, Brazil, India, Mexico, Russia and Southeast Asia.

As a result, we currently have a Neutral recommendation on Fred's Inc., supported by a Zacks #3 Rank (short-term ‘Hold’ rating).

Based in Memphis, Tennessee, Fred's Inc. sells frequently purchased items, like household goods, apparel, food, tobacco, and healthcare and paper products through company owned discount general merchandise stores, franchised "Fred's" stores.

Another Tennessee-based discount retailer company – Dollar General Corporation (DG - Analyst Report) – currently has a Neutral recommendation in the long term though its stock carries a Zacks #2 Rank (short-term ‘Buy’ rating).

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