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With consumables sales on rise, Fred's looks to aid challenged home business in 2012

Memphis, Tenn. - As home continued to struggle at Fred's over the fourth quarter, having dropped by 150 basis points, the regional chain is ramping up its offerings with more value-priced goods going forward.

During the 700-unit Southeastern chain's earnings call this morning, Fred's ceo Bruce Efird explained that the home business "continued to be challenged" as it is "the most susceptible" to declines during the still-difficult economic environment when Fred's core customers are instead focused on necessities versus discretionary goods, like home linens and décor.

To alleviate home's challenges, Fred's merchants are actively "making changes" to the home assortment with more "value-priced" merchandise in various categories, including "a lower opening price point" in bath as well as price shifts in new top of bed, window treatments and home furnishings, in hopes of "driving performance," Efird added.

"Were focused on [offering] more $50-and-under furniture and [value-priced] wall art, rolling out by the end of Q2, as examples of how we are working to drive the comps [in home]," Efird cited, adding that Fred's also recently hired a new head merchant for home as part of the effort.

"Our team has developed enhanced merchandising plans and expanded product areas to reinforce the Super Dollar and Core 5 programs for 2012," Efird later elaborated. "We are planning to continue our accelerated pharmacy expansion program and leverage the benefits of our pharmacy customers into all areas of our store."

Along with pharmacy, consumables also helped drive Fred's otherwise strong fourth quarter and fiscal 2011 results - which Efird said "exceeded expectations."

For the quarter, ended Jan. 28, Fred's net income increased 14% to $9.8 million versus $8.6 million in the year-earlier period, with earnings per diluted share rising 23% to 27 cents from 22 cents in the fourth quarter last year. Fred's noted that in the quarter, a favorable adjustment to its income tax rate added $0.02 cents to earnings per diluted share. Excluding the income tax rate effect, earnings per diluted share for the fourth quarter of 2011 increased 14% compared with fourth quarter of 2010.

Total sales increased 2% to $497.6 million from $485.6 million last year, and comparable store sales were up a modest 0.1%.

For the fiscal 2011, Fred's net income increased 13% to $33.4 million compared to $29.6 million for 2010, with earnings per diluted share rising 16% to $0.87 from $0.75 last year.

Total sales for the year increased 2% to $1.879 billion from $1.842 billion for the same period last year, and comps grew 0.5%.

"During 2011, we focused on our key strategic goals: building customer traffic, increasing market share, and accelerating growth," Efird said. "Both customer traffic and market share increased for the year, and new store openings were up 70% for 2011 with the opening of 26 new stores and 24 pharmacies. Also, we upgraded more than 200 existing stores with the elements of our Core 5 program - bringing the two-year total of upgrades to more than 400 stores."

This year, Fred's expects to open about 28 new stores and close 10 existing. Over the fourth quarter, Fred's opened 16 new stores and seven express pharmacy stores as part of its 2011 operating plan. The company also remodeled and refreshed 205 stores with its new Core 5 elements in 2011, bringing the total stores upgraded to 413 during 2011 and 2010.

Fred's offered it guidance for the first quarter of 2012 and the upcoming 53-week fiscal year.

For the quarter, Fed's said it is expecting: total sales in the range of 3% to 5%; comparable store sales to be approximately flat versus an increase of 1% last year; and earnings per diluted share to increase between 8% and 17% to a range of 26 cents to 28 cents.

Based on this outlook, total earnings per diluted share for 2012 are expected to be in the range of 96 cents to $1.04, representing an increase of 10% to 20% over last year. Excluding this impact, the increase in earnings per share is projected to be 13% to 22% in 2012.

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