Fred’s finishes fiscal year with sales declines

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MEMPHIS, Tenn. — Sales continued to slide at Fred’s Inc., as the discount and pharmacy retailer reported decreases for its fiscal 2016 fourth quarter and full year and January 2017.

Fred’s said Thursday that January sales totaled $148.1 million, down 5.6% from $156.9 million a year earlier. Same-store sales for the month fell 4.8%, compared with a 0.7% uptick in January 2016.

“We are pleased to report that comparable sales for our specialty pharmacy business trended positive in January 2017, reflecting the success of initiatives we have implemented over the past year to offset the industry-wide slowdown in hepatitis C drugs and diversify our specialty offering,” chief executive officer Michael Bloom said in a statement. “The progress we made in specialty pharmacy was offset in retail pharmacy by the effects of winter weather events, a slow cold and flu season, and continued reimbursement pressure.”

Issues in the front end — excluding competitive pressures — shaved January comparable-stores sales by about 2.4%, according to Bloom.

“In our front store, we experienced softer sales related to continuing challenges that we have discussed previously, such as issues related to transitioning several key categories to a third-party distributor, the impact of reduced SNAP benefits, unseasonably warm weather, and intense competitive conditions,” he explained. “Additionally, we encountered a new but transitory challenge in January: the delay of refunds for taxpayers receiving an earned income tax credit or an additional child tax credit, which we believe disproportionately affected our customers and, as a result, discretionary sales throughout our store. However, these refunds should be released on Feb. 15, which we anticipate will have a favorable impact on February sales.”
On the sales side, Fred’s closed out its 2016 fiscal year on a down note. Fourth-quarter revenue fell 4.3% to $530.7 million from $554.6 million a year ago. Comp-store sales in the quarter declined 3.6% versus a 1.7% gain in the prior-year period.

Overall, Fred’s fiscal 2016 sales came in at $2.126 billion, down 1.1% from $2.126 billion in fiscal 2015. Fiscal 2016 same-store sales decreased 2.2%, compared with a 1.5% increase for 2015.

“We continue to take a long-term view of our business and the opportunities ahead as a significant provider of health care services and value merchandise in the markets that we serve,” Bloom added. “Our confidence in this new vision remains firm, as does our enthusiasm for the potential we see to grow sales, traffic and profits, and in turn drive higher returns for our shareholders.”

Before Bloom became CEO at the end of August, Fred’s already had been working to make pharmacy the crux of its discount retail stores. His predecessors drove initiatives to refocus more of the business on pharmacy and health care. Those efforts included raising the percentage of the retailer’s stores with pharmacies as well as the acquisition of specialty pharmacy EntrustRx. And in July 2015 Fred’s said it retained global management consulting firm A.T. Kearney to help the retailer grow its pharmacy operation.

As a result of these efforts, more than half of Fred’s revenue now comes from pharmacy. Overall, the chain now has 644 discount general merchandise stores, including 362 pharmacies, in 15 Southeast states. The company also has three specialty pharmacy-only locations.

This past December, Fred’s made an even bigger move. The company agreed to acquire 865 Rite Aid stores for $950 million in connection with Rite Aid Corp.’s pending acquisition by Walgreens Boots Alliance (WBA), which may have to divest as many as 1,200 stores to gain antitrust clearance for the transaction. Bloom has said the addition of the Rite Aid stores will spur Fred’s growth strategy, which centers on sharpening the retailer’s health care and pharmacy focus.

With the Rite Aid stores, Fred’s would become the third-largest U.S. drug chain, with 1,227 pharmacies in its 1,509 stores overall. Under its agreement to buy the 865 Rite Aid stores, Fred’s could be required to purchase additional stores if the Federal Trade Commission requires WBA to divest more stores than was expected when the deal was struck in December.

Fred’s, though, might have some competition. The New York Post reported last week that Cerberus Capital Management has expressed interest as a potential buyer of the 865 Rite Aid stores that WBA and Rite Aid had agreed to divest to Fred’s. Cerberus reportedly lost out to Fred’s in a bid for the 865 Rite Aid stores.

After Fred’s deal to acquire the Rite Aid stores was announced, it was widely expected to pave the way for regulatory clearance of the Walgreens-Rite Aid merger. Yet published reports have said that the FTC still has concerns, notably regarding Fred’s ability to digest the store purchase and be a viable operator going forward.

On Monday, WBA and Rite Aid unveiled an amended merger agreement and extended deal date, but Fred’s said its deal to buy the Rite Aid stores remains in effect. “Fred’s Pharmacy continues to work with the FTC, Rite Aid and Walgreens to complete the transaction and looks forward to realizing the considerable benefits the transaction will bring to customers, patients, payors, supplier partners, team members and shareholders,” the company stated.



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