Fred's Management Discusses Q1 2013 Results - Earnings Call Transcript

May.30.13 | About: Fred's, Inc. (FRED)

Fred's (NASDAQ:FRED)

Q1 2013 Earnings Call

May 30, 2013 10:00 am ET

Executives

Pat Watson

Jerry A. Shore - Chief Administative Officer, Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Bruce A. Efird - Chief Executive Officer, President and Director

Alan C. Crockett - Chief Merchandising Officer and Executive Vice President

Rick A. Chambers - Executive Vice President of Pharmacy Operation

Analysts

Andrew P. Wolf - BB&T Capital Markets, Research Division

John R. Lawrence - Stephens Inc., Research Division

Jill R. Caruthers - Johnson Rice & Company, L.L.C., Research Division

Michael Richardson - Sidoti & Company, LLC

Patrick McKeever - MKM Partners LLC, Research Division

Operator

Good day, and welcome to the Fred's first Quarter Conference Call. Today's call is being recorded. At this time, for opening remarks, I would like to turn the call over to Mr. Pat Watson. Please go ahead, sir.

Pat Watson

Good morning, everyone. This is Pat Watson with corporate communications. Thank you for joining Fred's to review the company's financial and operating results for the first fiscal quarter that ended on May 4, 2013. Before we begin, I would like to remind everyone that management's comments in this conference call that are not based on historical facts are forward-looking statements. These statements are made in reliance on the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to uncertainties and risks. It should be noted that the company's future results may differ materially from those anticipated and discussed in the forward-looking statements. Some of the factors that could [ph] cause or contribute to such differences have been described in the news release issued earlier today in the company's annual report on Form 10-K and in other filings with the Securities and Exchange Commission. We refer you to these sources for more information. Lastly, I would like to point out that management's remarks during this conference call are based on information and understanding that are believed accurate as of today's date, May 30, 2013. Because of the time-sensitive nature of this information, it is Fred's policy to limit the archived replay of this conference call webcast to a period of 30 days. This call is the property of Fred's. Any distribution, transmission, broadcast or rebroadcast of this call for commercial purposes, in any form without, the expressed written consent of the company is prohibited. With those announcements, I'll turn the call over to Jerry Shore, the company's Chief Financial Officer. Good morning, Jerry.

Jerry A. Shore

Good morning, Pat, and good morning to everyone on the call. Thank you for joining us this morning for our discussion of first quarter fiscal 2013 results. With me this morning and available for questions are Michael Hayes, Chairman; Bruce Efird, Chief Executive Officer; Rick Chambers, EVP of Pharmacy Operations; and Alan Crockett, EVP and Chief Merchandising Officer.

As the company reported in its press release earlier this morning, Fred's total sales for the first quarter of fiscal 2013 increased 0.2% to $501.5 million from $500.5 million in the same period last year. On a comparable store basis, sales decreased 1.3% compared with a decrease of 0.4% last year. The quarterly sales mix comparison to last year was as follows: Household goods were 22.7% in the first quarter, a decrease from 23.4% last year; apparel and linens were 6.5% this quarter, decreased from 6.7%; health and beauty were 7.4%, no change from last year; paper and chemical were 8.4%, decreased from 8.6%; food and tobacco were 17.6%, increased from 16.3%; pharmaceuticals were 35.7%, decreased from 35.8%; and franchise were 1.7%, decreased from 1.8%.

For the quarter, comparable store customer traffic decreased 1.3% from last year, while the average customer ticket remained flat at $21.22. Sales per square foot for the trailing 12 months improved to $203 compared with $201 per foot during the prior 12-month period. Fred's net income in the first quarter was $11.4 million or $0.31 per diluted share compared with $10.5 million or $0.28 per share in the first quarter of 2012. Earnings per share increased 11% over the same quarter last year. EBIT or earnings before interest and taxes totaled $17.8 million compared with $17.1 million in the prior year quarter. Operating margin improved to 3.5% of sales compared with 3.4% last year.

