What Will Rite Aid-Walgreens Merger Mean To Fred's (FRED)?

Shares of Fred's, Inc. (NASDAQ:FRED) , popularly known as Fred’s Pharmacy, rallied nearly 23% on Jun 26, on rumors about the Federal Trade Commission’s (FTC) approval of the much-awaited acquisition of Rite Aid Corporation (NYSE:RAD) by Walgreens Boots Alliance, Inc. (NASDAQ:WBA) . However, we await FTC’s final decision on the merger slated for Jul 7.

The possible nod of FTC on Rite Aid-Walgreens merger has also paved way for Fred’s. The company had inked a deal in Dec 2016 with Rite Aid and Walgreens to buy 865 stores located in the eastern and western U.S., along with certain assets for a total cash outlay of $950 million. Additionally, 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 for the transaction.

How the Deal Would Benefit Fred?

The acquisition of these pharmacy stores is very crucial for Fred’s as it will place the company as the third largest drugstore chain in the U.S. after Walgreens and CVS Health Corporation (NYSE:CVS) . At present, the company operates 601 pharmacy and general merchandise outlets, along with three specialty pharmacy-only locations, comprising 14 franchised locations as of Jun 26, 2017. In addition, it possesses two distribution centers, each in Memphis, TN and Dublin, GA. The buyout of Rite Aid stores will more than double the company’s store count and would boost its network.

We note that Fred’s witnessed a slowdown in traffic in the last few quarters. This is evident from its sales that have been declining due to the fall in comparable store sales. Furthermore, the company has been reporting loss in the last four quarters.

In fact, the sluggishness is well reflected in the stock price performance of the company. Shares of Fred’s have declined over 14% in the past one year compared with the Zacks categorized Retail – Discount & Variety industry’s decline of 8.2%.

The deal is expected to aid this Zacks Rank #4 (Sell) company spark a turnaround. Additionally, the acquisitions will complement Fred’s strategy of focusing on the pharmacy department and contributing significantly to its overall performance. We believe that it will also improve the company’s healthcare growth strategy and would largely benefit its customers, patients, supplier partners and other stakeholders, going forward.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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