Fred's (FRED) CEO Jerry Shore on Q1 2016 Results - Earnings Call Transcript

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

Fred's, Inc. (NASDAQ:FRED)

Q1 2016 Earnings Conference Call

May 26, 2016 10:00 AM ET

Executives

Pat Watson - IR

Ben Garner - Corporate Controller

Rick Hans - EVP and CFO

Jerry Shore - CEO

Mike Bloom - President and COO

John Foley - EVP, Store Operations

Bryan Pugh - Chief Merchandising and Marketing Officer

Analysts

Andrew Wolf - BB&T Capital Markets

Ben Bienvenu - Stephens Inc.

Jill Nelson - Johnson Rice

David Magee - SunTrust

Operator

Good morning and welcome to the Fred’s Incorporated First Quarter 2016 Earnings Conference Call. All participants will be in listen only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Pat Watson with Corporate Communications. Please go ahead.

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 ended April 30, 2016.

Before we begin, I would like to remind everyone that management’s comments during this conference call that are not based on historical facts are forward-looking statements. These statements have been 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 cause or contribute to such differences have been described in the news release issued earlier today and the company’s Annual Report on Form 10-K and in other filings with the Securities and Exchange Commission.

Lastly, I would like to point out that management’s remarks during this conference call are based on information and understandings believed accurate as of today’s date, May 26, 2016. 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. 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 us this morning in sharing prepared remarks are Jerry Shore, Chief Executive Officer; Mike Bloom, President and Chief Operating Officer; Rick Hans, Executive Vice President and Chief Financial Officer; and Ben Garner, Controller.

After our prepared remarks, they will be available for questions along with Rick Chambers, Executive Vice President of Pharmacy Operations; Bryan Pugh, Chief Merchandising and Marketing Officer; Craig Barnes, Executive Vice President of Supply Chain, Logistics, and Loss Prevention; and John Foley, Executive Vice President of Store Operations.

I will now turn the call over to Ben Garner.

Ben Garner

Good morning, Pat, and good morning to everyone on the call. Thank you for joining us this morning for our discussion of the first quarter of 2016. Briefly, I would like to highlight some of the key aspects of our financial results for the quarter without unduly repeating details already contained in our press release this morning.

Total sales for the first quarter of fiscal 2016 increased 8% or $40.5 million from the same period last year largely reflecting the contribution of our April 2015 acquisition of EntrustRx specialty pharmacy. Having now lapped that acquisition in April, increases in total sales going forward will become more normalized. On a comparable store basis, year-to-date sales increased 1% versus an increase of 0.8% for the year earlier period. The comparable store sales increase for the first quarter was split between general merchandising departments, which were up 0.8% and the pharmacy department which was up 1.3%.

The quarterly sales mix comparison was as follows. Household goods and softlines increased to 23.4% from 22.9% last year, consumables decreased to 25.8% from 29.2% last year, pharmaceuticals increased to 49.5% from 46.3% last year, and franchise sales decreased to 1.3% from 1.6% last year.

Net income for the first quarter of 2016 increased to $1.3 million or $0.03 per share compared with flat or $0.00 per share in the prior year quarter. Adjusted net income for the first quarter of 2016 increased to $1.5 million or $0.04 per share.

Moving to performance discussions, gross profits for the first fiscal quarter of 2016 increased 3.1% to $141.3 million from the prior year period. Gross margins for the first quarter decreased 120 basis points to 25.7% of sales from the prior year period. The deleveraging in the quarter was primarily driven by the sales mix shift towards lower margin specialty drugs and continued reimbursement pressures.

The gross margin rate in our general merchandise departments continued to improve against prior year periods. We continue to see favorable leveraging and adjusted selling, general, and administrative expenses of 170 basis points in the first quarter of 2016 as adjusted selling, general, and administrative expenses declined to 25.2% of sales. This improvement reflected our pharmacy growth initiatives, better control of labor costs, and improved supply chain efficiencies.

