Fred’s Inc. (FRED) reported modest third quarter results with earnings of 13 cents per share. Earnings were 3 cents below the Zacks Consensus Estimate and were down 13% compared to the prior-year quarter.
Net sales for the quarter were almost flat year-over-year, declining 1.1% to $422 million. However, comparable same store sales for the quarter increased 1%. Furthermore, the company noticed continued improvement in its store operations, especially in controlling shrinkage and with improved inventory quality. The average store inventory was down 9%, while cash reserves increased $30 million year-over-year.
During the reported quarter, the pharmacy program also witnessed strong growth in both sales and script counts, with the 300th pharmacy being opened during the period. During the quarter, the company opened eight new pharmacies in all.
Gross margin for the quarter contracted 62 basis points (bps) to 29.1% versus 29.7% in the comparable prior-year quarter. The decline was primarily attributable to higher mark-downs of promotional sales and competitive pricing on pharmacy department sales, which was partially offset by the positive impact of higher initial mark-up on general merchandise and better shrink control. The operating margin for the quarter also contracted 43 bps to 1.8% from 2.2% in the prior-year quarter.
The company had cash and cash equivalents of $38.6 million and a long-term debt of $4.2 million.
Based on the results of the third quarter, management provided guidance for the fourth quarter of fiscal 2009. For the fourth quarter, the company expects net sales to increase in the range of 1% to 3%. Comparable store sales are expected to be approximately flat for the quarter.
Quarterly earnings are expected to be in the range of 17 cents to 24 cents per share. Annual earnings for fiscal 2009 are expected to be in the range of 62 cents to 69 cents per share.
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