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VOL. 132 | NO. 131 | Monday, July 3, 2017

Analyst: Fred’s Not Seen as Viable Buyer of Rite Aid Stores

By Andy Meek

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Fred’s CEO Mike Bloom said the company’s leadership team will still be moving ahead on its promise to “optimize” the company’s business model and execute a health care-focused strategy for Fred’s. (Daily News File/Andrew J. Breig)

Nick Mitchell, managing director and research analyst with Northcoast Research, didn’t have to do much work or analysis in the wake of news that Memphis-based Fred’s Inc. has been cut out of a deal between Walgreens and Rite Aid.

That’s because he’d always thought it was a long shot – and never really worked into his models – that Fred’s would get to buy hundreds of Rite Aid stores as planned to help a now-defunct proposed merger between Walgreens and Rite Aid pass regulatory muster. And sure enough, the two giant drugstore chains announced a new deal June 29 that scuttled the merger and calls for Walgreens to buy 2,186 of Rite Aid’s stores for $5.18 billion.

In a note to clients he distributed about that news, Mitchell wrote that the new deal that took Fred’s out of the picture is likely symptomatic of the Federal Trade Commission’s concerns over “Fred’s ability as a viable operator.”

“I don’t think the FTC could get comfortable with Fred’s, for lack of a better word, as a credible buyer,” Mitchell told The Daily News. “What the FTC wants to see is the marketplace remain competitive. In order to do that, whoever acquires the divested stores needed to have a strong operating plan, strong leadership team and strong financing behind the deal. Because (the FTC) wants to ensure not just tomorrow that there’s someone there to operate the stores, but five years down the road. I think that’s where the original deal was getting hung up.”

Fred’s is still grappling with an effort to improve its performance. For the first quarter that ended April 29, for example, the company posted a net loss of about $36.5 million.

The company’s leadership has been working to execute a major turnaround operation over the last year or so that includes everything from technology investments to cost-cutting and growing the company’s specialty pharmacy portfolio. Store remodels are also a part of that, with Fred’s planning to accelerate the pace of those this year.

The glass-half-full take on the news it won’t be buying the Rite Aid stores after all – which in December Fred’s CEO Mike Bloom described as a “transformative event” for the company – is that the company’s story is now simpler. It doesn’t have the complexity of integrating and managing hundreds of new stores, and it can focus on its existing markets and its core operation.

Bloom said the company’s leadership team will still be moving ahead on its promise to “optimize” the company’s business model and execute a health care-focused strategy for Fred’s. Fred’s is also getting $25 million as reimbursement for expenses associated with the terminated deal.

“While the acquisition of additional stores was an opportunity for growth, we always viewed it as a potential outcome that would accelerate our transformation, not define it,” Bloom said.

“This is a disappointing outcome; however, the termination of the transaction has no impact on the company’s transformation strategy or our ability to execute. We are as confident as ever that we have a strong team and the right strategy in place to drive long-term growth and profitability, and to enhance value for our shareholders.”

The less optimistic take on the news is that Fred’s doesn’t have an immediate path to the kind of growth the Rite Aid stores could have given it, and must now focus on the tougher work of shoring up what it has.

“The future’s probably a lot less complicated than it would have been if they’d acquired the stores from Rite Aid,” Mitchell said. “So it’s going to be simpler. However, it’s still going to be difficult. Some parts of the business I suppose you could say are getting a little bit better. But they’re still not performing exceptionally well, in my opinion.

“I think it’s probably going to require a couple of long, hard quarters of focusing on what needs to be fixed and trying to improve the execution,” Mitchell said.

PROPERTY SALES 207 263 9,865
MORTGAGES 197 246 10,862
BUILDING PERMITS 138 686 21,643
BANKRUPTCIES 0 256 6,219