No Easy Path Forward for Fred’s

Retailer Reaches Agreement to Sell Specialty Pharmacy Business

By Andy Meek

Memphis-based discount retailer Fred’s Inc. operates 584 company-owned stores that each stock more than 14,000 items and saw average sales of more than $3 million in 2017.

That’s one picture of the company, laid out in Fred’s just-released annual report. Another picture, though, can be found in Fred’s dismal financial performance of late – and in the fact that Wall Street has basically lost faith in the company’s prospects, which led to the price of Fred’s shares sinking 60 percent since January.

It is perhaps the most volatile backdrop for any of the publicly traded companies based in Memphis. A hedge fund president is the chairman of Fred’s, which saw three top executives depart over the course of a week in April and which, at the moment, has an uncertain path forward.

Memphis-based Fred’s Inc. reported a net loss for fiscal 2017 that doubled its loss in 2016. The price of Fred’s shares has sunk 60 percent since January.  (Daily News/Houston Cofield)

Fred’s chief financial officer Joseph Anto – who was hired for that job in February – is now the company’s interim chief executive in addition to his role as its finance chief. He’s now leading the execution of a new turnaround strategy, after the last one Fred’s tried focused on a shift away from retail to health care. That strategy effectively failed when the company got cut out of a deal to buy hundreds of Rite Aid stores and then saw the exit of the CEO who pushed it, Mike Bloom, who left the company effective April 24 after less than two years in the corner office.

On Monday, May 7, the company announced another facet of its latest turnaround strategy: selling its specialty pharmacy unit. Certain assets of that business, called EntrustRx, will be sold to a CVS Health Corp. subsidiary, Fred's announced. Proceeds from the $40 million sale, plus the value of inventory in EntrustRx, will be used to help pay down debt at Fred's, Anto said in announcing the pending sale. It is expected to close by the end of May.

Anto led his first quarterly earnings presentation on Friday, May 4, walking through results that included Fred’s fiscal year losses for 2017 doubling since 2016. Net sales for fiscal 2017 were also down 4 percent to $1.81 billion from $1.89 billion.

Anto laid out a fix-it plan during his presentation that includes, among other things: Expanding the rollout of beer and wine at Fred’s; cutting costs and improving supply chain efficiency; raising cash by “monetizing core assets” – the EntrustRx sale being an example; adding more lottery kiosks to stores; and launching a pharmacist outreach program to bring in more patients.

Customer spending in Fred’s pharmacies accounted for 45.7 percent of sales for the fiscal year ended Feb. 3, 2018. That’s according to the annual report released May 4, which also noted the company will be ranking the cash flow performance of all stores to determine where investments should be made or scaled back.

“I’ve been in situations like this before,” Anto said during his presentation, “where the results have been disappointing for too long and a significant reset is needed to get the business back on track. That is exactly where we are today here at Fred’s. Let me be clear. We are entirely dissatisfied with the results of the company over the last two years.”

Among the constraints Fred’s faces in turning a page in the story of its protracted slump, however, is the nature of its own business.

“We believe many of our customers have fixed or low incomes and generally have limited discretionary spending dollars,” Fred’s notes in its annual report. “In addition, we operate a number of stores in areas that are experiencing a lower or slower recovery following the economic downturn that began in late 2007 than the economy on a national level. A continued softening or slow recovery in consumer spending may adversely affect our industry, business and results of operations.”

The rest of the turnaround strategy Anto laid out could include selling assets like “significant pieces” of the company’s real estate portfolio.

Meanwhile, Anto says the company is also evaluating different options for its retail pharmacy portfolio. For the time being, at least, it looks like the future for Fred’s will very much resemble the past: a company-wide gamble on another turnaround plan, the fruits of which may or may not materialize.