Fred’s has big plans to improve across-the-board performance, profitability

MEMPHIS, Tenn. Earlier this month, discounter Fred’s announced that, based on an in-depth study of the company’s operations over the last 10 quarters, the discounter has embarked on a strategic plan to improve its performance.

That new strategic plan is heavily rooted in pharmacy.

“We are well positioned with our 296 pharmacists to take advantage of future growth in pharmaceuticals,” Bruce Efird, president of Fred’s, told analysts during a conference call. “It is worth noting that [a] key strength identified by our customers in recent customer research is our pharmacy operations. … Our plan does include accelerated pharmacy [file buys], which have historically provided a higher return on investment.”

As part of the new focus, Fred’s will be concentrating its improvement efforts on its over-performing locations—the chain’s top 50 stores represent 7 percent of Fred’s store base but 40 percent of the chain’s profits, Efird said.

“Our pharmacy teams will execute a similar program in our top 40 pharmacies that generates approximately 45 percent of our pharmacy operating profit,” Efird added. “Currently our front-end sales range from 9 percent to 10 percent higher in stores with pharmacies. This plan includes increasing the number of pharmacies script file buys as well as an aggressive marketing campaign.”

The study revealed that Fred’s has a strong and healthy core store base, and pointed out that upgrading the company’s real estate program will have measurable upside potential.

Specifically, the plan will involve the following elements, all focused on achieving the company’s long-term goal of increasing annual operating margin to 4.5 percent:

• improving the core store performance by closing 75 under-performing locations;
• repositioning and reducing corporate overhead by 10 percent;
• generating $11 million in annualized cash savings beginning in the second half of 2008; and
• initiating multiple merchandising programs to enhance margin and address the changing shift in sales mix.

Of the 75 stores identified for closure, only a handful have pharmacies, company executives told analysts Feb. 7.

Aside from these immediate steps, Fred’s plans to slow capital spending and the rate of new store openings beginning in 2008 in order to focus on growth that is more profitable and that produces a higher return on investment. Fred’s plans to open 18 new stores, 15 with pharmacies, in 2008. “Subsequently upon execution and validation of our transformation plan, we anticipate accelerating our store and pharmacy growth to historic levels,” Efird said.

And Fred’s is not concerned with expanding national chains like Walgreens, CVS and Rite Aid into its core Southeast base, Efird said. “When they come into these rural settings they don’t affect us,” Efird told analysts. “They are [pricey] at the front end and once a customer is accustomed to it, [it does] not match up well with [our present] pricing.”

Separately, Fred’s reported sales of $1.8 billion for the fiscal year ending Feb. 2, representing a 1 percent lift. Comparable store sales for fiscal 2007 increased 0.3 percent.