Fred's Super Dollar bullish on 2015 results with new team in place

MEMPHIS, Tenn. — Despite the fact that Fred's Super Dollar is gravitating toward a retail business model where retail pharmacy plays a more centric role, Fred's is not abandoning its value store heritage, Mike Bloom, Fred's president and COO, told analysts Thursday morning. Quite to the contrary. Bloom, a veteran of both the dollar store channel and retail pharmacy with stints at Family Dollar and CVS Health, respectively, is forming a team dedicated to capitalizing on the promise of retail pharmacy with a focus on delivering on that dollar store value proposition across the front-end.  

 

"We perform a role in these rural markets that is very important for the consumer. We are a general store, and we are still a value store," Bloom said. "One of my learnings from being here just a short three months is it's pretty shocking to me as I look across the general merchandise categories, the volume that we generate in some of these businesses. And to me that says we play a very important role in these markets," he said. "So I do not see us turning into a big-box drug store; I see us being a very strong hybrid model, with a great pharmacy business [and] a strong health and beauty aid business, which I think we can improve upon. ... But it's very important that we balance that with that general merchandise, with those categories that our customer expects Fred's to have and has relied on us for those for many years."

 

"As we considered Bryan Pugh for the position in merchandising, he was heavily involved in Walgreens' program to evolve their product mix and he brings a great strength in really understanding what our customer is looking for in our store beyond a pharmacy," added Jerry Shore, Fred's CEO. "Our team that we're putting into place, with Craig [Barnes] on the sourcing and the import products side, it's an excellent team to get us to that model that Mike is talking about."

 

Fred's is expecting to drive both improvements in sourcing and operational execution as well as improvements in customer care and communication to drive stong comparable sales and positive business results going forward. 

 

For the year ended Jan. 31, Fred's posted a loss of $28.9 million, or 79 cents per diluted share compared with a net income of $26 million in the year-ago period. Adjusted net loss for 2014 was $7.3 million or 20 cents per diluted share.

 

Fred's total sales for fiscal 2014 were $2 billion, an increase of 2%. On a comparable store basis, fiscal 2014 decreased 0.6% versus an increase of 0.6% for the year-earlier period.

 

"Although our pharmacy department posted another strong script performance in 2014, the year overall was challenging as we dealt with problems in the general merchandise side of our business and the expiring pharmacy supply contract," Shore stated. "During the last half of the year, we worked aggressively to clear inventory, close underperforming stores and improve supply chain strategies, among other things. Clearly, those steps were painful from a near-term perspective, but necessary in terms of our goal to restore Fred's to profitability, expand gross margins and capitalize on the positive business in the pharmacy department."

 

Shore noted that  Fred's announcement Wednesday of its acquisition of specialty pharmacy operator EntrustRx, when completed, will bring additional resources to Fred's specialty pharmacy operations, EIRIS Health Services.

 

"We enter 2015 with a strong sense of optimism because of the momentum that has been building during the past several months with regard to our emphasis on process improvement, expanding our pharmacy business, building talent across the organization and refining our store model," Shore said. "We now have leadership in place with the credentials and experience to execute our strategic plan and drive strong financial improvements, as our earnings guidance reflects, and build the base for even stronger returns in the future for our shareholders."

 

Total sales for the first quarter of 2015 are expected to increase in the range of flat to up 2%, Fred's projected. Comparable store sales for the first quarter also are expected to be flat to 2% compared with a decrease of 1.9% in the first quarter last year.

 

The company expects total sales for the year to increase 10% to 15% which includes the impact of the acquisition of Reeves-Sain Drug Store and the EntrustRx specialty pharmacy business. Comparable store sales for the year are expected to increase 4% to 6% compared with a decrease of 0.6% in the prior year.