Moving to the balance sheet, total inventories at the end of the first quarter increased 6.7% from the first quarter of 2015. General merchandise inventory increased 5.6%, primarily as a result of investments in seasonal lawn and garden inventory, spring and summer toys and apparel, and over-the-counter health and wellness, and personal care products.

Pharmacy department inventory increased 14.4% as a result of inflation and pharmacy department growth. Inventory turns at the end of the first quarter of 2016 improved to 4.7 times a year compared with 4.3 times a year in the first quarter last year. Borrowings under the revolving line of credit at the end of the first quarter of 2016 were related to our acquisition of EntrustRx.

Capital expenditures during the first quarter totaled $4.6 million compared with $5.7 million last year. The breakdown of capital expenditures in the first quarter was $2.8 million for existing and remodeled stores and pharmacies and $1.8 million for corporate and technology upgrades. The company’s total selling space at the end of the first quarter was approximately 8.6 million square feet compared with 8.5 million square feet in the same period last year.

This concludes my financial summary. I will now turn the call over to our CFO, Rick Hans for comments.

Rick Hans

Thanks, Ben and good morning, everyone. Let me begin by saying how honored I am to be a part of the team at Fred’s and a what thrill it is to be speaking to investors again.

We are pleased to provide financial guidance for the second quarter of 2016 and update annual guidance for the remainder of the current fiscal year. Please note, the following information excludes the potential impact of any further data security incident related expenses, which are unknown at this time.

For the second quarter, both total sales and comparable store sales are projected to be in the range of flat to a 2% increase. Also for the second quarter, earnings per diluted share are expected to be in the range of $0.00 to $0.03, and adjusted EBITDA which excludes the impact of LIFO, stock-based compensation, and non-recurring items if any is expected to be in the range of $14 million to $17 million versus an adjusted EBITDA of $7.3 million in the prior year quarter.

Regarding the full fiscal year, recall the company stated on the conference call on March 23rd that total sales were expected to increase 5% to 9% and comparable store sales were expected to increase from 2% to 5%. Based on current trends, we now expect that total sales will increase 2% to 6% and that comparable store sales will increase 1% to 4%. A number of factors are driving these changes. Specialty drug sales have been hampered by the industry wide slowdown in the demand for Hep C drugs and we had an additional impact from a unit miss in oncology.

On the retail side of the business, pharmacy sales have been impacted by the increase in 90 day at retail and the increase in a number of generic drugs dispatched. In addition, general merchandise sales have been negatively impacted by certain categories like food, household chemical, paper, and pet. Mike will provide further insights into these challenges and opportunities.

In spite of the lower sales expectations, we expect to continue to improve margins in general merchandise and to continue to leverage SG&A. Therefore, we are pleased to report that our expectations for earnings per share and adjusted EBITDA for the fiscal year are unchanged from the March 23rd call. Earnings per diluted share for fiscal 2016 are expected to be in the range of $0.27 to $0.32. Adjusted EBITDA for the fiscal year is forecasted to be in the range of $73 million to $78 million compared to $53.2 million in the prior year, an increase of approximately 35% to 45%.

With that as a backdrop, I’ll turn the call over to Mike Bloom.

Mike Bloom

Thank you, Rick and good morning, everyone. As Rick and Ben shared with you we are pleased with our first quarter results. In particular the earnings per share of $0.03, which was at the high end of our expectations while sales were softer than planned we are confident that the initiatives underway for the balance of the year will deliver on our guidance of earnings per share of $0.27 to $0.32, which we provided in March.

Let’s start with the first quarter business update. Total store comparable sales increased 1%, while traffic was down 1.8% ticket was up 2.8% driven by a larger front store basket and an increase in average script price due to brand inflation of 11.4% and a generic deflation of 1.2% for a net inflationary increase of 5.2%.

