Fred's: Earnings Preview

| About: Fred's, Inc. (FRED)
This article is now exclusive for PRO subscribers.

Fred’s Inc. (NASDAQ:FRED) is scheduled to report its second-quarter 2011 financial results on Thursday August 25, 2011 before the opening bell. The current Zacks Consensus Estimate for the quarter is pegged at 14 cents a share. The Zacks Consensus Estimate projects revenues for the quarter at $455 million.

First Quarter 2011 Recap

Fred’s, which faces stiff competition from Dollar General Corporation (NYSE:DG), Walgreen Co. (WAG) and Wal-Mart Stores Inc. (NYSE:WMT) posted strong earnings for the first quarter of fiscal 2011.

Adjusted earnings for the quarter climbed 14.28% year over year to 24 cents, in line with the Zacks Consensus Estimate.

Total sales for the first quarter of fiscal 2011 increased 3% to $484.4 million from $471.6 million for the same period last year. Comparable store sales for the quarter increased 1.0% compared with a 2.2% increase for the first quarter last year.

During the quarter, Fred’s opened one new store and four pharmacy express locations and closed seven underperforming stores and one pharmacy express location. Additionally, one franchise was also closed during the quarter. The company also renovated 56 stores with its new Core 5 elements in the quarter, bringing the total stores upgraded to 264 during 2010 and 2011.

Management Guidance

For the second quarter, management expects EPS to increase by 8% to 23%. The company expects to earn between 14 cents and 16 cents per share with total sales growth between 2% and4%.

For fiscal 2011, the Zacks Consensus Estimate projects an EPS of 83 cents compared with 22 cents in the previous year. The 2012 consensus estimate currently stands at 97 cents.

Second-Quarter 2011 Zacks Consensus

Earnings estimates for the second quarter of 2011, as provided by the analysts, range from a low of 13 cents to a high of 15 cents. Thus, the current Zacks Consensus Estimate for the quarter is pegged at 14 cents per share.

Agreement of Analysts

Over the past 30 days, 6 of the 8 analysts revised their earnings estimates downward. Hence, the current Zacks Consensus Estimate inched down by one penny over the last 30 days to the current level of 14 cents. The fiscal 2011 earnings estimate came down by three pennies to 83 cents over the same period.

Earnings History Outpaces Zacks

With respect to earnings surprises, Fred’s has topped the Zacks Consensus Estimate in the preceding four quarters. Over the last four quarters, the earnings surprise ranged from a 0.00% to 11.11%, with the average earnings surprise being 7.94%.


Fred's top-line growth has been negatively impacted by continued macroeconomic headwinds, which have adversely affected disposable incomes and forced customers to cut back on discretionary spending.

Moreover, the company operates in a highly fragmented industry and faces intense competition from national, regional and local retailing establishments, including department stores, discount stores, discount clothing, grocery and convenience stores and drug stores. Consequently, the company is under severe stress to maintain profitability.

Currently Fred’s holds a Zacks #4 Rank which translates into a Sell rating. On a long-term basis, we maintain a Neutral rating on the stock.