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Fred's Home Business 'Tough' in 2Q

Cecile Corral, Maria Weiskott -- Home Textiles Today, September 13, 2009

Fred's Inc.'s home category continued to be "tough" during the regional discount department store chain's second quarter, with inventories down as Fred's worked to trade quantity for quality in this small segment of its business.

"[For back to school] we were pleased with our school supplies stationary-related sales overall and our product sell-through — both which ran above plan," said Bruce Efird, president and ceo, during the company's second quarter earnings call. "However, we did not perform up to expectations in other back-to-school related departments, such as home furnishings and apparel, which continue to be tough areas for our consumers in this environment."

With overall inventories down about 8% for the quarter, 669-unit Fred's is taking a careful approach to its home business going forward, restricting its open to buy to better quality goods and basing the purchases on sales trends. Linen and apparel represented 7.8% of the mix, an erosion from 9.1% in last year's second quarter.

"We've made a strong effort this year to maintain portions of the open to buy that allows us to flex toward sales levels, and we've improved the quality of the inventory greatly in [the soft lines and home] areas," explained Jerry Shore, evp, cfo, and chief administrative officer.

Net income quadrupled to $4.2 million, or 11 cents per share, from $1.0 million or 3 cents per share, in the same quarter last year.

Included in the results were expenses amounting to $900,000, or 2 cents per share, relating to tax audits of the years 2004 through 2007. Excluding these effects, earnings increased 30% to 13 cents per share, while adjusted net income increased 21% to $5.1 million from $4.2 million for the second quarter last year.

Sales fell 3% to $434.2 million. Included in the sales for last year are 74 stores and 23 pharmacies that were closed during 2008. Excluding those units, sales were flat.

Comps declined 1.3% compared on top of a 4.9% increase in the year-ago period. Within the quarter, comp-store sales were a positive 0.2% in the first two months but negative 4.6% in July.

Year-to-date profit jumped 54% to $12.8 million, or 32 cents per share. Excluding the effects of the tax audits and 2008 store-closing costs, net income rose 19% to $13.7 million, or 34 cents per share.

Sales for the first half declined 2% to $892.6 million, with comps up 0.8%.

Fred's expects full-year earnings per share to be in the range of 73 cents to 80 cents.

"We anticipate discretionary spending will remain down, and strong promotional activity will continue," Efird said. "We remain committed to improving our customers' shopping experience through improved products, upgraded and remodeled stores, and better customer service."

"Our objective is to extend the positive trend we have seen in our operating performance while regaining sales momentum," he concluded.

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