EBITDA during the quarter totaled $28.1 million or 5.6% of sales compared with $26.5 million or 5.3% of sales last year. Gross profit for the first quarter of 2013 increased 2% to $151 million compared with $147.8 million last year. Gross margin for the first quarter increased 60 basis points to 30.1% from 29.5% last year. The improvement in gross margin primarily results from higher pharmacy department margins on generic prescriptions, as well as shrink improvement in the quarter, which more than offset unfavorable general merchandise markdowns and unfavorable LIFO charges on pharmacy inventory.

Selling, general and administrative expenses were $133.2 million compared with $130.7 million last year. Expenses as a percent of sales were 26.6% compared with 26.1% in the same period last year. The deleverage of 50 basis points is attributed to investments in costs associated with new pharmacies, expenses incurred in the quarter for 20 closing stores that began going-out-of-business sale in late April and increased occupancy costs from the growth in new stores and pharmacies. Depreciation and amortization expense in the first quarter was $10.3 million or 2.1% of sales as compared to $9.4 million or 1.9% of sales in the same period last year. For the first quarter, interest expense was $135,000 compared to $137,000 last year and in the first quarter the tax rate was 35.3% compared with 38.4% last year. In the prior year, federal tax credits were not yet approved resulting in the higher than normal tax rate.

Moving to the balance sheet. Cash and equivalents at the end of the first quarter were $7.8 million, no change from last year. Total inventories at the end of the first quarter of 2013 increased 2.7% to $369.9 million compared with $360.3 million at the end of the same period in 2012. The increase in inventory is attributed to the inflationary impact in our general merchandise inventory, as well as our growth of 8 net new store locations and 19 more pharmacies over the same period last year. Inventory turn at the end of the first quarter was 3.8 turns compared to 3.9 turns last year.

Capital expenditures for the first quarter totaled $6.9 million compared with $6.1 million in the first quarter of 2012. Capital expenditures were spent as follows: $0.5 million for new stores and pharmacies, $5.8 million for existing store expenditures and $0.6 million for technology, corporate and other miscellaneous expenditures. Additionally, we spent $2.4 million for pharmacy acquisitions in the first quarter.

Total debt at the end of the first quarter was only $5.8 million compared to debt of $7.2 million at the same time last year. There were no borrowings under the company's revolving line of credit at the end of the quarter.

For the first quarter of 2013, net cash provided by operating activities was approximately $18.2 million and free cash flow, which we identify as net cash provided by operating activities minus capital expenditures and pharmacy acquisitions, totaled $9 million.

At the end of the first quarter, there were 644 company-owned full-size stores, 50 company-owned express stores and 21 franchise stores for a total of 715 discount general merchandise stores, including 349 pharmacies. During the first quarter, the company opened one new full-service store and 3 new express pharmacy locations. The company also closed one full-service store. The company selling square footage of 9.6 million square feet was flat to the same time last year and year-end 2012. We continue to expect to open a range of 25 -- 20 to 25 new stores and 25 to 30 new pharmacies in 2013. Closings in 2013 are anticipated to be approximately 20 to 25 stores and 3 pharmacies. 20 store closings will occur in the second quarter.

Moving to our forward-looking guidance. In the second quarter of 2013, the company expects total sales to increase in the range of 2% to 4%. Comparable store sales are expected to be approximately flat. We expect general merchandise comparable store sales to continue the positive trends for the second quarter. We expect pharmacy comparable store sales will continue to be negative due to the ongoing brand-to-generic conversion. We anticipate pharmacy comparable scripts will continue to be positive in the quarter.

So far in the month of May, we are continuing to see the effect of cooler weather on our general merchandise sales. In total, we expect May monthly comparable store sales to be in the range of flat to down 2%. We expect general merchandise department comparable store sales to be positive but will not totally offset the negative pharmacy comparable sales.

Earnings per share forecasted to be in the range of $0.06 to $0.09 during the second quarter. I will point out that the earnings impact of closing 20 stores during the second quarter is a negative impact of approximately $0.03 per share. Additionally, our projected earnings include a potential mark -- include potential markdowns in the second quarter related to the weather impact on lawn and garden and other seasonal product categories. Last year in the second quarter, the company earned $0.17 per share, of which $0.12 per share was due to a one-time favorable tax rate. Excluding the tax rate impact, earnings per share expected to increase 20% to 80% over last year. Based on first quarter actual results and this outlook, the company continues to expect total earnings per diluted share for 2013 to be in the range of $0.77 to $0.88 per share. This concludes our financial summary, and now I will turn the call over to our CEO, Bruce Efird.