Moving on to pharmacy, we are pleased to share that comp scripts were up 85 basis points for the quarter when adjusted for 90 day fills. This increase is being driven by our key marketing initiatives and a focus on acquiring new 90 day script patients, which contributed 244 basis points to our script comp. pharmacy comparable sales were up 1.3% driven by our positive script comp and the net inflationary impact referenced earlier.

Total pharmacy sales for the quarter were up 16.2%, primarily reflecting specialty sales from the EntrustRx acquisition. As you all know margin compression continues to be an interesting challenge. One of the key initiatives that we shared with you on the March earnings call was the implementation of our labor optimization model. I’m happy to report that this new model is delivering a cost-to-fill reduction of approximately 8.5%. Another key win in pharmacy is the continued roll out of our new enterprise pharmacy system, which will be completed by the end of August.

When combined with order inside our new pharmacy inventory management system, our pharmacy teams will be provided more efficient work flow processes and the ability to maintain proper inventory levels, which will create an improved patient experience. The team continues to focus on expanding our clinical service offerings that will include new partnerships with manufacturers to provide injection services for at risk patient populations.

We are also in the process of developing a pharmacogenomics program that will be available to both patients and employers to ensure our patients are receiving the most efficient drug therapy possible. We will continue our focus on strengthening our key metrics that ultimately impacts star ratings and improves our positioning within the pay for performance managed care networks.

During the first quarter our specialty pharmacy division was adversely effected by a decline in Hepatitis C patients due to the general market slowdown in this therapy. Although the market has slowed we are expecting new Hep C product introductions in the second half of the year that should boost the overall market. We are positioning our specialty pharmacy team to capitalize on these opportunities.

To combat the current Hep C trend we have strengthened our specialty pharmacy sales force with the addition of four new business development managers with expertise in therapies such as oncology, multiple sclerosis, rheumatoid arthritis and limited distribution drugs covering multiple therapies. This strategy is critical to diversifying our specialty pharmacy revenue growth.

At this time I would now like to turn to the front store. Front store sales were negatively impacted by severe weather in the markets we serve. But the good news is the mix of sales in the front store generated an increase in gross margin rate of 150 basis points. This was driven primarily by health and beauty aids, toys and lawn and garden. These categories are delivering top-line growth. When combined they had a 160 basis point comp sales improvement. A result of the investment we have made to expand assortment in these high margin categories.

I do have to acknowledge the headwinds offsetting the growth from these categories, which primarily lie in three areas. Food which includes beverage has been negatively impacted by increased competition in our markets as well as aggressive promotional pricing by key competitors. We are in the process of deploying our new combat strategy, which includes an entire assortment reset of all the major food and beverage categories, new marketing and promotional efforts and an emphasis on in-store merchandising.

Household chemical, paper and pet top-line sales are down as a result of calculated changes to our promotional strategy to improve profitability. We are adjusting that strategy in order to achieve a better balance of driving traffic and improving profitability.

The other negative impact on comp sales was the $1 million in sales generated in Q1 2015 related to discontinued, unproductive inventory. If we remove the negative impact of these three areas our front store comps would have been up 2.9%. The team is laser focused on turning these trends around and I am fully confident in their ability to do so.

Now let’s talk about supply chain optimization. I am very pleased to share the total supply chain expense to sales for the quarter came in at 4.8% versus 5.5% in quarter one of 2015. The key drivers to this improvement were inbound freight expense reductions, a decrease in less than truck load shipments, outbound mileage reduction, the elimination of a third-party transportation agreement and the closing of a satellite warehouse. These initiatives will continue to drive savings throughout the year. The supply chain team has identified and is working on additional strategic expense reduction strategies that we will discuss later in the year.

Now let me give you an update on our store remodel program. As we continue to remodel stores we are refining our approach in order to optimize our return on investment. While it’s still very early, if we look at all 16 stores that have been remodeled from November through April we are still seeing promising results.

