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Fred's Dismal Comps Trend Continues, December Sales Slip

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Fred’s Inc. saw a soft start to the fourth 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 comps in Nov 2016, the trend was repeated in the five-week month of Dec 2016. Fred’s also reported a decline in sales in the above-mentioned period.

During the month of December, Fred’s comps declined 3.4% compared to an increase of 2.4% recorded a year ago. Total sales slipped 3.9% to $222.9 million in the month.

Sales in December were hurt by reduced Supplemental Nutrition Assistance Program (SNAP) benefits for core customers, competitive promotional activity and unusually warm weather conditions, which affected seasonal categories.

These factors offset comparable sales growth at the pharmacy department, which climbed 2% on prescription growth. Health and Beauty along with key holiday categories also posted higher comps and year-over-year sales during the month.

For the first eleven months of fiscal 2016, the Zacks Rank #3 (Hold) company’s sales slipped 0.8% to $1.9 billion. Comps, on the other hand, declined 2% versus an increase of 1.5% in the year-earlier period.

As of Dec 31, 2016, Fred’s operates 647 discount general merchandise stores and three specialty pharmacy-only locations across 15 states in the southeastern U.S. Included in the store count are 18 franchised locations as well. Also, there are 370 full service pharmacy departments located within Fred's stores, including four franchised locations.

However, the company is geared to more than double its store count very soon. In Dec 2016, Fred’s entered into an agreement with Rite Aid Corporation (RAD - Free Report) and Walgreen Corporation (WBA - Free Report) to acquire 865 stores in the Eastern and Western U.S. The newly-added stores will boost the company’s urban presence. The agreement, scheduled to close in the first half of 2017, should position Fred’s as the third largest pharmacy retailer in 2017.

The agreement boosted investor confidence which helped the stock stage a comeback, rallying 68% over the past one month. The stock also outshined the Zacks categorized Retail Wholesale industry’s decline of 1.4% despite the decline in comps over the past one month. The stock has been losing ground over the trailing eleven months, prior to the deal announcement.

Stock to Consider

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