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Fred's (FRED) Comp Sales Hit by Pharmacy Decline in June

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Fred’s Inc. made a soft start to the second quarter of fiscal 2016 with comps demonstrating a year-over-year decrease in the first two months of the quarter. After posting a year-over-year decline in May 2016, the trend was repeated in the five-week fiscal month of June, which ended on Jul 2, 2016. Fred’s also reported a decline in sales figures for the above mentioned period.

During the period, Fred’s comps declined 1.3% compared to an increase of 1.6% recorded a year ago. Total sales slipped 2.3% to $208.5 million from $213.3 million reported in Jun 2015.

Sales in Jun 2016 were below management’s expectations, as was announced during the first-quarter fiscal 2016 earnings conference held on May 26.

Front store core categories such as health and beauty aids, seasonal, apparel, toys, lawn and garden and electronics reported sales growth and higher comps. These categories partly offset sales decline in paper, chemicals and food. However, the pharmacy department performed weakly and reported lower-than-expected comps during the month mainly due to industry-wide slowdown in specialty pharmacy sales.

For the first five months of fiscal 2016, Fred’s sales increased 3.8% year over year to $923.2 million. Year-to-date comps increased 0.1% compared to an increase of 0.8% in the year-ago period.

For the second quarter, comparable store sales are expected to remain flat or increase up to 2%. Total sales are projected to range from flat to an increase of 2%. Earnings per share are projected in the range of flat to 3 cents compared with the nearly flat results in the prior-year quarter.

During June, Fred’s closed one full-service location. As of July 2, 2016, Fred's operated 653 discount general merchandise stores and three specialty pharmacy-only locations in 15 states in the southeastern United States..

For Jul 2016, Fred’s expects to see margin improvement in front store categories. The company is preparing to focus more on high-margin categories and labor management programs which will have a positive impact on its cost of labor. The pharmacy department is expected to be resilient and benefit from the new Hepatitis C drugs being introduced in July 2016.

This Zacks Rank #3 (Hold) stock is making a comeback with sales and profit initiatives reaping significant benefits. However, we are concerned about the decline in margins.

Stocks to Consider

Better-ranked stocks in the discount retail sector are The TJX Companies Inc. (TJX - Free Report) , Burlington Stores Inc. (BURL - Free Report) and Dollar General Stores (DG - Free Report) , all carrying a Zacks Rank #2 (Buy).

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