Bruce A. Efird

Thank you, Jerry. Good morning, everyone. To follow up on Jerry's comments, I'm pleased to note that our team executed well in the first quarter. Earnings per share increased 11% in the quarter on top of a 17% increase during the same quarter last year. Our earnings per share of $0.31 exceeded the top end of our quarterly guidance. We experienced the 60-basis-point gross margin improvement primarily driven by the positive impact of the pharmacy department branded-to-generic shift.

Our team did a good job of managing operating expense during the quarter. Although operating expenses increased $2.5 million and deleveraged by 50 basis points in the quarter, the increase is attributed to the investments made in new pharmacy growth. Outside of those expenditures, we experienced operational expense leverage in all other areas of the company.

In the quarter, we continue to generate good cash flow with EBITDA of $28.1 million, an improvement of $1.6 million or 6% over last year. Looking at our total and comparable store sales during the quarter from 2 perspectives, first, I will highlight factors impacting or influencing our first quarter comp sales and, second, our go-forward plans, programs and initiatives to drive comp sales. In the first quarter, we reported a comparable store sales decrease of 1.3%. As you know, our comparable store sales continue to be negatively affected by the pharmacy department brand-to-generic drugs shift, which dramatically reduces the script price and top line sales. This brand-to-generic shift impacted total company sales by approximately 290 basis points during the quarter. In the quarter, we saw a 2.6% increase in comparable scripts and a 6.8% increase in total scripts. We continue to be pleased with our pharmacy department relative to overall performance in terms of script growth and profitability.

During the quarter, unseasonably cool weather impacted sales in our general merchandise weather-sensitive product lines. As a result, sales in departments such as small appliances, lawn and garden, apparel and seasonal toys were negatively impacted. Overall, the weather impact on comp sales in these seasonal categories was approximately 100 basis points.

The first quarter had more than the usual economic challenges. Our customers had to contend with delays in income tax refunds and increased payroll taxes which affected disposable income, coupled with the cooler weather that impacted the average ticket. The unemployment in our core markets has yet to experience the same level of recovery that is being experienced in other areas of the country. That being said, we are pleased with overall general merchandise sales as we experienced positive comparable store sales of almost 1% during the quarter. Departments that performed well in the quarter were automotive and hardware, home, pet products, electronics and tobacco. As we have discussed in past calls, we have executed initiatives to improve tobacco sales, which generate strong customer traffic to our stores. Tobacco sales have performed exceptionally well as a result of these initiatives in place and we expect the positive performance to continue throughout the year. We saw strong comp sales in our consumable departments included mid-single digit comps in health and beauty care products and paper products. Our food and beverage categories delivered low-double digit comps as a result of our food and beverage product expansions.

Now I will shift and give you an update on our reconfiguration plan that we communicated in March. We designed a reconfiguration plan to leverage our strength and address the underperforming space in general merchandise, allowing us to regain the momentum we had in the 3 years prior to last year. We know that our stores with integrated pharmacy departments consistently exceed our 4% operating profit goal. The main focus of reconfiguration is to improve our overall store productivity and space efficiency while enhancing the product selection at our stores with pharmacies. Reconfiguration is a 3-year plan centered around 2 fundamental principles: number one, an aggressive expansion of our pharmacy presence; and number two, expanding space in more productive discretionary product lines within the general merchandise departments. In regards to the pharmacy aspect of a reconfiguration plan, we are pleased with the progress made since our last call. One of the core tenets of this plan includes the increase in number of pharmacy departments as a percent of our total store base. Based on our year-to-date performance, coupled with our pending deals, we expect to be ahead of plan by the end of the second quarter.

Our specialty pharmacy program continues to move forward and is meeting our expectations as we execute our three-pronged strategy including leveraging our relationship with Diplomat Specialty Pharmacy, our internal build out plans and a continued evaluation of potential specialty pharmacy acquisitions. Overall, our pharmacy reconfiguration plans are meeting expectations and we're looking forward to the future.

