On March 25, 2011, discounted general merchandise retailer Fred’s Inc. (FRED) announced its financial results for the fourth-quarter and year-end 2010.
Street analysts had more than a week to ponder on the news. In the paragraphs that follow, we cover the recent earnings announcement, subsequent analysts’ estimate revisions as well as the Zacks Rank and long-term recommendation for the stock.
Earnings Review
Fred’s Inc. posted an EPS of 22 cents in its fourth quarter of fiscal 2010, which missed the Zacks Consensus Estimate by 1 cent. However, it was 49% higher than the earnings reported in the year-ago quarter. For full year 2010 earnings increased 25% year over year and were reported at 75 cents, in line with the Zacks Consensus Estimate.
Total sales increased 3% year-over-year to $485.6 million, missing the Zacks Consensus Estimate of $487.0 million. Fred’s total sales for 2010 increased 3% to $1.842 billion from $1.788 billion for the same period last year.
(Read our full coverage on this earnings report: “Fred’s Misses in 4Q; In Line FY”)
Agreement of Estimate Revisions
The fourth-quarter 2010 as expected has left the analyst community unmoved, over the past one week, with static estimate revisions for the first quarter of fiscal 2011. For the second quarter of fiscal 2011 none of the analysts moved their estimate upward or downward.
Magnitude of Estimate Revisions
As a result of no movement in estimates seen over the past one week, the Zacks Consensus Estimates, for the first quarter of fiscal 2011 has remained at 25 cents. For the second quarter of fiscal 2011 and fiscal 2012 as well, the estimates have remained stagnant at corresponding earnings of 16 cents and 88 per share.
Our Recommendation
Our long-term recommendation on Fred’s is Neutral as we anticipate it to perform in line with the broader market. Fred’s strong focus towards low and middle income households in small towns, low debt balance sheet coupled with management efforts to remodel and update stores in an effort to drive traffic bode well for future earnings performance.
However, intense competition from other discounters and department stores and dependence on overseas suppliers severely undermine the company’s future growth prospects and sustainability. This leaves limited space for above-market performance of the company.
The company faces stiff competition from Dollar General Corporation (DG) and Walgreen Co. (WAG). It currently holds a Zacks #3 Rank. On a long-term basis, we maintain a Neutral rating on the stock, with a short-term Hold rating.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/
DOLLAR GENERAL (DG): Free Stock Analysis Report
FREDS INC (FRED): Free Stock Analysis Report
WALGREEN CO (WAG): Free Stock Analysis Report
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