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Fred's to Expand Pharmacy Unit with Rite Aid Buyout, Stock Up

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Discount retailer Fred’s Inc. recently entered into an agreement with Rite Aid Corporation RAD) and Walgreens Boots Alliance, Inc. WBA to buy 865 stores located in the Eastern and Western Unites States and certain assets that are required for store operations. The deal is worth $950 million and was paid in cash.

The news was of great interest to investors which is evident from the price movement of the stock which soared almost 82% on Dec 20, 2016, after the agreement was announced. So far this year, stocks of the company have gained 23.3% outperforming the Zacks categorized Retail-Discount & Variety industry which showcased a gain of 9%. The outperformance can be attributed to the robust performance of the company’s pharmacy segment.

 

 

The deal does not require Fred’s shareholders approval. However, the company can forge ahead with the deal only after Rite Aid’s proposed acquisition by Walgreens materializes post the Federal Trade Commission (FTC) clearance. Both the parties anticipate the deal to close by first-half fiscal 2017.

The sell off of these 865 stores is a part of divestiture by Rite Aid as a prerequisite for obtaining FTC approval for the proposed Walgreens takeover of Rite Aid. Walgreen had entered into an agreement to take over Rite Aid in Oct 2015 for a total enterprise value of approximately $17.2 billion, including acquired net debt.

Fred's pharmacy segment will continue to employ certain field and regional team members of the acquired stores. Upon completion of the acquisition, Fred’s will operate the stores under the Rite Aid banner through a 24-month transition.

The takeover of these 865 stores in key market areas, will position Fred’s as the third largest drugstore chain in the U.S. The company operated 647 discount general merchandise stores and three specialty pharmacy-only locations in 15 states in the southeastern.United States including 18 franchised locations as of Oct 29, 2016. The newly added stores will more than double Fred’s store count and also boost Fred’s urban presence post takeover.

The acquisition complements the company’s ongoing strategy of focusing on the pharmacy department as the specialty pharmacy sector has been gaining momentum recently and has been contributing significantly to revenues. In Apr 2015, Fred’s took over specialty pharmacy chain Reeves-Sain Drug Store in order to expand its presence in the specialty pharmacy arena. Fred’s continues to open pharmacy stores across the U.S. and its specialty pharmacy business is accredited and licensed in all 50 states.

The takeover of the stores is anticipated to aid the Zacks Rank #5 (Strong Sell) company post a turn around from its recent dismal performance. Low traffic at the brick-and-mortar stores along with soft performance of the front store categories are resulting in lower year-over-year sales in the past four quarters.

Stock Pick

A better-ranked stocks in the same sector are Burlington Stores Inc. BURL. Burlington Stores sports a Zacks Rank #1 (Strong Buy) and has an expected earnings growth rate of 19.9%. You can see the complete list of today’s Zacks #1 Rank stocks here.

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