Fred's (FRED) Q4 Loss Widens Year Over Year, Stock Loses 6%

Fred’s Inc. (NASDAQ:FRED) released fourth-quarter fiscal 2017 results, wherein both the top and bottom line deteriorated year on year. Shares of the company lost 6.3% on May 4, following the dismal performance.

In fact, the company has lost almost 89% in a year, as against the industry’s 17.3% growth. This is largely attributable to Fred’s dismal comps and earnings record, as well as the impact of the canceled merger between Rite Aid (NYSE:RAD) and Walgreens (NASDAQ:WBA) . The canceled deal thwarted Fred’s store expansion plans and kept it behind industry leaders like Walgreens and CVS Health Corporation (NYSE:CVS) .

Q4 Highlights

The discount retailer posted adjusted loss of 62 cents per share from continuing operations, which was wider than the prior-year quarter’s loss of 58 cents.

Quarterly net sales climbed 2.1% year over year to $477.3 million. Sales in this quarter gained from an additional week this year, compared to the year-ago period.

Comps slipped 0.9% in the quarter, while it was narrower than a 4.8% dip witnessed in the year-ago quarter.

The company’s gross profit tumbled 8% year over year to $115.1 million. Further, gross margin contracted 280 basis points to 24.1%, mainly accountable to the Front Store business. This in turn was hurt by unfavorable mix and markdowns on clearance inventory.

Fred’s posted an adjusted operating loss (or EBITDA) of $18.9 million in the reported quarter, comparing unfavorably with the year-ago quarter, when the company posted adjusted operating earnings of $13 million. During the quarter, management successfully reduced adjusted selling, general and administrative (SG&A) expenses (as a percentage of sales) by 230 bps to 28.4%.

Financial Update

Fred’s ended fiscal 2017 with cash and cash equivalents of $6,573 million, long-term portion of indebtedness of $167.1 million and shareholders' equity of roughly $181 million.

Store Update

Fred’s currently operates 600 pharmacy and general merchandise stores. These include 12 franchised locations along with three additional specialty pharmacy-only locations.

Looking Ahead

Management is on track with turnaround strategies focusing mainly toward delivering considerable enhancing free cash flow and removing debt load. The company remains committed toward undertaking strategic transactions, improving cost structure and capital allocation, optimizing assortments, undertaking talent acquisition and efforts to drive revenues and margins. Notably, management foresees cost savings opportunities of $30-$40 million for fiscal 2018, backed by the aforementioned efforts and initiatives to lower SKU count.

With regard to strategic transactions, the company revealed that it is already on track to sell its specialty pharmacy business and some parts of its huge portfolio. In fact, the specialty pharmacy business now forms part of discontinued operations. Apart from this, the company is also seeking different options for its retail pharmacy portfolio.

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