What You Should Know About Fred's Apart From Dismal Comps

Fred's, Inc. (NASDAQ:FRED) has been in the red for quite some time now due to sluggish comps. The company has been struggling with declining sales that has been impacting its profits as well as overall growth. Also, it seems that the company is yet to recover from the cancelled Walgreens Boots Alliance, Inc. (NASDAQ:WBA) and Rite Aid Corporation (NYSE:RAD) merger. Such factors have hurt the performance of the company in the last reported first-quarter fiscal 2017 results.

Let’s now delve deeper into some of the factors that has been pulling down Fred's performance.

Dismal Comps Trend and Declining Sales

Fred’s has been posting dismal comps since past many quarters, as a result of the sale of low productive discontinued inventory. Declining traffic trends are also hurting comps. We note that the company’s July comp sales declined 0.1%, after posting a decrease of 1.6% in June and 0.8% in May.

Sales were also affected by the closure of 39 underperforming stores in the first quarter of 2017. Continued challenges in the Front Store business and competitive consumable categories also affected the top-line. We note that Fred’s reported a year-over-year decline of 2.7%, 3%, 3.1% and 5.3% during March, April, May and June, respectively. The company’s total sales for July declined 3.5% to $150.5 million.

Cancelled Merger - A Grave Disappointment

Owing to various antitrust issues and unlikely FTC (Federal Trade Commission) clearance, Walgreens Boots Alliance decided not to proceed with its planned takeover of rival drugstore, Rite Aid Corporation. The cancelled Walgreens-Rite Aid merger also closed doors for Fred’s, which had inked a deal in Dec 2016 to buy 865 Rite Aid stores. The acquisition of these stores would have positioned Fred’s Pharmacy as the third-largest drugstore chain in the nation after Walgreens and CVS Health Corporation (NYSE:CVS) . Fred’s was left disappointed after the cancelled merger, which would have given the company greater negotiating power and would have also improved its healthcare growth strategy. Moreover, the professional, legal, banking and integration planning fees incurred in connection with this deal, have also become unyielding and have hurt the company’s profits.

Less International Exposure

Fred’s does not have any presence in the developing markets which deprives it of the benefits of high growth opportunities in the developing nations like China, Brazil, India, Mexico, Russia and Southeast Asia. Since the developed markets of Europe, America and Canada are already saturated, most of the U.S. companies are looking toward the emerging ones, which offer great growth opportunity owing to the growing population and affluent middle class.

Bottom Line

In an effort to revamp its performance, the company has shifted focus to its pharmacy organization to drive scripts into the stores and improve service to its patients. Growth strategies of the company also include internal reorganization and geographic expansion.

Although such efforts have improved Fred’s specialty business, they are yet to bear a significant impact upon the company’s top-line. Moreover, the management expects that the current headwinds combined with lower-than-expected sales trend would impact second-quarter results. Such weak fundamentals indicate that Fred’s is not a favorable stock currently.

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