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Factors Setting the Stage for Fred's (FRED) in Q4 Earnings

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Fred's, Inc. is scheduled to report fourth-quarter fiscal 2017 results on Apr 18, before the opening bell. Well, the company has been reeling under soft comparable store sales (comps) for quite some time now, which along with intense promotional activity has been weighing on its bottom line. Incidentally, the company has been reporting a loss for six straight quarters.

The impact of these factors is clearly visible in investors’ sentiment, as the company’s shares have lost close to 81% in a year, as against the industry that gained nearly 18%. In fact, investors’ concerns over Fred’s upcoming release is also evident from the 9.3% drop in its stock price over the last seven trading sessions.

 


 

On that note, let’s delve deeper into the factors likely to impact this quarter and see if Fred’s strategic initiatives to counter these hurdles can provide any respite.

Dismal Comps Raise Concerns

Fred’s’ comps slipped 1.2%, 0.3% and 0.8% during the first, second and third quarters, respectively – mainly attributable to sluggish store traffic, which has also resulted in many store closures. Apart from this, persistent rise in generic dispensing rate, sale of low productive discontinued inventory, continued challenges in the front store business and competitive consumable categories have been a drag on Fred’s. To make matters worse, Fred’s store expansion plans were gravely impacted by the cancelled Walgreens Boots Alliance (WBA - Free Report) and Rite Aid Corporation (RAD - Free Report) merger in June 2017.

Had the deal materialized, Fred’s would have emerged as the third-largest drugstore chain in the nation after Walgreens and CVS Health Corporation (CVS - Free Report) . Obstacles such as antitrust concerns that cancelled the deal kept Fred’s behind industry leaders. Other than this, the company has also been undertaking intense promotional activity that remains a threat to its margins.

Focus on Cost Cuts & Traffic Driving Initiatives to Help?

Nevertheless, Fred’s is making solid attempts to improve its business. To this end, the company has been making efforts to drive store traffic, which has shifted its focus to pharmacy organization. This is likely to drive scripts into its stores and enhance services for patients. Notably, Fred’s Retail Pharmacy business seems to be stable, benefiting from the company’s shift to profitable generic prescriptions. In order to improve retail pharmacy business, the company has been expanding flu shots capacity along with aggressive inventory management and marketing initiatives. Further, management continues to build momentum in the Specialty Pharmacy business through investing in sales team, therapy diversification and technology.

Fred’s is also taking endeavors to curtail expenses to achieve profitability. Evidently, the company successfully reduced selling, general and administrative (SG&A) expenses by 7% to $133.4 million in the last reported quarter. Further, management expects lower SG&A costs to help augment free cash flows. The company expects to pass the gains from the reduced cost structure to its customers and drive store traffic. Moreover, management plans to allocate funds derived from the cancelled dividend toward curtailing debt load, buyback shares and undertake other corporate initiatives.

That said, let’s wait and see if these efforts can help Fred’s tide over the aforementioned hurdles and raise investors’ dwindling confidence in the stock.

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