Fred’s CFO: FY07 earnings will be up 6% to 12%
During a morning conference call, management of pharmacy and discount retailer Fred’s, Inc. (Nasdaq: FRED) said low apparel sales and higher expenses hurt second-quarter results, but outlined guidance for the next six months that could represent a 6% to 12% annual increase in earnings compared with 2006.
CEO Mike Hayes said the company is “really disappointed” with the performance of the apparel segment. He said a problem with the retail refresher program – bottoms were shipping at different times than tops – adversely impacted sales.
“It’s performing poorly,” he said. “The rest of the programs are hitting our targets.”
During the call, CFO Jerry Shore announced that the company expects sales to increase in range of 6% to 8%, or between $432.34 million and $440.50 million, during the third quarter ending in early November. Last year’s third-quarter revenue was $407.87 million. Shore said Fred’s expects fourth-quarter sales in the range of $535.56 million to $546.27 million, which would be flat or an increase of 2% from $535.56 million in the year-ago period. Shore reminded analysts that last year’s fourth quarter includes an extra week and, excluding that extra week, this year’s guidance would represent a sales increase in the range of 4% to 6%.
Fred’s expects earnings of between $0.15 and $0.17 per share during the third quarter, compared with $0.15 per share in the comparable quarter of 2006. Hayes said the company anticipates earnings in the range of $0.29 to $0.32 in the fourth quarter, compared with $0.23 per share in year-ago period. He said the company expects fiscal 2007 earnings in the range of $0.71 to $0.75 per share, compared with $0.67 in 2006.
Before the start of trading, Fred’s announced second-quarter net income of $3.1 million, or $0.08 a share, compared with $4.3 million, or $0.11 a share, in the prior-year period. The earnings were below Wall Street estimates of $0.09 per share. Sales for the three months ended August 4 increased 4% to $424.6 million, from $406.9 million in the same period of 2006, but below analyst expectations of $427.06 million. On a comparable store basis, sales were up 0.8% for the quarter versus a 3.1% increase a year earlier.
The firm’s selling, general and administrative expenses during the period increased to 27.2% of sales, from 26.8% of sales in second quarter 2006. Shore said unanticipated employee insurance costs, lease termination expenses related to store closings and additional advertising expenses contributed to the cost increases.
Fred’s also announced a share repurchase plan before the opening bell. The plan allows for the repurchase of up to 4 million shares of common stock, in open-market or negotiated transactions. The repurchase will represent about 10% of the company’s 40.1 million shares currently outstanding.
An analyst on the call expressed concern that the buyback might signal a slowdown in new store growth.
“I didn’t expect to see a $10.50 stock,” Hayes said. “When you really have a bright future ahead of us, we’re very excited and we think it’s an opportunity to by our stock. It’s cheap in our view – not the Street’s view. Like George Bush, I am reversing my position.”
In today’s trading, shares are up 1.32%, or $0.14, at $10.73. Over the last 52 weeks, shares have ranged between $9.71 and $15.74.
During the period, Shore outlined the year-over-year comparison of Fred’s segments as a percentage of total sales:
• Household goods increased to 23.8%, from 22.5%
• Food and tobacco increased to 14.1%, from 12.8%
• Health and beauty aids was flat at 8.2%
• Paper and chemical increased to 9.2%, from 9%
• Apparel fell to 10%, from 12.4%
• Pharmacy fell slightly to 32.6%, from 33%
• Franchise sales were flat at 2.1%
Fred’s customer traffic during the quarter was flat, Shore said, but the average customer ticket increased 0.8% to $18.29, from $18.14 in the year-ago period.
During the second quarter, the retailer opened five general retail stores and three pharmacies. Shores said the firm expects to open 10 stores in the third quarter ending in early November and eight new stores in the fourth quarter ending in February 2008.
After Wednesday’s close, Fred’s announced it named Bruce A. Efird, 48, as the new company president. Hayes said the president has reporting to him merchandising, marketing, store operations, distribution, IT, finance and the strategy department.
In today’s trading, shares of the small-cap are up 1.04%, or $0.11, at $10.70. Over the last 52 weeks, shares have ranged between $9.71 and $15.74.
