Fred's (FRED) To Get Additional Funds For Rite Aid Stores

Fred's, Inc. (NASDAQ:FRED) or Fred’s Pharmacy has entered into a second amended and restated commitment letter with a number of banks on Jun 9, 2017. The agreement pertains to the company’s debt financing plans as well as the proposed acquisition of 865 stores, certain intellectual property and certain other tangible assets of Rite Aid Corporation (NYSE:RAD) , announced in Dec 2016.

Notably, Fred’s can forge ahead with the $950 million deal only after the proposed merger of Rite Aid and Walgreens Boots Alliance, Inc. (NASDAQ:WBA) materializes post the Federal Trade Commission (“FTC”) clearance.

Fred’s is working in collaboration with Walgreens Boots Alliance, Rite Aid and the FTC to obtain the approval of Walgreen Boots Alliance’s pending acquisition of Rite Aid (announced in Oct 2015) and the divestiture of certain Rite Aid assets. Fred’s also announced that it might buy additional assets, including up to 1,200 Rite Aid stores, in order to obtain the FTC’s approval of the transaction.

According to 8-K SEC filing, Fred’s has received increased committed financing for the deal from $1.2 billion to $1.65 billion on Jun 9 and extended the commitment date to July 31. Fred’s could extend the outside commitment date further to Oct 31.

In addition to the financing, the letter included provisions for a senior asset-based term loan secured by certain acquired intellectual property and for real estate financings and sale-leaseback transactions. Per the letter, Fred’s has received increased financing “contemplated thereunder” by $100 million, from $450 million to $550 million.

Hence, the available finances will be used to fund the company’s proposed acquisition from Rite Aid of assets, including up to 1,200 retail stores, certain intellectual property, corporate infrastructure and distribution centers. The acquisition of these stores will position Fred’s as the third-largest drugstore chain in the nation. It will also improve the company’s healthcare growth strategy and would largely benefit customers, patients, payors, supplier partners, team members and shareholders.

However, the company has been disappointing investors of late.

Disappointing Q1

Fred’s posted weaker-than-expected sales in the first quarter of fiscal 2017, wherein losses were in line with the Zacks Consensus Estimate. Adjusted quarterly loss of 6 cents per share was also unfavorable compared with the year-ago quarter figure 3 cents. Decline in sales along with lower comps and gross margin contraction led to the decline.

First-quarter sales slipped 3.1% year over year to $532.2 million, while comparable store sales dipped 1.2%, as a result of the sale of low productive discontinued inventory. The company is also facing headwinds in the competitive consumable categories.

Estimates Moving South

Estimates for the company for fiscal 2017 and fiscal 2018, have moved south in the past 30 days, reflecting the negative outlook of analysts. While estimates for fiscal 2017 dropped 86.4% from earnings of 22 cents to just 3 cents, for fiscal 2018, the same declined 32.3% to 65 cents per share.

Price Performance

Fred’s stock has lost around 28.3% in the past three months, underperforming the Zacks categorized Retail-Discount & Variety industry's gain of 1.7%.

Fred’s currently carries a Zacks Rank #4 (Sell).

Key Pick from the Sector

Investors interested in the broader retail space may consider Burlington Stores Inc. (NYSE:BURL) , which carries a Zacks Rank #2 (Buy) and has long-term earnings growth of 15.85%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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