Comp sales in these stores were up 3.8%, gross margin dollars were up 5.3%, gross margin rate has improved by 45 basis points. The remodel stores are off to a great start, which is informing our decision to continue investing and upgrading our fleet. We are carefully studying assortment in key categories like health and beauty aids that are driving the results in these stores to look for opportunities to accelerate growth in the rest of the chain.

We are confident that all of the initiatives we have in place will provide the foundation for the front store team to continue delivering strong results in 2016. We still expect the front stores to deliver the following: comp sale improvement between 200 and 250 basis points, improve the trend and traffic by 75 to 100 basis points, average ticket improvement of 100 to 150 basis points and gross margin expansion of 25 to 50 basis points.

In summary we are aware of the challenges in the first quarter and we have the plans to turn the headwinds into tailwinds. And I have confident that the investments we are making in the key initiatives will deliver the results for long-term sustainable growth.

Thank you all for your time. I would now like to turn the call over to Jerry.

Jerry Shore

Thank you, Mike. I’d like to add my congratulations to our entire Fred’s team for what we accomplished in the first quarter of 2016. The progress we continue to make in implementing strategic initiatives are moving our business forward. It is an exciting time to be part of the Fred’s team. We delivered profitable and improving results compared with both the recent fourth quarter of 2015 and the first quarter a year ago. This is being driven by investments we have made in human capital, strategic planning, process enhancements and technology. All with the sense of urgency that will build long-term shareholder value.

Back to the topic of talent, I want to reiterate my enthusiasm for how our team has been elevated throughout the company over the last year and half. The recent announcement of Rick Hans as our new CFO, as well as recent additions in strategy development, pharmacy, general merchandise, supply chain and real estate are proving to be great moves for us. I also want to point out that our addition of talent has raised the development and enthusiasm of the whole team. We are building a team that will drive our goal to deliver healthcare services that improve the outcomes of people in the communities that we serve.

Our migration towards becoming a healthcare company is part of our new strategic roadmap. It capitalizes on our strong bonds with customers in our rural markets who need access to healthcare. It also provides Fred’s many new opportunities to leverage our capabilities to offer additional ancillary healthcare services in combination with our front store offerings, which are our key points of differentiation in these rural markets. By accelerating the integration of pharmacy, specialty pharmacy, clinical services and our new retail store format and assortment, Fred’s can become a primary source for healthcare needs for our customers.

Considering the market shift towards performance based payer models, which reward those providers that can improve outcomes, we are well positioned to participate in this new payer environment over the coming years. And while our retail pharmacy is the primary customer facing aspect of this strategy, our growth in specialty pharmacy is equally important.

With last year’s acquisition of EnthrustRx we not only expanded our share in one of the fastest growing segments in healthcare, but we also gained critical new access to manufacturers, payers and the medical community to further leverage our retail pharmacy network of over 370 brick-and-mortar locations. Only a handful of approximately 400 specialty pharmacies operating today offer the access and value of retail store fronts. Allowing the opportunity for either customer pickup or home delivery, as well as pharmacy patient engagement on a daily basis.

I think by now you will have grasped a few important themes from our comments today. We will continue to invest in talent as people are the core to our success. The team is focused on continuing to build momentum that will drive future growth and long-term shareholder value. There are changes in our business model that will capitalize on our pharmacy capabilities. Our new retail store format and assortment provides our consumers with a better shopping experience and complements our healthcare strategy. We have a renewed sense of optimism for what we as a company can achieve and our willingness to invest more in our infrastructure to support future growth and the payback we are seeing from those increased investments.

So to summarize, I remain enthusiastic about the momentum we continue to see throughout the company, especially the positive results expected in our adjusted EBITDA, which as Rick mentioned will grow to a range of $73 million to $78 million for 2016, representing an increase of 35% to 45%. I am confident as ever in the leadership team, our unique business model and the growth prospects for Fred’s as a regional provider of healthcare services and value merchandise in the markets we serve.

