A month has gone by since the last earnings report for Fred's, Inc. (NASDAQ:FRED) . Shares have added about 4.3% in that time frame, outperforming the market.
Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Fred's Fourth Quarter Loss Narrower than Expected, Sales In-Line
Fred's posted narrower-than-expected losses in fourth-quarter fiscal 2016. However, sales lagged the Zacks Consensus Estimate. Nevertheless, the company has witnessed improvement in bottom line driven by sequential growth in retail pharmacy adjusted script comps, sequential progress in sales trends in the Specialty Pharmacy business, Front Store margin expansion and strong holiday seasonal category sales.
Quarterly Results
The discount retailer posted adjusted quarterly loss of $0.11 per share, which was narrower than the Zacks Consensus Loss Estimate of $0.19 per share. The figure, however, was in line with the year-ago loss of $0.11. Improvement in gross margins was offset by lower comps.
Revenues & Margins
Fourth-quarter sales slipped 4.5% year over year to $529.7 million and also lagged the Zacks Consensus Estimate of $531 million by 0.2%.
Comparable store sales dipped 3.6%, narrower than a 3.8% decline recorded in the preceding quarter. However, results compared unfavorably with a gain of 1.7% reported a year ago. Comps declined as a result of the sale of low productive discontinued inventory versus the fourth quarter of 2015.
Gross profits slumped 2.5% year over year to $129.6 million, while gross margins increased 50 basis points (bps) to 24.5%, driven by the successful and profitable sale of discontinued inventory. We note that this gross margin increase was significantly better than the 480 bps decline in gross margins in the preceding quarter, which was due to soft sales and continued reimbursement pressure in the pharmacy category.
In the fourth quarter, Fred’s incurred an operating loss of $22.2 million, compared to a loss of $5.1 million incurred a year ago. Losses increased due to higher selling, general and administrative expenses.
Selling, general and administrative expenses, including depreciation and amortization, expanded 380 bps to 28.7% of sales mainly due to higher professional, legal, banking and integration planning fees incurred in connection with the announced agreement to acquire Rite Aid stores.
The Rite Aid transaction
On Dec 20, Fred’s entered into an agreement with Rite Aid Corporation and Walgreens Boots Alliance (NASDAQ:WBA) to buy 865 stores located in the Eastern and Western Unites States and certain assets that are required for store operations. The deal is worth $950 million and was paid in cash.
Fred’s Pharmacy is working collaboratively with Walgreens Boots Alliance, Rite Aid and the Federal Trade Commission (FTC) to help 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 to Fred’s. Recently, Fred’s Pharmacy 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. However, the completion of the transaction is still subject to approval by the FTC, and requires other customary regulatory approvals and closing conditions.
The acquisition of these stores will give scale to the company and will position Fred’s Pharmacy as the third-largest drugstore chain in the nation. It will also improve the company’s healthcare growth strategy and would largely benefit its customers, patients, payors, supplier partners, team members and shareholders.
Fiscal 2016 Results
In fiscal 2016, adjusted losses were $0.52 per share, narrower than the Zacks Consensus Loss Estimate of $0.59 per share. It was however wider than the year-ago loss of $0.20 per share.
Net sales in fiscal 2016 were in line with the Zacks Consensus Estimate but decreased 1.2% year over year to $2.13 billion, due to a 2.2% decline in comp sales.
March Sales
In the five-week period ended April 1, 2017, sales dipped 2.7% to $208.6 million, due to comps decline of 0.5% against an increase of 1.8% in Mar 2016. A delayed Easter (from March last year to April this year) and a shift in holiday sales into April more than offset the benefit of tax refunds (which were delayed from February to March).
Store Update
As of Jan 28, 2017, Fred’s operates 601 pharmacy and general merchandise stores and three specialty pharmacy-only locations, including 14 franchised Fred’s Pharmacy locations.
Looking Ahead
The company is witnessing consistently favorable sequential growth in Retail Pharmacy adjusted script comps along with sequential progress in sales trends in its Specialty Pharmacy business. The company expects the sequential improvement to continue throughout 2017. The company also remains focused on health care services, improving trends in Front Store and reducing inventory and expenses throughout the business, which will improve cash flow.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimate flatlined during the past month. There has been one revision higher for the current quarter compared to one lower. In the past month, the consensus estimate has shifted lower by 142.9% due to these changes.
VGM Scores
At this time, Fred's stock has a poor Growth Score of 'F', however its Momentum is doing a lot better with an 'B'. However, the stock was allocated a grade of 'D' on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of 'F'. If you aren't focused on one strategy, this score is the one you should be interested in.
The company's stock is suitable solely for momentum based on our styles scores.
Outlook
The stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.
Fred's, Inc. (FRED): Free Stock Analysis Report
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