Fred's misses analyst expectations, points to aggressive pharmacy expansion as future growth driver

MEMPHIS, Tenn. — The consumer's wallet isn't the only headwind blowing out of a still-struggling economy. Higher operating costs have also helped to undercut Fred's Super Dollar performance in the past year, Fred's CEO Bruce Efird explained to analysts Thursday morning.

Fred's total sales for the 53-week fiscal 2012 increased 4% to $2 billion from $1.9 billion for the same period last year. Comparable store sales increased 1.1%. Excluding the effect of the extra week in the current year, fiscal 2012 comparable store sales for the year decreased 1.4% from the year-earlier period. 

For the year, profit fell 11% to $29.6 million, or 81 cents per share. Fred's projected 2013 earnings to fall between 77 cents per share and 88 cents per share in 2013. Analysts had expected 95 cents per share, according to published reports. Fred's shares were down 1.8% to $13.85 in early morning trading.

But Fred's focus on pharmacy is paying off. Fiscal 2012 pharmacy sales totaled $709.8 million, up 8.2% vs. the year-ago period. 

Fred's realized a 3.7% lift in comparable prescriptions filled, Efird said, adding that stores with a pharmacy "consistently exceed a 4% operating profit on a full P&L basis." Fred's will be looking to extend its pharmacy penetration to as high as 70% of all stores in the next three years.

Fred's plans to remodel between 15 and 20 stores each year, adding a pharmacy operation. All new store openings — between 25 and 30 each year — will include a pharmacy operation. Fred's will also continue its pursuit of between five and 10 independent pharmacy acquisitions per year. 

Sales across the front-end proved challenging, Efird said. "We were disappointed by the results, but now move forward with optimism about future opportunities and embark on a three-year reconfiguration plan designed to help us regain the momentum we experienced in the prior three years," he said. "Our reconfiguration plan will seek to elevate our general merchandise performance by shifting our general merchandise business to a healthier balance of higher gross margin, discretionary departments and consumables, while accelerating our pharmacy and healthcare services growth. Through these efforts, we believe we can improve overall store productivity and space efficiency and enhance product selection in stores with pharmacies," he said. 

"We will aggressively accelerate our pharmacy presence ... while tailoring our merchandise mix toward pharmacy customers in stores with pharmacies," Efird told analysts Thursday morning. Fred's plans to expand categories including health and beauty aids, cosmetics, eye care, vitamins, pain relief and durable medical equipment. 

Efird expects those efforts to yield 2013 earnings growth in the range of 12% to 28% higher than in 2012. 

Through fiscal 2012, Fred's opened 12 net new locations consisting of 20 full-service store openings, 15 new Xpress pharmacy locations and the closure of 14 full-service stores and nine Xpress pharmacy locations. For fiscal 2012, the company added 21 net new pharmacies.

Currently, Fred's operates 712 discount general merchandise stores, including 21 franchised Fred's stores. Within those stores are 346 pharmacies. Fred's may open as many as 30 new pharmacies through fiscal 2013. 



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