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Fred's Continues to Post Weak Comps

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In spite of a tough retail environment, Fred’s Inc. has been posting better comps for several past months. After posting flat year-over-year comps for Nov 2013, off-price retailer Fred’s' comps inched up only 1.4% for the five weeks of Dec 2013 compared with a 4.2% fall in the year-ago month. The comps were within management’s expectation of a flat to up 2% growth announced during the third-quarter conference call.

Total sales for the month were flat at $209.5 million compared with the year-ago period as benefits from Fred’s’ reconfiguration plan were offset by a general tendency among consumers to restrain their spending.

Categories like Pharmacy, Hometown Auto & Hardware, Pets, Small Appliances and Consumables performed well during the month. However, the strong performances of these businesses were partly offset by a competitive environment which continued to exert pressure on the comps. Moreover, Fred’s’ promotional campaigns to boost sales during Black Friday did not produce any positive results.

Fred’s opened two stores with pharmacies and two Xpress pharmacy locations in Dec 2013. As of Dec 2013, Fred’s operated 701 discount general merchandise stores, including 21 franchised Fred's stores, in the southeastern United States.

During the recently concluded quarter reported on Nov 27, 2013, Fred’s’ total sales increased 2.0% year over year to $460.5 million, slightly missing the Zacks Consensus Estimate of $461.0 million. Sales were within Fred’s’ top-line growth expectation of 1%–3%. Modest sales gain in food and tobacco and pharmaceuticals businesses/segments were offset by sales decline in household goods, apparel and linens, paper and chemicals and franchise categories.

Fred’s’ comps climbed 1.4% during the quarter, compared to a 2.5% decline a year ago, and within management’s expectation of flat to up 2%.

We are encouraged with Fred’s' 3-year reconfiguration plan, through which the company is increasing its focus on higher-margin categories and moving away from the lower-margin consumable categories. The company is remodeling and refreshing its store layouts and allocating space to highlight the 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 has plans to convert 150 to 200 stores in 2014 and take up the pharmacy penetration up to 60% by  2014-end.

Other Stocks to Consider

Fred's currently carries a Zacks Rank #4 (Sell). Other diversified retailers worth considering include The TJX Companies Inc. (TJX - Free Report) , Columbia Sportswear Company (COLM - Free Report) and Micheal Kors Inc. (KORS - Free Report) . All these stocks carry a Zacks Rank #2 (Buy).

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