Moving to general merchandise reconfiguration. As we discussed on our year-end conference call, the 3 focus areas for 2013 were the expansion of automotive and hardware, seasonal space expansion and the expansion of health and beauty aids in stores with pharmacies. At that time, we discussed the test of our hometown auto and hardware expansion to 74 stores. As of today, we have reconfigured an additional 101 stores with our expanded hometown and automotive and hardware, bringing the total number of stores to 175. We are pleased with the results of the 175 stores -- that the 175 stores are delivering, with automotive and hardware comparable store sales increase of 15% and 43%, respectively. Additionally, these stores, overall, are outperforming the balance of the chain in comparable store sales. Looking ahead, we have identified an additional 150 stores that will be reconfigured beginning in late Q2 with completion anticipated in Q3. All of these additional stores will have expanded automotive and hardware, and approximately half will have expanded seasonal space, as well as health and beauty aids. By the end of the third quarter, we will have approximately 325 stores that have been reconfigured to accommodate the changes we have discussed.

Now I'd like to move to the second quarter and beyond to share with you some of our additional initiatives to continue improving sales and operating performance at Fred's. As a reminder, our guidance for the year reflects an increase in operating earnings per share of 12% to 28%. A key initiative in Q2 will be focusing on driving comp sales and the general merchandise departments, continuing the positive trend we achieved in the first quarter. Our outlook is somewhat tempered based on the increased payroll tax and impact on our core customers' disposable income. We anticipate the pharmacy department will continue to see negative comparable store sales. We expect the pharmacy department comparable sales will turn positive during the last half of the year.

In addition to general merchandise reconfiguration, we anticipate benefits from a number of sales driving initiatives we have implemented in Q1. In Q1, we completed the expansion of our food cooler program in our top 100 stores, and we're pleased with the results, thus far. Our discount tobacco shop continues to provide positive benefits both in terms of sales and traffic. The marketing department will be implementing a stronger ad program in both quarter 2 and quarter 3, focusing around our discretionary product lines. We continue to expand our name brand product offerings with the recognizable brands such as Dickies, Wrangler, Fruit of the Loom, Huggies, Dixie, Brawny, Igloo and Barbie. We also will be introducing new and expanded categories to our customers, such as school uniforms, kitchen and bath organization, portable room air conditioners and expanded pool chemicals.

Shifting to growth and real estate. During the first quarter, the company opened one new full-service store and 3 new express pharmacy locations. The company also closed one full service store during that time frame. At the end of the quarter, there were a total of 715 stores including 349 pharmacies. During the second quarter, we expect to open a range of 2 to 5 new stores and 7 to 10 pharmacies. We'll close 20 stores in the quarter, and the financial impact of these store closings are included in our earnings projections that Jerry outlined.

As stated in our press release, the team has laid out an aggressive program for 2013, including accelerating pharmacy growth with 3-year goal of 65% to 75 -- to 70% penetration of our company-owned store base; transitioning Fred's pharmacy from being primarily a dispenser of product to that of a provider of health care services; execution of new general merchandise programs previously outlined to improve the product mix and space with auto hardware expansion will be the main focus in 2013; tailoring our product mix to leverage the customers' expectations of a full-service pharmacy department; an aggressive marketing campaign focused on our expanded discretionary businesses; continued operational improvements to drive expense leverage, the launching of the test store, our 5 new destination stores; and finally, refining and improving our new small format Getwell Drug & Dollar stores.

In closing, I want to thank our team for another quarter of financial improvement and for the ongoing execution of our aggressive plans. Over the balance of the year, we will continue to relentlessly execute our plan with the goal of delivering strong bottom line results in 2013 for our shareholders. Thank you for your interest in Fred's and for joining us today. Now we will open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Andrew Wolf with BB&T Capital Markets.

Andrew P. Wolf - BB&T Capital Markets, Research Division

Just wanted to focus on a few questions, just on the results at the 175 stores with the auto and hardware reset. First, you go into 325, so that number is kind of close to the number of stores with pharmacy. Are these only going to stores with pharmacies? Or are they going to stores without pharmacies as well? That's the first question.

