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Fred's Beats on Q4 Earnings; Outlook Bleak

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Fred's Inc.’s fourth-quarter fiscal 2013 earnings of 17 cents exceeded both the Zacks Consensus Estimate and year-ago results by 13.33%. The fourth-quarter results also exceeded the company’s expected range of 13 to 16 cents. Management had lowered fourth-quarter earnings outlook during its conference call for January same store sales from 18 cents to 23 cents. Frequent boutique shutdowns due to harsh weather in the last month of the quarter led to the guidance revision.

Revenues and Margin Performance

Total fourth-quarter sales slipped 7.2% to $495.1 million from $533.4 million in the year-ago quarter. Sales missed the Zacks Consensus Estimate of $500.0 million by 1%. The lower-than-expected sales resulted from 120 full and partial daily stores closings during January due to extreme weather. Weather impacted sales negatively by 100 basis points (bps) during the quarter. Excluding the effect of an extra week in the comparable prior-year quarter, total sales inched up 0.5%.

Comparable store sales increased 0.1% versus a decline of 2.8% in the year-ago period. Increase in average customer transaction was partially offset by lower customer traffic during the quarter.

During the quarter, Fred’s opened three stores, consisting four full-service stores and four Xpress pharmacy locations. It, however, closed four full-service stores and one Xpress pharmacy location.

Gross profits slipped 10% to $133.6 million and gross margin shrank 90 basis bps to 27.0% from the year-ago quarter due to higher merchandise markdowns. Merchandise markdowns were negatively affected by continued sales mix shift toward lower-margin consumables and higher inventory shrinkage.

Disciplined cost management lowered selling, general and administrative (SG&A) expenses in the quarter. SG&A expense margin leveraged 40 bps to 25.9% in the quarter.

Operating income declined 34% to $5.6 million or 1.1% of sales compared with $8.5 million or 1.6% of sales in the prior-year period due to soft sales.

Fiscal Results

Fred's Inc.’s fiscal 2013 earnings of 71 cents missed both the Zacks Consensus Estimate by 5.3% and company’s expected range of 81 cents–86 cents per share. It however surpassed year-ago results by 8% backed by the company’s reconfiguration plans. Net sales increased 1.4% year over year to $1.9 billion and was in line with the Zacks Consensus Estimate


First-quarter fiscal 2014

Fred’s carrying a Zacks Rank #4 (Sell) provided a conservative outlook for first-quarter fiscal 2014 as it expects business headwinds to continue. Moreover, February and March sales have been heavily impacted by bad weather affecting general merchandise sales.

For first-quarter fiscal 2014, Fred’s expects total sales to be flat compared to an increase of 2% in the previous year. Comparable store sales are expected to be flat to down 2%, compared to a negative 1.3% in the previous year. Earnings per share are forecasted in the range of 23 to 27 cents for the first quarter compared with 31 cents in the year-ago quarter.

Fiscal 2014 Outlook

Management expects general merchandise and pharmacy department to turn positive in the second half of the year backed by new programs to reconfigure its stores. For fiscal 2013, Fred’s expects total sales to increase 1% to 3%. Comparable store sales for 2014 are expected to be flat to an increase of 2% in 2013.

Earnings per share for 2014 are expected in the range of 74 to 80 cents up 8% from 2013.

The Zacks Consensus Estimate is pegged at 32 cents per share for the first quarter and 88 cents for fiscal 2014.

Bad weather conditions during the last two months also affected discount retailers like Wal-Mart stores Inc. (WMT - Free Report) , Target Corporation (TGT - Free Report) and Costco Corporation (COST - Free Report) which reported decline in same store sales for the previous quarter.

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