Fred's Q4 Profit Down 39%, Results Miss View; Issues Weak Outlook

(RTTNews) - Discount retailer Fred's Inc. (FRED) on Thursday reported a 39 percent decline in profit for the fourth quarter from last year, reflecting lower sales and margins. Results for the quarter missed analysts' estimates.

Looking ahead, the company forecast earnings for the first quarter and fiscal 2014 below analysts' expectations, citing the impact of generic drug price increases.

Bruce Efird, CEO noted that the fourth quarter results were impacted by unusually harsh weather of the past several months and a significant 24% increase in the cost of generic drugs, which reduced gross margin by 100 basis points in Pharmacy department."

The company's net income for the fourth quarter was $3.97 million or $0.11 per share, down from $6.56 million or $0.18 per share in the prior-year period. The latest quarter included 13 weeks, compared to 14 weeks in the same period last year.

The results reflect an impact of $0.06 per share related to a LIFO inventory adjustment and a year-end inventory reserve for general merchandise categories that the company will be exiting, as they do not fit with Fred's long-term strategic plan.

On average, ten analysts polled by Thomson Reuters expected the company to report earnings per share of $0.15 for the quarter. Analysts' estimates typically exclude one-time items.

Net sales for the quarter declined 7 percent to $495.03 million from $533.38 million in the year-ago quarter. Analysts had a consensus revenue estimate of $507.09 million for the quarter.

To make the results comparable with those of the prior-year period, the company eliminated the first week of the latest quarter to make similar 13-week periods.

On this adjusted basis, total sales increased 0.5 percent for the quarter. Comparable store sales on an adjusted basis edged up 0.1 percent, compared with a decline of 2.8 percent in the year-ago period.

Gross margin decreased 90 basis points from the year-ago period to 27 percent. According to the company, the deleveraging for the quarter was driven by markdown reserves on product categories that the company has decided to exit in the coming year.

Operating margin edged down 50 basis points from the prior-year period to 1.1 percent.

During the fourth quarter, Fred's opened three net new locations. This consists of four full-service store openings, four new Xpress pharmacy locations and the closure of four full-service stores and one Xpress pharmacy location.

Looking ahead to the first quarter of 2014, Fred's forecasts earnings per share in a range of $0.23 to $0.27 compared with $0.31 last year. The company attributes the lower earnings to sales pressures on higher-margin seasonal product departments as well as the significant impact of higher generic drug pricing on pharmacy department gross margin.

Fred's projects total sales for the first quarter to be flat to up 2 percent, and comparable store sales to be flat to down 2 percent. This reflects poor weather conditions and weather-related store closings that have affected Lawn & Garden and other seasonal merchandise, and compares with a decrease of 1.3 percent in the same period last year.

Analysts expect the company to earn $0.33 per share for the quarter on revenues of $506.57 million.

According to Efird, the weather impact on sales, expenses and the lingering effects of the utility bills, as well as the impact of generic drug price increases are expected to have a combined impact in the range of $0.10 to $0.12 per share during the first two quarters of 2014. This is reflected in the company's guidance.

For fiscal 2014, Fred's forecast earnings per share in a range of $0.74 to $0.80, an increase of 4 percent to 11 percent over $0.71 for 2013. Street expects the company to earn $0.89 per share for the year on revenues of $2.00 billion.

FRED closed Wednesday's trading at $19.14, down $0.24 or 1.24 percent on a volume of 193,433 shares.