Following disappointing quarter, Fred's to shut 60 stores and focus on pharmacy

MEMPHIS, Tenn. — In the wake of a disappointing second quarter, Fred's Super Dollar last week announced a series of initiatives, including the shuttering of 60 non-pharmacy stores and a stepped up focus on pharmacy.
"Our second-quarter results reflected the strategic decision the company has made to build our business model for the future as a convenience/pharmacy-centric store, driven by data-based inventory management," reported Bruce Efird, Fred's CEO. "The dynamic challenges we face surfaced in fourth quarter 2013 throughout our general merchandise and pharmacy departments. Customer trips came under pressure from internet intrusion, while generic drug price inflation ramped up faster than our payer increases were occurring," he said. 
"As a result, in January we undertook a deep analysis into all processes with a recognition that retail will not continue with business as usual and changes will have to take place," Efird added. "From this thinking came key changes that will drive the transformation of the stores to a convenience/pharmacy-centric store, which began the in the second quarter."
Those changes included:
  • An acceleration of pharmacy acquisitions that will help Fred's achieve a target of reaching a 65% to 70% penetration rate of stores with a pharmacy. Fred's derived 40.4% of its sales from pharmaceuticals in the second quarter, compared with 36.4% for the same period a year ago;
  • The initiation of a new marketing plan, directed at driving customer traffic through multiple avenues, including expanded ad circulars and in-store programs;
  • The utilization of data-driven inventory and category-management tools and metrics;
  • Process changes to distribution and store procedures to get inventory directly from the truck to the store floor in the same day;
  • Expanded leadership throughout the organization, particularly in merchandising sourcing, store operations and information technology; and
  • The decision to close a greater number of stores that do not fit the thresholds of the convenience/pharmacy-centric store model, allowing a reallocation of capital.
That expanded leadership included naming Jerry Colley as Fred's EVP store operations; Ken Donahue as SVP and chief information officer; Craig Barnes assumed the role of SVP global sourcing and hardlines merchandising responsibility; and Kelly Ma joined Fred's as VP international and domestic sourcing.

"In pharmacy, we completed the prime vendor agreement that has substantial benefits to all aspects of our pharmacy operations and our specialty division, with components needed to support our accelerated investment in pharmacy acquisitions.”

"Although we were disappointed in second quarter financial results, there were several key wins in the quarter," Efird noted. "We saw improvement in general merchandise sales and customer traffic from our new marketing program, which indicates positive traction for the future, [and] in pharmacy, we completed the prime vendor agreement that has substantial benefits to all aspects of our pharmacy operations and our specialty division, with components needed to support our accelerated investment in pharmacy acquisitions."
Following the second quarter results, the dollar store/pharmacy hybrid announced several forward-looking operational changes, including:
  • Addressing low-productive inventory that does not fit Fred's go-forward store model;
  • The closing of 60 stores that have no pharamcies and do not meet operational performance targets;
  • Supply chain and operational improvements at stores to improve productivity and remove costs associated with excessive inventory;
  • Expanded general merchandise product sourcing capabilities; and
  • The transition to a new pharmacy prime vendor agreement with Cardinal Health.
And Fred's pharmacy business going forward is looking up. "We anticipate the improved script comp performance we’re seeing each month during the first half of year to continue and even accelerate in the second half as many of our growth initiatives matures," Efird told analysts last week. "For example, we’re ahead of schedule on our Time My Meds program, which is an appointment-based model to drive improved patient compliance and adherence. We’ve already exceeded our patient enrollment goal by over 40%, and we’re beginning to see benefits, [such as] improved script comp."
Fred's total sales for the second quarter of fiscal 2014 increased 2% to $491.2 million. On a comparable-store basis, second-quarter sales decreased 0.1%. Fred's total sales for the first six months of fiscal 2014 increased 1% to $989.4 million. Six month same-store sales decreased 1%. 
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