Alan C. Crockett

This is Alan. No, they are not going to stores that only have pharmacies. There are stores that have pharmacies and there are stores that do not -- we're not going exclusively to that pharmacy stores at this time. The health and beauty aid expansion will be primarily focused around pharmacy stores and, as we said, half of the stores that we'll do, half of the 150 will be health and beauty expansion so that will leave runway for next year to continue that expansion in stores with pharmacies.

Andrew P. Wolf - BB&T Capital Markets, Research Division

And I think last quarter, Bruce, you indicated there was something like a -- these stores that Core 5 did better in the stores as well. Is that still the case? And my other question is related, again, to the source of the reset. The better relative comps that they're experiencing, is that mainly increased ticket because folks are buying, finding more things they want when they come in? Or is it actually helping with the traffic, driving traffic and frequency of shopping?

Bruce A. Efird

Yes, Andy, as we stated when we communicated the reconfiguration plan, we see reconfiguration as a next step or logical progression of Core 5 creating more destination departments within our store. Having said that, we were pleased to see that in stores that we had rolled out the automotive and hardware expansion, we did see an improvement in home sales overall and sales in the discretionary departments responded positively. So the answer to your question is, yes, we have seen improvement in -- specifically in the home areas which is one of the Core 5 areas that has been lagging.

Andrew P. Wolf - BB&T Capital Markets, Research Division

And on the traffic, are the resets also getting greater shopper frequency and in particular some of the issues you've been having on the weekend with maybe people driving to discounters, larger discounts?

Bruce A. Efird

Andy, we've seen higher ticket in those stores, and we haven't been able to separate the traffic generation as a result of the automotive hardware expansion versus the tobacco action that we've taken and that is we know is driving stronger traffic. So we know it's driving ticket and believe it's having a slight impact on traffic, overall.

Jerry A. Shore

Andy, I would add to that, one of the things we talked about was the intention of reconfiguration in attracting a new customer. And with the hardware and auto sales that we're seeing and the rub-off on home, we do believe we're attracting a different trip which is the whole purpose of reconfiguration. And we do believe that's having -- as Bruce said it's hard to sort of flesh out the traffic in terms of the strong tobacco but we do believe we are generating an additional true up and at the same time, which is very important, not alienating our current customer. That's the thing we have to be very careful about with this is that we reconfigure the store in a way that the current customer continues to shop while we tend to attract the new customer.

Operator

And we'll take our next question from John Lawrence with Stephens.

John R. Lawrence - Stephens Inc., Research Division

Just a quick comment. Jerry, on the gross margin, obviously, you had some gains there with pharmacy, et cetera. Could you talk a little bit about some of the things that you've put in place as far as to help that gross going forward, as far as the mix is concerned, maybe in the back end, delivery of your product or how that works?

Jerry A. Shore

Yes, and I'll also turn it over more to Alan on the mix of the general merchandising gross margin, but we do expect gross margin to improve. We've talked about the gross margin in, being the primary driver of our earnings for the year. We will continue to see it in the pharmacy from the generic shift and the arrangements that we have with our third-party distributors. So we expect pharmacy to continue to increase, and I'll let Alan take it from here on the general merchandise side.

Alan C. Crockett

John, this is Alan. Let me -- the general merchandise side, we continue number of initiatives to drive margin. Certainly, one of them is continuation with our sourcing that we talked about in the past. Our own brand, obviously, is still a very key focus for us and in the second quarter we have about 25 additional new own brand items coming online. Our pricing technology, we've garnered benefits from that and we are continuing to expand that and we'll continue to do that for the balance of the year. And then finally, I would note that reconfiguration, part of reconfiguration is driving sales in higher margin discretionary categories so as we continue with that and continue the number of stores continuing with the expansion of auto hardware and seasonal, we expect to see margin benefit from that as well.

John R. Lawrence - Stephens Inc., Research Division

And then just last question related to that side is, as we see the anniversary of pharmacy, obviously, you're better positioned with comp acceleration to leverage on that -- on the SG&A side despite the expenses on the initiatives?

Jerry A. Shore

Yes, John, I'll start out and that is part of what we expect for the year as the pharmacy anniversaries, that the deleveraging that we have seen in the first quarter and looking backwards will turn more in our favor as the top line increases. The dollar increase in pharmacy has not the been as great as what we've seen in the past. It's just that the top line pressure has resulted in the deleveraging. Rick?

