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Recently, Fred's Inc. (FRED - Analyst Report) reported total sales and comparable sales for December 2012, both of which declined from the prior-year level.

Comparable store sales for the month dropped 4.2%, versus a marginal decline of 0.4% in the year-ago level. The decline in comparable store sales in December 2012 resulted from the ongoing economic challenges in U.S. that compelled the customers to limit their discretionary and seasonal purchases.

Total sales for December 2012 dipped 1% from the prior-year to $209.9 million. Successful completion of the company’s layaway sales program and script improvement in the pharmacy department was offset by reduced purchasing power due to diminishing disposable income of U.S. customers.

The company opened four new stores and one Xpress pharmacy and closed two Xpress pharmacy locations during the month.

The company expects stronger sales in the upcoming months helped by increased marketing efforts in specialty drugs and clinical services, as well as contribution from strategic acquisitions. Moreover, discount tobacco programs and the new Hometown Auto and Hardware program aiding store expansion are also expected to boost comparable store sales.

As per the guidance provided during the third quarter conference call, Fred’s expects fourth quarter total sales, including the one extra week, to increase in the range of 9% to 11%. Comparable store sales, including the extra week, are expected to increase 6% to 8% in the fourth quarter of 2012.

We are encouraged by Fred’s focus on high-margin products and its initiative of revamping its stores and upgrading stocks to attract more traffic. These factors in combination bode well for long-term growth, despite 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 which competes with Dollar General Corporation (DG - Analyst Report) and Wal-Mart Stores Inc. (WMT - Analyst Report). The stock carries a Zacks #3 Rank (a short-term Hold rating).

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