FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended April 29, 1995.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
Commission file number 000-19288
FRED'S, INC.
(Exact name of registrant as specified in its charter)
Tennessee 62-0634010
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4300 New Getwell Rd., Memphis, Tennessee 38118
(Address of principal executive offices) (zip code)
(901) 365-8880
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X . No .
The registrant had 9,335,367 shares of common stock outstanding as
of April 29, 1995.
FRED'S, INC.
INDEX
Page No.
Part I - Financial Information
Item 1 - Financial Statements:
Consolidated Balance Sheets as of
April 29, 1995 and January 28, 1995 3
Consolidated Statements of Income
for the Thirteen Weeks Ended April
29, 1995 and April 30, 1994 4
Consolidated Statements of Cash Flows
for the Thirteen Weeks Ended April
29, 1995 and April 30, 1994 5
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and
Analysis of Financial Condition and
Results of Operations 7 - 8
Part II - Other Information 9
Signatures 10
FRED'S, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except for number of shares)
APRIL 29, JANUARY 28,
1995 1995
ASSETS
Current assets:
Cash and cash equivalents $ 3,703 $ 5,944
Receivables, less allowance for
doubtful accounts 5,299 4,033
Inventories 87,950 82,163
Deferred income taxes 1,525 1,590
Other current assets 671 756
Total current assets 99,148 94,486
Property and equipment, at depreciated cost 50,649 49,550
Equipment under capital leases, less
accumulated amortization 877 951
Deferred income taxes 4,958 5,170
Other noncurrent assets 1,418 1,428
$157,050 $151,585
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 27,532 $ 24,324
Current portion of indebtedness 1,583 1,629
Current portion of capital lease obligations 400 408
Accrued liabilities 4,973 5,030
Income taxes payable 2,019 1,042
Total current liabilities 36,507 32,433
Indebtedness 2,566 2,938
Capital lease obligations 733 802
Other noncurrent liabilities 997 955
Total liabilities 40,803 37,128
Commitments and contingencies
Shareholders' equity:
Common stock, Class A voting, no par value,
9,335,367 shares at April 29, 1995 and
9,307,373 shares at January 28, 1995
issued and outstanding 63,458 63,185
Retained earnings 53,345 51,555
Loan to ESOP (283) (283)
Deferred compensation on
restricted stock incentive plan (273) -
Total shareholders' equity 116,247 114,457
$157,050 $151,585
See accompanying notes to consolidated financial statements
FRED'S, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
THIRTEEN WEEKS ENDED
APRIL 29, APRIL 30,
1995 1994
Net sales $ 97,050 $ 90,904
Cost of goods sold 71,512 66,681
Gross profit 25,538 24,223
Selling, general and administrative
expenses 21,852 19,846
Operating income 3,686 4,377
Interest expense, net 118 28
Income before taxes 3,568 4,349
Income taxes 1,313 1,570
Net income $ 2,255 $ 2,779
Net income per share $ .24 $ .30
Weighted average number of common
shares and common equivalent shares
outstanding 9,307 9,307
See accompanying notes to consolidated financial statements
FRED'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
THIRTEEN WEEKS ENDED
APRIL 29, APRIL 30,
1995 1994
Cash flows from operating activities:
Net income $ 2,255 $ 2,779
Adjustments to reconcile net income
to net cash flows from operating
activities:
Depreciation and amortization 1,254 974
Deferred income taxes 277 976
(Increase) decrease in assets:
Receivables (1,266) (719)
Inventories (5,787) (5,795)
Other current assets 85 428
Other noncurrent assets (73) (11)
Increase (decrease) in liabilities:
Accounts payable 3,208 2,586
Accrued liabilities (57) (831)
Income taxes payable 977 594
Other noncurrent liabilities 42 36
Net cash (used in) provided by
operating activities 915 1,017
Cash flows from investing activities:
Additions to property, equipment and
equipment under capital leases (2,196) (2,392)
Net cash (used in) provided by
investing activities (2,196) (2,392)
Cash flows from financing activities:
Proceeds from borrowings and
increase in capital lease obligations - 1,700
Reduction of indebtedness and
capital lease obligations (495) (69)
Payment of cash dividends (465) (465)
Net cash (used in) provided by
financing activities (960) 1,166
Increase (decrease) in cash and cash equivalents (2,241) (209)
Cash and cash equivalents:
Beginning of period 5,944 8,070
End of period $ 3,703 $ 7,861
Supplemental disclosures of cash flow information:
Interest paid $ 51 $ 100
Income taxes paid $ 60 $ -
See accompanying notes to consolidated financial statements
FRED'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
Fred's, Inc. ("Fred's" or the "Company") have been prepared in
accordance with the instructions to Form 10-Q and therefore do not
include all information and notes necessary for a fair presentation
of financial position, results of operations and cash flows in
conformity with generally accepted accounting principles. The
statements do reflect all adjustments (consisting of only normal
recurring accruals) which are, in the opinion of management,
necessary for a fair presentation of financial position in
conformity with generally accepted accounting principles. The
statements should be read in conjunction with the Notes to the
Consolidated Financial Statements for the fiscal year ended January
28, 1995 included in the Company's Annual Report on Form 10-K.
