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VOL. 131 | NO. 254 | Thursday, December 22, 2016

Analyst: Rite Aid Buy ‘Good Deal’ for Fred’s

By Andy Meek

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Memphis-based Fred’s Inc. got a “really good deal” on the 865 Rite Aid stores it’s agreed to buy for $950 million in a deal that takes the company beyond its core market and marks a significant new chapter in its story.

Fred’s got a “really good deal,” according to one analyst, on the 865 Rite Aid stores it agreed to buy for $950 million, a major transaction the Memphis-based company announced earlier this week.

(Daily News File/Andrew J. Breig)

Fred’s, which alluded to a pending transaction during its third quarter earnings presentation to analysts earlier this month and declined to take questions because of that, agreed earlier this week to buy the stores from Walgreens Boots Alliance Inc. and Rite Aid Corp., making Fred’s the third-largest drugstore chain nationwide.

“The deal works out to about $1.1. million per store,” said Nick Mitchell, managing director and research analyst with Northcoast Research.

Mitchell said Fred’s would probably have had to pay more if it wanted to build those stores itself from the ground up.

That move comes as Deerfield, Ill.-based Walgreens works to close its $9.4 billion purchase of Rite Aid, which would give the combined company 12,000 U.S. locations – several thousand more than the nearest competitor, CVS Health Corp.

With such a large deal, Walgreens – the nation’s largest drugstore chain – was expected to be forced to sell stores to ease concerns from regulators about competition. In fact, the company may be required to include more stores in the deal with Fred’s.

Fred’s will continue to operate the newly acquired stores with the Rite Aid banner during a 24-month transition period. The company will also use them, meanwhile, to help it continue to make progress in growing the health care side of its business.

To that end, Fred’s CEO Mike Bloom described the deal as a “transformative event” for the company.

“We believe that this transaction will also create tremendous opportunities for both our new and existing front of store and pharmacy team members,” Bloom said. “We look forward to realizing the considerable benefits this transaction will bring to our customers, patients, payors, supplier partners, team members and shareholders.”

While the eyebrow-raising move is aggressive, industry observers are quick to note that Fred’s management team is being led by former executives from Walgreens and CVS. Bloom is a former executive at CVS and Family Dollar Stores Inc. And chief financial officer Rick Hans spent nearly 30 years at Walgreens.

As far as what comes next, Mitchell says it’s too early to pass judgment on the efficacy of the deal. Fred’s, he said, has “done a good job” over the last 12 to 24 months refreshing and rebuilding the company’s leadership team.

“Now, the problem is you have to actually execute on the strategy,” he said. “It’s obviously a different strategy.

“Fred’s transitions now from what was basically a model built in small rural towns in the Southeast to more of a nationwide footprint, even though the stores they acquired are really heavy on the East and West Coast,” Mitchell said.

The company’s legacy stores are facing significant headwinds.

Fred’s runs 647 general merchandise discount stores clustered mainly in the Southeast, and it operates 371 full-service pharmacy departments within its stores. It also runs three specialty pharmacies.

Fred’s released its third quarter earnings on Thursday, Dec. 8. At the time, the company reported a net loss of $38.4 million for the quarter ended Oct. 29, a swing to a loss from the $1.4 million in net income it reported during the year-ago quarter.

Along with a general cost-cutting push, Fred’s is planning a relocation of its headquarters and is also closing 40 stores next year.

“They have a lot on their plate right now,” Mitchell said.

RECORD TOTALS DAY WEEK YEAR
PROPERTY SALES 0 133 1,342
MORTGAGES 0 131 1,047
FORECLOSURE NOTICES 20 39 190
BUILDING PERMITS 0 305 3,056
BANKRUPTCIES 17 135 753
BUSINESS LICENSES 0 53 329
UTILITY CONNECTIONS 0 0 0
MARRIAGE LICENSES 0 0 0