Rick A. Chambers

This is Rick, John. I would just follow up with what Jerry had said that we are really looking at that beginning in early third quarter moving into the back half when we anniversary those larger generics that kicked off in late '11, early '12. So feel very confident about that as we move into the back half.

John R. Lawrence - Stephens Inc., Research Division

And then, Rick, as you look at that just back of the envelope is that 200 basis points, 300 basis points delta, as far as that gap is concerned now?

Jerry A. Shore

John, I'm not ready to break that out yet. We'll talk about that more into the future.

John R. Lawrence - Stephens Inc., Research Division

All right. And Jerry, last question. The store closings, what's the impact of sales -- the sales impact in the second quarter on the store closings?

Jerry A. Shore

The sales impact is not great in the second quarter with the going-out-of-business sales, it's up slightly. It's not a big impact. We've taken those out of the comp, they are not included in the comp so there's neither a positive or negative impact on the sales from the GOVs but it does have a negative earnings impact because of the markdowns associated, the cost of the liquidations from the third-party, as well as any write-offs related to fixed assets or remaining on the books.

John R. Lawrence - Stephens Inc., Research Division

Yes, one last one, I'm sorry. Rick, what's the major step function with Diplomat as far as being able to deliver either hotshot overnight some of those products that's on the specialty side?

Rick A. Chambers

Well, John, to follow-up on that, now the Diplomat relationship is more of a back-end service provider. All of the inventory and product will be delivered at our pharmacy location. We won't be having any product being shipped to the pharmacy or the customer by Diplomat. That's not how our model is set up.

John R. Lawrence - Stephens Inc., Research Division

Okay. And the timeline of when that'll really -- you'll start to see it in the results, would be how soon? Late [indiscernible]

Rick A. Chambers

That would line up late in the back half of '13 as well, yes.

Operator

And we'll take our next question from Jill Caruthers with Johnson Rice.

Jill R. Caruthers - Johnson Rice & Company, L.L.C., Research Division

You've seen some improvement with the additions you've done with the tobacco shop. Given you have a kind of a new competitor in the arena, beginning in April, could you talk about if you've seen any recent changes in the tobacco sales or any pressure from that new player in the market?

Alan C. Crockett

Sure, Jill, this is Alan. As you recall, we implemented most of our changes in Q3, Q4 last year and really expanded into our discount tobacco shop concept. Family Dollar entered the market late last year, early this year and then DG entered the market, is still entering the market, when you put it that way. We have seen no impact from either. We -- our comps are very strong and their assortments are not near what we have, they're not anywhere close. And our pricing is directly in line with them so we have not seen any impact from them entering the category.

Bruce A. Efird

Jill, just to add to that, it speaks to the ongoing effect that we see in our business overall. We see less effect from Family Dollar and Dollar General but more so, and our customers consistently tell us, we're compared more to Wal-Mart from a customer perspective.

Jill R. Caruthers - Johnson Rice & Company, L.L.C., Research Division

Okay, that's helpful. If you could address the 20 closings in April. That assumes to be kind of you've initially guided for the year, were these underperforming stores or are these additional closings that you're planning versus I guess your comments last quarter?

Jerry A. Shore

Jill, in the last quarter, we said approximately 20 Club Store closings for the year. We're going to close 20 in the second and we closed one in the first. They're just some miscellaneous stores and we did talk about the opportunity for more closings in our fourth quarter and as stores come open for leases, we are looking at those, that's why the number is somewhat higher in this quarter.

Jill R. Caruthers - Johnson Rice & Company, L.L.C., Research Division

Okay. So additional potential closings could occur but it would be a more fourth quarter timing?

Jerry A. Shore

I'm not going to say that. It could be, I think they will be later in the year, but not necessarily only in the fourth quarter.

Operator

We'll take our next question from Mike Richardson from Sidoti.

Michael Richardson - Sidoti & Company, LLC

I apologize if I missed this, in general merchandise, I was wondering if you could share with us was what the sales mix was between discretionary and consumable? And if there was any change in that year-over-year.