And now operator you may open the lines for questions?

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Andrew Wolf of BB&T Capital Markets. Please go ahead.

Andrew Wolf

Hi thanks good morning.

Jerry Shore

Good morning, Andy.

Andrew Wolf

Good morning, all. Mike I think last quarter you talked about food and it sounded more like it was just the part of the frontend you just hadn’t got you yet, but now this quarter at least -- it sounds a little more like it’s competitive. Could you talk a little more and give us a little more color on what’s going on? Is it really new entrants like ALDIs or someone like that or new stores from any Wal-Mart or someone else or is it more incumbents, Winn-Dixie or whomever on the price side. Where you’re seeing the pressure?

Mike Bloom

Yeah, sure, hi Andy. So a couple of things, one is -- there is increased competition in our markets, specifically ALDI and Save-A-Lot. So that’s one. Two is we are seeing more aggressive promotional pricing in our markets throughout the competition. We’ll adjust that accordingly. I do want to remind you though that in our remodeled stores we are seeing food doing much better than the chain, so some of that is about merchandising and location and the additional coolers and freezers, but there is certainly increased competition in both pricing and of course the value grocery players.

Andrew Wolf

Okay. So it sounds like in addition to the merchandising side, there has to be some change in the price and promotional offer to consumers?

Mike Bloom

Yeah I think, yeah, no questions, I mean we will react like retailers do accordingly with the promotional strategy and do what’s right for our stores, our customers. So we’re keeping an eye on it closely, and you can open the Sunday paper and look at the various competitors and see the recent aggressive pricing on several different categories related to food and beverage.

Andrew Wolf

Okay. And I just wanted to ask a question on the guidance for the year or for how the quarter came in at. Just in general, you’re -- at least in the quarter, you hit the low end of the same store sales guidance and yet higher end of earnings guidance, and for the year, you’re maintaining earnings guidance while trimming some of the sales outlook. So obviously, something in the margin structure is -- would be above the guidance plan. And I know -- and you guys highlighted some good numbers on the supply chain and on cost of fill. Is that where most of it’s coming in on reducing the cost structure or is there other stuff coming in it looks like in the gross margin at least in the frontend. Just give us a sense of what’s about plan that is -- or about the guidance plan such that with the sales not quite being where you expected or at least at the lower end, the earnings are solid. And I guess what kind of runway you have with that, is that something that extends into ‘17 or is that -- it's a sense of how that kind of process, how long that can play out?

Jerry Shore

Yes Andy, this is Jerry, and I’ll take that and then Mike and others can jump in as necessary. But I think the first quarter serves as an example of what we’re seeing better than originally planned. The gross margins, especially in the frontend of the store are doing better for a lot of reasons. We’ve talked a lot about our initiatives, and if you look at the frontend, I think that we have the initiatives such e-auctions, our sourcing initiatives to buy more directly, vendor relations have improved, there are a lot. And Mike and Brian can jump in, but then we get to the supply chain side of it, and we’ve had a lot of improvements by Craig Barnes and his team. And we also expect as we go through the year to get greater efficiencies once we move over to our new JDA technology.

On the pharmacy side, I think the biggest -- two big drivers. One will be the completion of the EPS, the Enterprise Pharmacy System technology as well as our efforts that we are continuing to roll through on reducing our cost-to-fill, and that’s in the SG&A side. Specialty pharmacy margins were better in the first quarter than we anticipated, so I know that’s a lot Andy, but there is a lot going on and Mike, Brian…

Mike Bloom

Andy let me add one more thing to it. It’s important to note that there is also a mix of sales shift going on here that’s positive for our business that supports our core healthcare strategy and quite frankly where we can win in our market. So, the categories of health and beauty and personal care all at higher margins than our company average are also part of driving that change going forward. And then, if you look at some of our core businesses where we’re winning in our markets, you can see home furnishings, toys, all of those core businesses that Fred’s stands for in our markets, and again where we can win and our point of differentiation is also driving that margin.

