Fred's reviews its options after releasing Q3 results

MEMPHIS, Tenn. Fred’s may soon be on the sales block, Michael Hayes, the company’s chief executive officer stated Thursday morning in announcing the company’s third-quarter results. According to Hayes, Fred’s has received multiple inquiries from qualified parties and the company has retained Merrill Lynch to review a range of strategic and financial alternatives.

In addition, Fred’s has suspended its stock repurchase program, suggesting that a deal may be imminent.

“The inquiries that came in were from different types of players [meaning both strategic and financial],” Hayes told analysts during a conference call Thursday morning. “What triggered it, as you can understand, is our stock is trading around book value,” Hayes said, even though the company has a strong balance sheet.

Fred’s reported total sales of $419.9 million, a 3 percent increase for the third quarter ending Nov. 3. On a comparable store basis, sales increased 1.1 percent for the quarter versus a 3 percent increase in the year-earlier period.

“As announced earlier this month, we now have completed our refresher program, which involved a substantial revamping of our store look and merchandise across our chain,” Hayes stated. “Obviously, a project of that scale caused some disruption to our store operations; however, we think this initiative will strengthen Fred’s competitive position over the long term by making our stores easier to shop and more appealing to customers. Still, early indications from our holiday sales while strong in the new expansion departments, thus far show that consumers remain conservative in spending.”

Fred’s also reported a slow start to the flu season to date, citing three sources—internal trackings, the FAN report and the FluSTAR report. “All of those are very indicative” of a slower start to the season as compared to last year, commented Rick Chambers, Fred’s executive vice president of pharmacy operations. “We saw our first spike around December of last year with the main spike coming in February, but we’re still anticipating a month or two off before we start seeing any relevant flu activity.”

The company reported a drop in its third-quarter sales mix in both health and beauty aids and pharmacy as compared to the year-ago period. The company’s mix included an 8.2 percent of HBA sales, 8.4 percent last year, and a 33.9 percent pharmacy share, compared to 34 percent in last year’s third quarter.

Fred’s gross profit for the third quarter increased 5 percent to $124.9 million, representing a 40 basis point increase in gross margin to 29.7 percent, primarily reflecting the impact of increasing generic drug penetration in the pharmacy department, Fred’s reported.

Fred’s total annual sales for 2006 were $1.8 billion. According to Drug Store News, it is the 26th largest retail pharmacy operator in America, just ahead of Kinney Drugs and Kerr Drug.

Fred’s, Inc. operates 708 discount general merchandise stores mainly in the southeastern United States, including 24 franchised Fred’s stores.

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