Jerry A. Shore

This is Jerry. I did give that information and I will tell you in the discretionary areas, household goods did decrease from the 23.4% last year to 22.7%. And in soft lines, we decreased from 6.7% to 6.5%, so we did continue to see that shift towards the more basic and consumable with food and tobacco being the largest increase. We did give that in our notes, and it's not out of line from what we expected. We do expect, as we've talked about, reconfiguration for that to moderate but there -- this is a trend that has been ongoing for quite some time now.

Alan C. Crockett

And this is Alan, I mentioned it in the first quarter, one of our biggest challenges was our ability to get reconfiguration up and going at the same pace as the consumable acceleration was occurring, which is what Jerry just highlighted.

Michael Richardson - Sidoti & Company, LLC

Okay. And gross margin in general merchandise, did you say that was down 100 basis points and that was primarily weather driven, did I hear that correctly?

Bruce A. Efird

No, Mike, the comp sales in weather-related products that directly -- weather related products category...

Michael Richardson - Sidoti & Company, LLC

Gross margins. Not sales gross margin.

Jerry A. Shore

No, we did -- Mike, this is Jerry. We did not mention nor do we break out the difference of our product department gross margins, so we did not break that out. When Bruce was talking about the 100 basis point decrease that was related to sales, not gross margin.

Michael Richardson - Sidoti & Company, LLC

Okay. And just one, last one. I saw you guys paid some debt down in the quarter. I was wondering if that plans for excess cash include being debt free possibly by the end of the year?

Jerry A. Shore

Mike, this is Jerry again. The debt we have on our books are all related to real estate properties that we own. We assumed that debt when we acquired those properties. They do have termination dates and what we had done in the quarter was make a payoff on either 1 or 2 of those properties so they will drop but they will only drop in line with the ends of those loans. We do not have any borrowings under our revolving line of credit, which would be for working capital purposes.

Operator

We'll take our next question from Patrick McKeever of MKM Partners.

Patrick McKeever - MKM Partners LLC, Research Division

So question on the -- you mentioned the expanded personal refrigerated offering, I think. Just wondering what you've done there and if that is behind the strength in food and tobacco in the quarter.

Alan C. Crockett

Yes, this is Alan again. What we did was we essentially replaced and expanded the cooler program in our top 100 stores. The expansion in most cases was 2 additional doors, which allowed us to add 20 to 30 new products in those -- in that category, which is really a big addition. It will get us more variety, get us more offering to the customer. We know that the coolers generate traffic. We know they are a traffic driver. We have seen the overall impact of that cooler expansion on that particular food category and, certainly, as those customers come in for those products, they're situated near food, that would certainly have an impact on the total food and snack offering as well. But we've seen a direct correlation to that category, not just on new products but raising the overall category as well.

Patrick McKeever - MKM Partners LLC, Research Division

And on -- are you seeing any meaningful changes in food stamp usage?

Alan C. Crockett

No, I don't think we've seen any meaningful change, and we have a high percentage of that business and have -- we haven't seen any huge uptick of that in recent months.

Jerry A. Shore

Patrick, this is Jerry. If you look at our food stamp business as a tender type, that number is somewhere in the 3.5% to 4% range. It is increasing but it's still a relatively small number of our total tender type. But it is increasing, to your question.

Patrick McKeever - MKM Partners LLC, Research Division

Okay, okay. And then, a pharmacy question. Just on the plan to take that penetration rate to 65% to 70%, kind of a broad question and that is, with your pharmacy -- the acquisitions that you're making, and also, I think you're doing some cold starts, although not that many, what is the outlook there for pharmacy acquisitions in some of the markets that you operate in and some of the new markets you're planning to go into? I mean is it just -- is it kind of more that what you been doing over the years in terms of the basic approach to locating and then acquiring an existing pharmacy? Do you continue to oftentimes bring the pharmacists, head pharmacist, along with you, does that person typically join the company? That sort of thing, just any kind of broad commentary you can make to help us understand how you're going to get up to that 65% to 70% penetration rate.