Jerry Shore

And Andy, I’ll go to your last question of does it extend to 2017? I think the answer to that is absolutely, I hope you could see here the enthusiasm that we have for the talent upgrades that we’ve made and the initiatives. So, we believe that all of our initiatives do move into 2017.

Andrew Wolf

Okay, thank you.

Operator

Our next question comes from Ben Bienvenu of Stephens Inc. Please go ahead.

Ben Bienvenu

Yeah, thanks good morning, guys.

Jerry Shore

Good morning, Ben.

Ben Bienvenu

Hey, I just wanted to touch on the remodel front that was helpful color on same-store sales results and I’m curious given those results what do you think the max number is that you could do per year of store remodels and is it possibly we could see an acceleration or do you feel like you are at capacity?

Mike Bloom

Yeah hi Ben it’s Mike. So yeah we’re -- clearly we’re pleased with the results we’re getting out of remodels there is a couple of things going on here that I’ll note. So this year we talked about 60 stores and the acceleration that we’re likely to see this year is the acceleration of what’s winning in those stores taking them to more stores chain wide i.e. the assortment potentially involved check out that we’re working on now that could potentially go to more stores.

So we’re learning from those stores that are up there now and while I don’t think this year we’ll accelerate the number of remodels if the results continue I think it’s fair to say that we probably discussed doing more than 60 stores in ‘17. But the key here is taking what we’re learning and getting it into more stores faster.

Ben Bienvenu

That’s great. And then on the comps side you had pretty consistent ticket increase I wonder how sustainable you think that ticket increase is and at what point do you think you have the opportunity for traffic to turn positive or do expect trend line where you’ve seen on the traffic front is sustained and it’s a ticket driven comp growth story?

Jerry Shore

So Ben this is Jerry I think a big part of the ticket increase over the last year and half is very much based on pharmacy and expanding our healthcare presence and services and then the assortment with more of a healthcare focus. So I think we’re very positive that the ticket will continue to grow positively and that the challenge as Mike talked about is on the traffic. And then the changes that we will be rolling out to overcome that the remodels are a big part of the traffic improvement. We’ve seen traffic improvement in the remodels just with the layout changes and have not really rolled out a lot of the assortment yet. So I do think the traffic are -- the remodels and then the product assortment.

Ben Bienvenu

Encouraging to hear. And then just one last one from me, you spoke some of the buckets of margin improvement on the general merchandise side that give you confidence in the full year I would be curious to hear what your underlying assumptions are on the pharmacy margins and as we start to lap over pressure that we started to feel intensified pressure in last year, the back half of last year or how are you thinking about the pharmacy margins going forward?

Jerry Shore

Ben, we are continuing to believe that there will be margin pressure and part of that is driven with more emphasis on the specialty side at EntrustRx. Rick you want to?

Rick Hans

This is Rick, the only thing I would add is as Jerry said the retail side will continue to see that year-over-year pressure that we’ve seen, but the payers we do believe as we move more into these paper performance based networks that we will have some long-term potential upside as we perform better within those networks and then almost in line with the talent upgrade comments earlier, we’ve also done so on the specialty side effectively in the trade and payer areas, where we do believe as we -- Mike had earlier commented about the diversification of our revenue and the strategy around that, which will be to move towards more favorable margin products within specialty as well to help offset that overall shift within the mix. And along with that we’ll also be sure to include the continuing optimizing our labor in order to better manage our cost-to-fill throughout the year.

Ben Bienvenu

Great, thanks for the detail. Best of luck, guys.

Jerry Shore

Thanks, Ben.

Rick Hans

Thanks, Ben.

Operator

[Operator Instructions] Our next question is Jill Nelson of Johnson Rice. Please go ahead.

Jill Nelson

Good morning. You talked about general merchandised margins for the year you expect to be up 25 to 50 basis points. But I believe first quarter they are up 150 basis points. But could you talk about kind of the variance and why do you think that improvement might slow throughout the duration of the year?

