Fred Posts Weak Comp Sales in Nov

Recently, Fred's Inc.’s ( FRED - Analyst Report ) reported total sales and comparable sales for November 2012. Both total sales and comparable sales declined from the prior-year level.

Total sales for November 2012 dipped 1% from the prior-year quarter to $150.4 million. Top line was significantly impacted by the recent shift in the pharmacy sales from branded drugs toward generic ones.

Comparable store sales for the month also dropped 3.6%, in contrast to a growth of 1.5% in the prior-year quarter. The decline in comparable store sales in November 2012 resulted from strong competitions from the peer companies. Comparable store sales were impacted by intensive brand building by its competitors surrounding Thanksgiving and Black Friday.

The company expects stronger sales in the upcoming months owing to increased marketing efforts. As per the guidance provided at the third quarter conference call, Fred’s expects fourth quarter total sales, including one extra week, to increase in the range of 9% to 11%. Comparable store sales, including one extra week, are expected to increase 6% to 8% in the fourth quarter of 2012.

We are encouraged with Fred’s focus on high margin products, its initiative of revamping its stores and upgrading stocks to attract more traffic. All these bode well for long-term growth, despite the short-term headwinds. However, a tough retail environment and declining comparable store sales over the past several months remain a concern.

We currently have a long-term Neutral recommendation on Fred’s. The stock carries a Zacks #3 Rank (a short-term Hold rating). Its peers, Dollar General Corporation ( DG - Snapshot Report ) and Wal-Mart Stores Inc. ( WMT - Analyst Report ) , both carry a Zacks #3 Rank (short-term Hold rating).