Rick A. Chambers

This is Rick. Again, the strategy is very similar to what we've had in the past but with a much different focus on our existing store markets. And we've gone back and done some very thorough analysis in terms of looking at stores that obviously have an independent in that market, and when I say stores, I mean, Fred's stores that don't have a pharmacy today. And then looking at is there an independent available? And then what's the capability for a drive-through, that's one probably change that's gotten much more attention over the last 2 to 3 years that if we cannot have a drive-through option in that facility, it does move towards the bottom of the list. And then that strategy, coupled with new markets and new opportunities along with those expressed opportunities that come up in terms of having those as a precursor for our new stores and then following up on your last comment regarding the bringing on across the pharmacist, pharmacy owner or pharmacist-in-charge, that is a critical piece for us in that acquisition and we've said many times before that we value that acquisition, it changes up or down based on the longevity of that pharmacy owner and his willingness to come to work for us.

Bruce A. Efird

Patrick, just to give you a little more color relative to the longer term opportunity. Within our 11 states in which we operate pharmacies today, there are over 5,000 independent pharmacies in those markets. And if you expand that to our 15-state footprint in which, in total stores, there's 8,500 independent pharmacies. So we see the run rate -- the runway and the opportunity for continued acquisitions as being positive.

Patrick McKeever - MKM Partners LLC, Research Division

And how about just valuing those acquisitions and the prices that you need to pay to acquire the operations, anything changing there? I mean, what's been happening over the past year or 2 with all the pressure on sales with generics, yet the nice profit benefit as well?

Rick A. Chambers

Again, this is Rick. And it's been fairly consistent with what we've seen in the past. I know all of you have seen our spend go up with that only normal, maybe the same number of acquisitions, but that has to do more with the size of the acquisitions that we're acquiring because but that has -- that's probably the one thing has changed over the last 2 or 3 years, that we are seeing some bigger volume stores that are now on the market that were not available a few years ago.

Operator

We'll take our next question from Andrew Wolf with BB&T Capital Markets.

Andrew P. Wolf - BB&T Capital Markets, Research Division

Just wanted to ask on the increase in advertising and other media. I think, Bruce, you said that last quarter, I think, you said that would increase impressions by 45 million impressions. And can you give us a sense of what the base is or how much of an increase that is? And also whether that was sort of activated in the quarter or -- and did that also helps the quarter's traffic and perhaps the mix?

Alan C. Crockett

Andy, this is Alan. The 45 million impressions is a significant increase. I don't want to go into the total number as a percentage, but it is a significant increase on number of impressions. The incremental advertising which is the distribution of our mid-month ad, we said that we would do 7 this year, 6 of those are in the second and third quarter. So we only had one incremental in the first quarter.

Bruce A. Efird

And Andy, that's based on the success and track record that we saw last year, as we expanded the number of distributed mid-months this past year so we're continuing to move forward with that strategy.

Andrew P. Wolf - BB&T Capital Markets, Research Division

Okay. Could you tell us which month? Was is it this last month? That you reported?

Bruce A. Efird

In the fourth quarter?

Andrew P. Wolf - BB&T Capital Markets, Research Division

Yes.

Bruce A. Efird

It was February.

Andrew P. Wolf - BB&T Capital Markets, Research Division

And just, Jerry, housekeeping, on the $0.03, that is -- just want to confirm, that is in the guidance, right? So...

Jerry A. Shore

Yes, it is.

Andrew P. Wolf - BB&T Capital Markets, Research Division

I

Okay. Now if we wanted to adjust and get to sort of what the normal margins would be, otherwise, which line items are most affected? Is it the gross margin, because of the discounting or is it SG&A because accelerated depreciation or how do we try to normalize that out, analytically?

Jerry A. Shore

Of the $0.03 that's in there, which is about $1.7 million, Andy, about $1 million of that is in gross margin and the rest in expenses.

Operator

[Operator Instructions] And we have no further questions. I would now like to turn the conference back over to Mr. Bruce Efird.

Bruce A. Efird

Thank you very much for joining us and for your ongoing interest in Fred's. Have a great week.

Operator

And this does conclude today's conference call. Thank you all for your participation.

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Fred's (FRED): Q1 EPS of $0.31 beats by $0.04. Revenue of $501.5M (+0.2% Y/Y) beats by $2.09M. (PR)