The results of operations for the thirteen week period ended April
29, 1995 are not necessarily indicative of the results to be
expected for the full fiscal year.
NOTE 2: NET INCOME PER SHARE
Net income per share is based on the weighted average number of
common shares and common equivalent shares outstanding. See
Exhibit 11.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Fred's operates 184 discount general merchandise stores in nine
states in the southeastern United States. Eighty-six of the stores
have full service pharmacies.
Due to the seasonality of Fred's business and the continued
increase in the number of stores and pharmacies, inventories are
generally lower at year-end than at each quarter-end of the
following year. As shown on the consolidated statement of cash
flows, inventories increased $5,787,000 during the thirteen week
period ended April 29, 1995. In addition, cash was used to fund
accounts receivable ($1,266,000), capital expenditures incurred
primarily in connection with opening new stores and pharmacies and
purchasing enhanced point-of-sale cash registers ($2,196,000) and
cash dividends ($465,000). The increased inventory levels and
other cash outlays were financed from increased accounts payable
($3,208,000), net income, and existing cash. The Company believes
that sufficient capital resources are available in both the short-
term and long-term through currently available cash, cash generated
from future operations and, if necessary, the ability to obtain
additional financing.
The Company has a $12,000,000 revolving credit commitment and a
$4,500,000 term loan. At April 29, 1995, there were no borrowings
outstanding under the revolving credit agreement and there was
$3,900,000 outstanding under the term loan.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED APRIL 29, 1995 AND APRIL 30, 1994
Net sales increased from $90.9 million in 1994 to $97.1 million in
1995, an increase of $6.2 million or 6.8%. The increase was
attributable to comparable store sales increases of 3.0% ($2.3
million) and sales by stores not yet included as comparable stores
($3.7 million). Wholesale sales to franchisees and independents
increased $.2 million or 1.8% in 1995.
Gross profit decreased from 26.6% of sales in 1994 to 26.3% in 1995
because of the Company's implementation of a more competitive
pricing strategy. The Company's management believes that the new
pricing strategy will result in increased market share and restore
earnings growth; however, the process of educating Fred's customers
to the strong everyday values will take time.
Selling, general and administrative expenses increased from $19.8
million in 1994 to $21.9 million in 1995 due primarily to expenses
associated with new stores and pharmacies. As a percentage of
sales, expenses increased from 21.8% to 22.5% primarily because the
Company's retail business, which carries higher expense percentages
than the wholesale business, increased as a percentage of the
total.
EFFECT OF INFLATION
The impact of inflation on labor and occupancy costs can
significantly affect Fred's operations. Many of Fred's employees
are paid hourly rates related to the federal minimum wage and,
accordingly, any increase affects Fred's. In addition, payroll
taxes, employee benefits and other employee-related costs continue
to increase. Occupancy costs, including rent, maintenance, taxes
and insurance, also continue to rise. Fred's believes that
maintaining adequate operating margins through a combination of
price adjustments and cost controls, careful evaluation of
occupancy needs, and efficient purchasing practices is the most
effective tool for coping with increasing costs and expenses.
SEASONALITY
Fred's business is subject to seasonal influences, but the Company
has tended to experience less seasonal fluctuation than many other
retailers due to the Company's mix of everyday basic merchandise.
The fourth quarter is typically the most profitable quarter because
it includes the Christmas selling season. The overall strength of
the fourth quarter is partially mitigated, however, by the
inclusion of the month of January, which is generally the least
profitable month of the year.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Securities Holders
Not Applicable.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
Exhibit 11 - Computation of Net Income Per
Share
Reports on Form 8-K:
Not Applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
FRED'S, INC.
/s/Michael J. Hayes
Michael J. Hayes
Date: June 1, 1995 Chief Executive Officer
/s/Bruce D. Smith
Bruce D. Smith
Date: June 1, 1995 Chief Financial Officer