Jerry Shore

Good morning, Jill. This is Jerry. I know one of the big factors is going to be our sales mix. The first quarter margins were heavily influenced by sales mix towards the more discretionary areas and we anticipate changes as we go forward. The other consideration that has come into our -- how we are operating our business is this whole pricing issue and competitive pricing that we are seeing in the values base.

So we still expect a lot of initiatives to improve. But we are also being cognizant of what’s going on in the market and the initiatives that we have in those consumable areas.

Jill Nelson

Okay. And then just wanted your view on the new overtime rules changes there and how much do you think that those changes would impact Fred’s business?

Mike Bloom

Jill, it's Mike. We’ve done actually quite a bit of work on that, we have been working on because as you know it’s going to go live -- anticipated to go live sooner than it is now as you know right now the logo is scheduled to go into effect December 1st and we are actually looking at it as an opportunity to sort of reevaluate our current processes, field organization some of the improved efficiencies. We are working on long-term solution. Our goals would obviously be to have a minimal impact on turnover, mitigate any expense increases that are going to happen from this.

So we are working on it, we’ve got a lot of people who are working against this and we feel pretty good that we’ll have some good options that will; one, keep us competitive and keep our folks in a growth mode and happy at Fred’s.

Jerry Shore

And Jill, this is Jerry. I would just say John Foley is in the room. I’m going to ask him if he has anything to add, but John is leading the group as we look at this working with our HR departments and other operational areas. John, anything else to add?

John Foley

Jill, I look at this as an opportunity in order to really improve some of our HR processors as well as our in-store procedures. I think that will really in the long run be something better for our employees and that will result in things can better for our customers.

Jill Nelson

Alright, appreciate it. Thank you.

Operator

Our next question comes from David Magee of SunTrust. Please go ahead.

David Magee

Hi, good morning everybody.

Jerry Shore

Good morning.

Mike Bloom

Good morning, David.

David Magee

You mentioned the space itself being more promotional and you probably notice that some of your competitors reported some pretty strong numbers this morning. Curious, if you sort of look at your frontend volume and where the growth versus what they’re putting up. What do you think is causes the primary differential, is it the mix issue or is it more geography or what would you say the differential is caused by?

Jerry Shore

So David this is Jerry. For us first of all I think we’re extremely proud of the increase in earnings and EBITDA as compared to the competition. And then secondly, I think probably you’re referring to the comp store sales because we certainly had margin improvement. I think the on the comps, I think probably the largest factor that we know of and believe is the amount of growth that they’re seeing new stores, relocations both announced significant growth. And obviously that drives comps overtime. We have not had that growth, and that opportunity is ahead for us. We recently hired a very strong addition in real estate. And I think that as we look to the future we will see those benefits as well.

Mike Bloom

Hey, David let me give you couple more points on this just I think are important that are worth noting. And I’m not a big let’s talk about weather guy, but let me give you a couple of stats here. In the states where -- and remember we’re concentrated in a very select number of states that we don’t have the luxury of when we have a weather problem or system coming across all six or eight of our core states. And we don’t have the luxury of the Northwest or the Northeast stores all over the country. But let me give you some facts, Mississippi in Q1 had 9 inches more rain than last year. Lusitania had 3.5 inches and Arkansas had 5 inches.

If you look at that there is two key states here that were not impacted by weather, which is Georgia and Tennessee. Those two states had a 2.8 comp and a 2.2 respectively. So when you -- I hate to be a weather guy, but this was a really tough quarter for us from a rain perspective.

Bryan Pugh

This is Brian Pugh as well. And just one more thing to note, while dollar I think was around 2% comp and our 1% we have bigger boxes, we also sell seasonal and apparel and while those businesses were not negative as they were in all of your major retailers and your department stores dollar is not as bigger mix as we are in those areas. Those businesses were strong and healthy, definitely department stores took a much bigger hit than we did in Q1 and that’s part of our mix as well.

