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Bear of the Day

Even if a management team can identify the company’s negative issues, and create a sound game plan to reduce these issues, it does not always work out.  This is the case of the Bear of the Day, Fred’s Inc. (FRED - Free Report) .  Management has been working on optimizing their stores, and supply chain, but their synergies are not expected to be achieved for another 6-12 months. 

This Zacks Rank #5 (Strong Sell) company operates discount general merchandise stores in a number states in the southeastern United States. Fred's stores generally serve low, middle and fixed income families located in small to medium sized towns. The majority of the company's stores have full service pharmacies. The company also markets goods and services to franchised Fred's stores.

Recent Earnings Announcement

While the company beat both top and bottom line expectations, the company saw their net loss (-$6.9 million) widen by 40.1% from the year ago quarter.  Further, the company posted year over year losses in Total Sales (-3.0%), and Comparable store sales (-2.0%).  Unfortunately for FRED, these negative trends bled into their Q3 data as well; August total sales declined by -3.5% (compared to August of 2015), and comparable store sales also fell by -3% compared to August of last year. 

Management’s Take

According to Michael K. Bloom, Chief Executive Officer, “Looking at the quarter, we are disappointed with the Company's performance, as comparable store sales were down in front store, retail pharmacy and specialty pharmacy. The deleveraging impact of lower-than-plan sales, combined with a decline in gross margin rate for the pharmacy division, driven by generic deflation, reimbursement pressures and unexpected direct and indirect remuneration (DIR) fees, accounted for the quarter's net loss and the revision in guidance for 2016 that we provide later in this release. While we did see progress on initiatives in the front store delivering improved gross margins and operating profit, the headwinds in pharmacy and competitive pressures in the front store were deeper than anticipated. There are some new initiatives that we will be launching in the back half of 2016 that will help set the stage to combat these headwinds. We remain confident that the ongoing plan will result in improved company performance over the long term.

Price and Consensus Graph

As you can see in the price and consensus graph below, FRED’s stock price and future consensus estimates have fallen, and are expected to continue to fall into 2017.

Price and Consensus

Price and Consensus | Quote

Declining Estimates

Analysts over the past 7 days have reduced earnings estimates for Q3 16, Q4 16, FY 16, and FY 17.  Q3 16 fell from -$0.01 to -$0.13, Q4 16 dropped from $0.05 to -$0.08, FY 16 plummeted from -$0.12 to -$0.36, and FY 17 slipped from $0.13 to $0.00

Bottom Line

As management works to fix several issues facing the company, it looks like the solutions and subsequent rebound is about 6-12 months away.  Therefore, it would be prudent to stay away from FRED for the remainder of 2016 while they attempt to shore up their sales issues.

If you are inclined to invest in the Discount Retail segment, you would be best served by looking into Burlington Stores (BURL - Free Report) , Big Lots (BIG - Free Report) , or Dollar Tree (DLTR - Free Report) , all of which currently carry a Zacks Rank #2 (Buy).

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FREDS INC (FRED) - free report >>

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