Fred's braces for challenges in second half as it closes Q2 with good results

Home Textiles Today Staff -- Home Textiles Today, 8/23/2012 2:16:29 PM

Memphis - Fred's Inc. reported a strong double-digit net income increase as well as more modest positive sales for its second quarter and year-to-date results.

But comps were lackluster for both periods.

As ceo Bruce Efird explained, Fred's positive performance in the second quarter "reflected several unusual items. The 31% increase in earnings for the quarter included the positive impact of a complex state income tax settlement that added $0.11 to earnings per diluted share - clearly a benefit to the company and its shareholders."

But, he continued, this benefit "was reduced significantly by one-time adjustments related to the accelerated closing of 14 stores and added promotional markdowns for product transitioning."

Good news for home, he cited. "Several merchandising initiatives that we have rolled out this year also did well in the quarter" - namely those for bedding, bath, housewares, and financial services."

Results were also strong in the pharmacy department, and the company continued to see "excellent start-up performance" from its newly opened stores.

For the second quarter, ended July 28, Fred's net income increased 20% to $6.1 million compared with $5.1 million in the year-earlier period, with earnings per diluted share up to $0.17 from $0.13 in the second quarter last year.

Total sales were up 4% to $470.8 million from $452.7, but comparable store sales dipped 1.0% -- worse than the year-ago period's 0.4% dec,line.

For the first six months period, net income jumped 13% to $16.5 million, or $0.45 per diluted share, from $14.6 million, or $0.37 per diluted share, in the first half of 2011.

YTD total sales increased 4% to $971.3 million from $937.1 million, but comps fell 0.5% versus the better-off 0.4% increase for the same period last year.

As the company looks ahead, its outlook is reserved, Efird said.

"We expect that the macroeconomic environment in our region of the country will continue to lag the national numbers and anticipate an intensely competitive retail environment during the third and fourth quarters," he warned. "Expecting little benefit from the economic environment, we have accelerated several major merchandising initiatives, increased our marketing spend for the third and fourth quarter print and electronic media, and have increased the pace of pharmacy acquisitions - all directed at adding and rebuilding customer traffic."

At the same time, Fred's is pursuing its real estate expansion with approximately 20 new stores and pharmacies slated to open during the back-half of this year. The company currently operates 698 units.

"We remain confident in our forecast that earnings will increase 10% to 20% for the full year as we continue to build a stronger foundation for Fred's in 2012 and beyond," Efird summed.

In the third quarter, the company expects total sales to increase in the range of 2% to 4% and comparable store sales to decline in the range of 1% to 3% versus an increase of 1.5% in the third quarter last year. Earnings per diluted share are forecasted to be in the range of $0.22 to $0.26, compared with $0.24 in the same period last year, for the quarter.

Based on results for the first half of 2012 and this outlook, Fred's said it now expects total earnings per diluted share for 2012 to be in the range of $0.97 to $1.04.