Fred’s Profit Falls on Year-Ago Charges

AP

MEMPHIS (AP) – Fred’s Inc. reported Thursday that its fiscal second-quarter net income fell sharply because of a sizable tax benefit a year ago, but adjusted results showed improved profitability.

While the discount retailer’s sales have been improving and helping its profits, it warned that its lower-income customers are still feeling economically pressured.

The company, based in Memphis, has 697 general merchandise stores across the Southeast.

Fred’s CEO Bruce Efird said that the second quarter was helped by stronger customer traffic in stores, increased spending during each visit, improved margins and lower expenses.

The company reported net income of $3.3 million, or 9 cents per share, for the quarter that ended Aug. 3. That is down from net income of $6.1 million, or 17 cents per share, in the prior year’s quarter. The prior year’s results included a $4 million, or 11 cents per share, benefit tied to a state income tax settlement and other tax matters.

Revenue increased 2 percent to $482.2 million from $470.8 million. Revenue from stores open at least a year increased 2.2 percent following a decline of 1 percent last year. This is considered a key indicator of a retailer’s financial performance as it strips away the effect of recently opened or closed stores.

The quarter’s profit met market expectations and revenue exceeded them. Analysts polled by FactSet, on average, were anticipating earnings of 9 cents per share for the quarter on revenue of $480.6 million.

Fred’s said that it anticipates the competitive climate will be intense and the operation environment will be challenging in the second half of the year. This echoes the sentiment of many retailers, from Macy’s to Wal-Mart, which have lowered their full-year forecasts on weaker consumer spending patterns.

“Discretionary spending for lower-income consumers – a key customer segment for Fred’s – is expected to remain under pressure,” Efird said.

He said the company’s merchandising programs, expansion of the number of pharmacies in stores and other efforts are designed to meet these economic and competitive challenges.

The company said it expects earnings for the year to fall between 81 and 86 cents per share; analysts were anticipating 84 cents per share.

Fred’s also said that it expects it will earn 19 to 23 cents per share on revenue gains between 1 and 3 percent. Based on its third-quarter revenue of roughly $450.6 million last year, that suggests revenue of $455.1 million to $464.1 million.

Analysts had forecast earnings of 22 cents per share for the quarter on revenue of $461.4 million.

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