Fred's, Inc. (FRED) CEO Joe Anto on Q4 2018 Results - Earnings Call Transcript

|
About: Fred's, Inc. (FRED)
by: SA Transcripts
Subscribers Only
Earning Call Audio

Fred's, Inc. (NASDAQ:FRED) Q4 2018 Earnings Conference Call May 6, 2019 8:00 AM ET

Company Participants

Joe Anto - Chief Executive Officer

Jen Ehlers - Vice President of Brand Marketing

Conference Call Participants

Operator

Good morning, everyone. Thank you for attending today's conference call to review Fred's Financial Results for the Fourth Quarter and Fiscal Year ended February 2nd, 2019.

Joining us today are Fred's Chief Executive Officer, Joe Anto; as well as Fred's Vice President of Brand Marketing, Jen Ehlers.

Now I would like to turn the call over to Jen Ehlers. Jen?

Jen Ehlers

Thank you. Good morning, everyone, and thank you for joining today's call to review Fred's financial and operating results for the fourth quarter and fiscal year ended February 2, 2019. Before we begin, I'd 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 are made in reliance on the Safe Harbor provision 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 10-K and in other filings with the Securities and Exchange Commission. We refer you to these sources for more information.

Also I'd like to remind you that during the course of this call, we will discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in our earnings release, which is available on our website at investors.fredsinc.com and on the Securities and Exchange Commission's website at sec.gov, where we filed our earnings release earlier today as an exhibit to our current report on Form 8-K.

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 6, 2019. Because of the time sensitive nature information of this information, it is the company's policy to limit the archived replay of this conference call webcast to a period of 30 days. The call is the property of Fred's, and 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 that, I'd like to now turn the call over to Joe Anto, Fred's Chief Executive Officer. Joe?

Joe Anto

Thank you, Jen, and good morning, everyone. The fourth quarter was a challenging one for the company as sales in the front store dropped significantly versus the same period last year. In our view, the primary contributors of the reduction in sales were significant decline in overall traffic precipitated by persistent out-of-stock issues in key food, consumable and seasonal categories. This was due to a combination of factors primarily related to supply chain and liquidity issues.

Despite the progress we made reducing expenses during the year, we cannot offset the steep declines we saw in revenue and gross margin during Q4. We improved our out-of-stock situation as we entered the new fiscal year, but continued to have declines in traffic and sales. This combined with significant investment related to the increased inventory purchases made between December and February, adversely impacted the company from a cash flow and liquidity perspective as outlined in our recent 10-K filing. Our ABL balance ended the year at $15.6 million, and the balance as of April 30 stood at $78.3 million with $37.1 million of excess availability.

Our facility requires that we maintain excess availability of at least $21 million. Because of recent events we have disclosed in our 10-K filing, we're now in the process of negotiating a forbearance agreement with our banks. We believe that this agreement, if and when finalized, would give us the necessary time to complete the previously announced 159 store closures, evaluate additional store closures and develop a go-forward business plan for the company.

Additionally, we are continuing to pursue the sale of our remaining pharmacy locations as well as opportunities to monetize pieces of our real estate portfolio. As we announced in April, we've also engaged PJ Solomon to help us evaluate strategic alternatives for the company, which could include but are not limited to, additional store closures, asset sales or refinancing of our ABL.

The near-term goal for the company is to create a roadmap that allows us to stabilize our front store business, pay down our current ABL facility, remain a good partner to our key vendors and ultimately create value for our shareholders. I will now turn to the numbers and will address the fourth quarter results and trends on a year-over-year basis.

As a reminder, all of them reflect the fact that our Specialty Pharmacy business as well as the sale of prescription files and certain other assets from 179 of the company's Retail Pharmacy stores to Walgreens have been classified as a discontinued operation. For the fourth quarter of 2018, net sales decreased 17.2% to $307.1 million from $370.9 million for the fourth quarter of 2017. Note that there are 13 weeks in the fiscal fourth quarter of 2018 compared to 14 weeks in the fourth quarter of 2017. Comparable store sales for the quarter decreased by 9.7%.

For fiscal 2018, net sales decreased 8.9% to $1.27 billion from $1.39 billion for fiscal 2017. Comparable store sales decreased 1.7% for the fiscal year 2018. Gross profit in the fourth quarter decreased 22.1% to $71.7 million from $92.1 million in the prior year period.

Gross margin as a percentage of sales decreased 147 basis points to 23.4% from 24.8% in the same quarter last year. For the year ended 2018, gross profit decreased 11.2% compared to fiscal 2017 from $363.8 million to $323 million. Gross margin, as a percentage of sales, decreased approximately 70 basis points to 25.4% from 26.1% from the same period in the prior year. In the front store, we are continuing to see gross margin impact from a shift in sales mix from general merchandise to food and consumables.

On the pharmacy side, margins declined as there were prescription rebates in 2017 that did not recur in 2018, and there was an increase in DIR fees paid to PBMs in 2018 over 2017. Adjusted SG&A decreased for the fourth quarter to $102.6 million from $108.4 million in the same quarter last year. Adjusted SG&A for the fiscal year ended 2018 decreased by $29.9 million to $409.3 million from $439.2 million for the same period in 2017.

The decline in adjusted SG&A is the result of various cost savings initiatives, including workforce reductions. Net loss from continuing operations for the fourth quarter 2018 was $67.3 million or $1.86 per share compared to a net loss of $25.4 million or $0.68 per share in the fourth quarter of 2017. Net loss from continuing operations for fiscal year ended 2018 was $137.2 million compared to $144.5 million for the same period in 2017 or a loss of $3.76 and $3.87 per share, respectively.

For the fourth quarter of 2018, adjusted EBITDA, which further excludes items management does not consider to be indicative of our core operating performance was negative $17.7 million compared to $31.4 million in 2017. For the fiscal year ended 2018, adjusted EBITDA was negative $48.1 million compared to $20.3 million in fiscal year 2017.

Turning to our balance sheet, we ended the year with approximately $5.4 million in cash, compared to $6.6 million at the end of fiscal 2017. Inventory at year-end was $246.5 million, down from $263.8 million last year, a $17.3 million reduction year-over-year. Total debt stood at $73.1 million compared to $167.2 million at the end of 2017. In terms of capital deployment, our CapEx spend was $9 million in 2018 compared to $15.8 million in 2017 and we repurchased approximately 2.6 million shares during the year for a total of $5.8 million.

Before I end the call, I'd like to thank our employees, particularly our store associates, for their hard work and resiliency during a very challenging time at Fred's. As a company, we will continue our efforts to improve our revenue trend and right-size the business.

Thank you for participating today, and we look forward to addressing you when we report our Q1 results in June.

Question-and-Answer Session

End of Q&A

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.