• Cecile Corral

Fred's 3Q Sales Grow, Profit Drops

As Fred's Inc. works to rebrand itself and revamp some of its key units to better drive traffic, the discount retailer saw its total sales slightly increase but net income drop 17% during the third quarter.

"The company's third-quarter sales and financial results did not meet expectations," said Bruce Efird, ceo, of the 665-unit discount chain. "During the quarter, we ramped up our promotions and advertising programs to drive traffic, and while those efforts produced a substantial increase in sales of the featured items, sales and traffic did not increase sufficiently to offset the higher markdowns and expenses."

For the third quarter, ended Oct. 31, Fred's net income was $5.0 million or 13 cents per share, down 17% from $6.1 million or 15 cents per share in the same quarter last year. The company said profit was impacted by a significant increase in promotional programs and associated expenses.

Sales increased 1% to $422.4 million from $418.0 million a year ago. Comps rose 1.0% compared with a 1.4% increase in the third quarter last year.

For the nine months, net income increased 24% to $17.8 million or $0.45 per diluted share from net income of $14.4 million or $0.36 per diluted share for the same period last year.

Year-to-date sales declined 1% to $1.315 billion from $1.329 billion. Excluding stores closed last year, sales from ongoing stores increased 1% versus the year-earlier period, and comp store sales increased 0.8% compared to 2.9% in the prior-year period.

In terms of product mix sales, the apparel and linens segment is fifth among seven total businesses. For the quarter, apparel and linens accounted for 7.4% of sales — a slight decline compared to last year's 7.7% rate. Year to date, apparel and linens dipped to 7.7% of sales versus 8.6% in the year-ago period.

Fred's is on track to rebrand itself and remodel some of its units to drive traffic and give added focus to customer service and shop-ability for shoppers, executives said. Changes include a single-door entrance, the relocation of the customer service department by the entrance, an enhanced display of seasonal at the "front and center" of the store. The retailer also has plans to bring pharmacy to the front "for more exposure" as well as health-and-beauty goods, and anchor the store at the back corners with paper and chemical and with food at opposite ends to get traffic to flow throughout the stores.

"Those stores have in fact outperformed our traditional or old-style [units] to date," said Efird.

Year-to-date traffic comp store traffic was flat with last year while average customer ticket increased about 0.8% to $19.02

Fred's customers were perceived by the company as taking "a very cautious approach to this holiday season," as reflected by the retailer's 600% increase in layaway sales during the quarter compared with the same period last year."

The company singled out "several positive trends and milestones" in the third quarter: continued improvement in store operations, especially in controlling shrinkage; improved inventory quality, as average store inventory was down 9%; and an increase of cash reserves to $30 million year over year.

Looking to the fourth quarter, "given increased competition for the reduced discretionary dollar and a very cautious consumer," Efird noted, Fred's is broadening the range of its earnings forecast.

In the fourth quarter of 2009, the company expects sales to increase 1% to 3% and comparable store sales to be about flat. This compares with a comparable store sales decrease of 1.1% in the fourth quarter last year.

Earnings per share are forecasted to be in the range 17 cents to 24 cents for the fourth quarter compared with earnings per share of 20 cents, before special charges, in the same period last year. Based on this outlook, Fred's Inc. expects total earnings per share for the fiscal year to be in the range of 62 cents to 69 cents.

Cecile CorralCecile Corral | Senior Product Editor, Home & Textiles Today

Cecile B. Corral has been a product editor with Home Textiles Today since late 2000. She covers the area and accent rug, kitchen textiles, table linens, beach towels, decorative bath and decorative pillow categories, as well as some retail subjects.

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