David Magee

All right. Thank you for the insights there, I can talk maybe I had nerves [ph]. That’s good intel. Secondly the inventory increase, the front end inventory. Do you feel pretty good about that in terms of the quality and visibility of working that down?

MikeBloom

Yeah it’s Mike again. Yeah we actually feel really good about where we’ve invested in inventory. And again when you think about the numbers and the businesses that are driving our comp sales again I’ll give you a couple of facts here some fun facts. When you look at our beauty inventory that we’ve added to the stores it’s up $1 million over the last year, but our comps and beauty are up double0digit in the first quarter. When you look at our toy inventory that’s up $3 million to last year, again our comps are in the strong double-digit category.

So and home I can go on healthcare, home furnishings. So where we’ve invested we are seeing that comp growth, which -- now we’ve got opportunities of course in some of our lower performing items and categories that we’ve addressed as well by just continuing quite frankly several 100 items. So we are working hard against that, but pleased with where we’ve invested the inventory.

David Magee

Thank you, Mike. And then just lastly, what are your currents thoughts with regard to possible opportunities getting some stores from Walgreens or [indiscernible] and maybe divestitures coming from that combination?

Jerry Shore

So David, this is Jerry. We do evaluate the opportunities that come our way and yes we’ve notified the appropriate parties that we are interested. We do believe that potential merger will create opportunities and we will look at it both from the divestitures when they are announced and then following that in the future at the opportunities that arise from it.

David Magee

Okay. So there has been no list put out there yet at this point?

Jerry Shore

Right, there has been no list put out there.

David Magee

Great, thanks guys. Good luck.

Jerry Shore

That we are aware of.

Operator

Our next question comes from Andrew Wolf of BB&T Capital Markets. Please go ahead.

Andrew Wolf

Hi just wanted to circle back to some of the margin pressure in pharmacy and obviously as a chain you are investing in some things to mitigate that are maybe some from the drug store chains are done so it’s a good thing to do. But where does that leave the independence in your markets? The last I think you updated it sounded like it didn’t seem like Fred’s was looking to intensify file buys or buying independence, but it just sort of stands the reason that the pressure there must be building and I’m just wondering if there is any update not formally, just how are you thinking about the independent opportunity in Fred’s market kind of going forward?

Rick Hans

Andy, this is Rick. We've seen a lot of opportunity specially here in the first quarter and really as we moved into the end of 2015 we’ve -- and where we are seeing a lot of the opportunity is as much in incremental acquisitions delay into our current existing stores and we have been very pleased with what we’ve seen and the ability to get those negotiated and closed. So that’s increased if anything and then the opportunity for the new acquisitions was as referenced earlier around the new talent in real estate we’ll see that as a big opportunity on the new store growth as well with those independent. So that’s not slowed at all.

Andrew Wolf

Okay. It sounds a little if I’m interpreting what you are saying right that maybe the sellers are little more interested in selling and maybe the valuations are a little more interesting for you guys?

Rick Hans

Yeah, they are a lot more of them interested in talking and the strange thing is we experienced similar opportunity in 2006 when Med D came out and they all felt it was still what it was worth in 2001 when Med D wasn’t out. So there is some education working through that in terms of the industry dynamics as that changes. But to your point yes we are having very favorable discussions with these individual owners to help see the impact and why now is a good time to make the change.

Andrew Wolf

Okay, thank you.

Rick Hans

You’re welcome.

Operator

This concludes our question-and-answer session. I would like to turn the conference back to Jerry Shore for any closing remarks.

Jerry Shore

Thank you everyone for joining us on the call. As you’ve heard today there are a lot of exciting things happening at Fred’s, as we continue to focus on ways to enhance our business model, drive improving profitability and delivering great value for our shareholders. We look forward to talking to you in the future.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines. Have a great day.

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