Fred's Confirms Sale Of Specialty Pharmacy Unit, Stock Up

Fred’s Inc. (NASDAQ:FRED) confirmed sale of certain assets of its specialty pharmacy business, EntrustRx, to CVS Health Corporation (NYSE:CVS) . The company has been considering the divesture of its specialty pharmacy unit for a while, in a bid to monetize non-core assets, reduce debt load and induce a turnaround in its operations. Per the terms, Fred’s is entitled to receive $40 million along with a sum equivalent to EntrustRx’s inventory value. The transaction is expected to close by May-end, upon approval of customary closing conditions.

Further, this latest move by Fred’s seems to have perked up investors’ optimism in the stock. Evidently, the stock moved up 2.1% in yesterday’s trading session. Let’s now delve into this development and see how Fred’s is expected to benefit from it.

The Significance of the Divestiture

Fred’s has been grappling with dismal comparable-store sales performance since many quarters, due to lower traffic, sale of low productive discontinued inventory and persistent increase in generic dispensing rate. Although the company made investments in sales teams, therapy diversification and technology upgradations to revive its pharmacy business, it failed to uplift performance. To make matters worse, the company’s attempt to improve its pharmacy business performance was crushed by the cancelled Rite Aid Corporation (NYSE:RAD) and Walgreens Boots Alliance (NASDAQ:WBA) merger in June 2017. The deal could not make its way through regulatory hurdles, which marred Fred’s store expansion plans.

Amid such headwinds, Fred’s has long been exploring strategic alternatives for its pharmacy business and revive itself. Indeed, the company seems to have struck the right chords with its latest deal with CVS Health. The divestiture is expected to provide a relief to Fred’s ailing business by vending off some of its dismally performing business units and concentrate more on other prospective areas. In fact, management of Fred’s also stated that the cash proceeds from this divestiture will enable the company to strengthen its financial position by reducing debt load.

Apart from this, Fred’s has also been exploring opportunities to augment its retail pharmacy operations. The company is 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. We expect that such well-chalked strategies will aid the company to uplift its stock performance in the long run that has declined almost 64% over the past six months, compared with the industry’s rally of 16.4%.

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