Fred's Inc (FRED) Q2 Loss Wider Y/Y Due To Lower Sales

Fred's, Inc.’s (NASDAQ:FRED) incurred second-quarter 2016 loss of 18 cents per share, narrower than the Zacks Consensus Estimate of 21 cents but wider than year-ago loss of 13 cents. Lower revenues and operating losses resulted in the year-over-year earnings deterioration.

Revenues & Margins

Second-quarter sales slipped 3% year over year to $529.50 million but inched past the Zacks Consensus Estimate of $528 million by 0.3%.

Comparable store sales dipped 2%, comparing unfavorably with a 1% improvement recorded last quarter. Results also compared unfavorably with a gain of 0.8% reported a year ago. The downside stemmed from lower-than-expected comps in front store, retail pharmacy and specialty pharmacy

FREDS INC Price, Consensus and EPS Surprise

FREDS INC Price, Consensus and EPS Surprise | FREDS INC Quote

Front Store comps dropped 1.6% due to underperformance of certain categories like food, household chemical, paper and pet. Retail pharmacy comps were down 1.3% year over year and specialty pharmacy comps declined 5.4% year over year due to a reimbursement pressure, especially in Medicaid and Medicare Part D. While company traffic was down 3.4%, basket was up 1.4% during the quarter, both on a year-over-year basis. Categories like Household goods and Softlines improved from the prior-year level, while pharmaceuticals, consumables and franchise sales deteriorated.

Gross profits slipped 2.9% year over year to $128.1 million. Gross margins of 24.2% remained flat year over year.

Selling, general and administrative expenses expanded 70 basis points to 26.3% of sales from 25.6% of sales in the prior-year quarter. This was mainly due to a decrease in sales volume in 2016, partially offset by a decline in insurance expenses as well as lower labor expenses due to implementation of pharmacy labor optimization initiatives.

In the second quarter, Fred’s incurred an operating loss of $10.9 million, wider than a loss of $7.8 million in the prior-year period.

Outlook for the Second Half of 2016

Based on a soft result for the first half of this year, Fred’s carrying Zacks Rank #5 (Strong Sell) expects total sales and comparable store sales to range between negative 1% and positive 1% for the second half of 2016. For the second half, Fred’s expects loss per share in the range of 18 cents to 23 cents.

This company seems to be making a comeback after witnessing sluggish comps and intense competition in the discount retail sector over the past few quarters. Sales and profit initiatives are yielding significant results as is evident from the improvement in the first-quarter comps. However, declining margins remain a concern.

Fiscal 2016 Outlook

For the fiscal year, Fred expects loss per share to be in a range of 33 cents to 38 cents. Adjusted operating income for the fiscal year is forecasted to be in the range of $35 million to $38 million compared to $53.2 million in the prior year.

Stocks to Consider

Some better-ranked stocks in the same sector are Big Lots Inc. (NYSE:BIG) , Costco Wholesale Corporation (NASDAQ:COST) and Ross Stores Inc. (NASDAQ:ROST) . All three stocks carry a Zacks Rank #2 (Buy).

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