Fred's Q2 Profit Down 45%, But Matches View; Tightens Full-year Outlook

(RTTNews) - Discount retailer Fred's Inc. (FRED) on Thursday reported a 45 percent decline in profit for the second quarter, as a tax benefit in the year-ago period more than offset higher sales and comparable store sales in the latest quarter. However, revenue for the quarter slightly missed analysts' estimates, while earnings per share matched their expectations.

Looking ahead, Fred's forecast earnings for the third quarter mostly below Street estimates, but tightened its earnings outlook for fiscal 2013. The company expects discretionary spending for lower-income consumers, a key customer segment, to remain under pressure.

Fred's net income for the second quarter declined to $3.33 million or $0.09 per share from $6.05 million or $0.17 per share in the year-ago period. The prior-year quarter's results included a benefit of about $4 million or $0.11 per share for favorable tax credits related to a state income tax settlement as well as adjustments for other tax related assumptions and estimates.

On average, ten analysts polled by Thomson Reuters expected the company to earn $0.09 per share for the quarter. Analysts' estimates typically exclude special items.

Net sales for the quarter rose 2 percent to $482.18 million from $470.82 million in the previous-year quarter. Analysts had a consensus revenue estimate of $482.45 million.

Comparable store sales for the quarter increased 2.2 percent, compared to a decline of 1 percent in the prior-year quarter.

Gross margin increased 20 basis points to 28.2 percent from 28 percent in the same period last year, primarily driven by an increased pharmacy department gross margin. This specifically reflects the impact of the brand-to-generic mix shift and better shrinkage control.

Looking ahead to the third quarter, Fred's forecasts earnings in a range of $0.19 to $0.23 per share, compared with earnings of $0.18 per share in the year-ago period. The company also forecast total sales to increase in a range of 1 percent to 3 percent.

Analysts expect the company to report earnings of $0.23 per share for the quarter on revenues of $460.97 million.

The company projects comparable store sales for the third quarter to be flat to up 2 percent, versus a decrease of 2.5 percent in the same period last year.

Bruce Efird, chief executive officer said, "...we anticipate that the competitive climate will be intense and the operating environment challenging in the second half of the year. Discretionary spending for lower-income consumers - a key customer segment for Fred's - is expected to remain under pressure."

For fiscal 2013, Fred's now forecasts earnings in a range of $0.81 to $0.86 per share, compared to the prior range of $0.77 to $0.88 per share. Street expects the company to report earnings of $0.85 per share for the year.

During the second quarter, Fred's opened two new stores as well as one new Xpress location and closed 21 locations. Currently, Fred's operates 697 discount general merchandise stores, including 21 franchised Fred's stores, in the southeastern United States.

FRED closed Wednesday's trading at $15.98, up $0.03 on a volume of 75,600 shares.