Memphis-based discount store and pharmacy operator Fred’s third-quarter net income declined 27 percent as sales in its established stores dropped and its costs rose.

The company said it faced an “intensely challenging retail climate,” and pharmacy sales suffered from a shift from branded drugs to generics, but traffic improved in October. Its outlook for the current quarter, which contains the holiday shopping season crucial for retailers, is in line with analysts’ prediction.

The company reported Tuesday that it earned $6.6 million, or 18 cents per share, in the three months through Oct. 27, compared with $9 million, or 24 cents per share, a year earlier.

Analysts expected earnings of 21 cents per share, according to a FactSet poll.

Revenue rose 1 percent to $450.6 million, matching Wall Street expectations, from $444.4 million. Revenue at stores open at least a year dropped 2.5 percent. This metric is a key indicator of a retailer’s health because it excludes results from stores recently opened or closed.

General expenses rose 4 percent to $118.1 million for reasons including higher costs for labor and for opening new stores. Fred’s has 708 discount stores in the southeastern U.S.

For the fourth quarter, which ends in January, Fred’s Inc. expects earnings of 31 cents to 36 cents per share, with a 2-cent bump thanks to an extra week in the quarter compared with last year. It predicted revenue of $543 million to $553 million.

Analysts foresee profit of 31 cents per share on revenue of $546.9 million.

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