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 July 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 9,335,359 shares of common stock outstanding as
of July 29, 1995.
FRED'S, INC.
INDEX
Page No.
Part I - Financial Information
Item 1 - Financial Statements:
Consolidated Balance Sheets as of
July 29, 1995 and January 28, 1995 3
Consolidated Statements of Operations
for the Thirteen Weeks Ended and the
Twenty-Six Weeds Ended July 29, 1995
and July 30, 1994 4
Consolidated Statements of Cash Flows
for the Twenty-Six Weeks Ended July
29, 1995 and July 30, 1994 5
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and
Analysis of Financial Condition and
Results of Operations 7 - 9
Part II - Other Information 10 - 11
Signatures 12
FRED'S, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except for number of shares)
JULY 29, JANUARY 28,
1995 1995
ASSETS
Current assets:
Cash and cash equivalents $ 1,598 $ 5,944
Receivables, less allowance for
doubtful accounts 5,179 4,033
Inventories 86,731 82,163
Deferred income taxes 1,490 1,590
Other current assets 882 756
Total current assets 95,880 94,486
Property and equipment, at depreciated cost 51,154 49,550
Equipment under capital leases, less
accumulated amortization 680 951
Deferred income taxes 5,050 5,170
Other noncurrent assets 1,433 1,428
$154,197 $151,585
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 27,839 $ 24,324
Current portion of indebtedness 1,609 1,629
Current portion of capital lease obligations 272 408
Accrued liabilities 4,901 5,030
Income taxes payable 339 1,042
Total current liabilities 34,960 32,433
Indebtedness 2,044 2,938
Capital lease obligations 660 802
Other noncurrent liabilities 1,039 955
Total liabilities 38,703 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 52,451 51,555
Loan to ESOP (142) (283)
Deferred compensation on
restricted stock incentive plan (273) -
Total shareholders' equity 115,494 114,457
$154,197 $151,585
See accompanying notes to consolidated financial statements
FRED'S, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
JULY 29, JULY 30, JULY 29, JULY 30,
1995 1994 1995 1994
Net sales $ 93,295 $ 88,108 $190,345 $179,012
Cost of goods sold 70,353 63,995 141,865 130,676
Gross profit 22,942 24,113 48,480 48,336
Selling, general and
administrative expenses 23,520 22,026 45,372 41,872
Operating income (loss) (578) 2,087 3,108 6,464
Interest expense, net (98) 34 216 62
Income (loss) before taxes (676) 2,053 2,892 6,402
Provision (benefit) for
income taxes (249) 741 1,064 2,311
Net income (loss) $ (427) $ 1,312 $ 1,828 $ 4,091
Net income (loss) per share $ (.05) $ .14 $ .20 $ .44
Weighted average number of
common shares and common
equivalent shares outstanding 9,335 9,307 9,330 9,307
See accompanying notes to consolidated financial statements
FRED'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
TWENTY-SIX WEEKS ENDED
JULY 29, JULY 30,
1995 1994
Cash flows from operating activities:
Net income $ 1,828 $ 4,091
Adjustments to reconcile net income
to net cash flows from operating
activities:
Depreciation and amortization 2,611 2,026
Contribution to ESOP to reduce
ESOP loan balance 141 142
Deferred income taxes 220 1,206
(Increase) decrease in assets:
Receivables (1,146) (810)
Inventories (4,568) (13,477)
Other current assets (126) 680
Other noncurrent assets 29 (82)
Increase (decrease) in liabilities:
Accounts payable 3,515 2,976
Accrued liabilities (129) (1,066)
Income taxes payable (703) (251)
Other noncurrent liabilities 84 73
Net cash (used in) provided by
operating activities 1,756 (4,492)
Cash flows from investing activities:
Additions to property, equipment and
equipment under capital leases (3,978) (5,371)
Net cash (used in) provided by
investing activities (3,978) (5,371)
Cash flows from financing activities:
Proceeds from borrowings and
increase in capital lease obligations - 5,350
Reduction of indebtedness and
capital lease obligations (1,192) (1,136)
Cash dividends paid (932) (930)
Net cash (used in) provided by
financing activities (2,124) 3,284
Increase (decrease) in cash and cash equivalents (4,346) (6,579)
Cash and cash equivalents:
Beginning of period 5,944 8,070
End of period $ 1,598 $ 1,491
Supplemental disclosures of cash flow information:
Interest paid $ 213 $ 129
Income taxes paid $ 1,547 $ 1,356
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 complete
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 and twenty-six week
periods ended July 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 188 discount general merchandise stores in nine
states in the southeastern United States. Eighty-five of the
stores have full service pharmacies, and there are three Fred's
Xpress stand-alone 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 $4,568,000 during the twenty-six week
period ended July 29, 1995. In addition, cash was used to fund
accounts receivable ($1,146,000), capital expenditures ($3,978,000)
incurred primarily in connection with opening new stores and
pharmacies and purchasing enhanced point-of-sale cash registers,
and cash dividends ($932,000). The increased inventory levels and
other cash outlays were financed from net income, increased
accounts payable ($3,515,000) and existing cash. The Company
believes that sufficient capital resources are available in both
the short-term and long-term through currently available cash and
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 July 29, 1995, there were no borrowings
outstanding under the revolving credit agreement and there was
$3,515,000 outstanding under the term loan.
RESULTS OF OPERATIONS
Thirteen Weeks Ended July 29, 1995 and July 30, 1994
Net sales increased from $88.1 million in 1994 to $93.3 million in
1995, an increase of $5.2 million or 5.9%. The increase was
attributable to comparable store sales increases of 2.5% ($1.9
million) and sales by stores not yet included as comparable stores
($3.0 million). Wholesale sales to franchisees and independents
increased $.3 million or 3.5% in 1995.
Gross profit decreased from 27.4% of sales in 1994 to 24.6% in
1995. The Company's merchandising strategy is in a state of
transition as Fred's is simultaneously implementing an everyday
competitive pricing strategy, introducing the new Fred's Super
Dollar Store concept, and eliminating certain advertising
circulars. Fred's has also added a new Executive Vice President of
Merchandising. The everyday competitive pricing strategy
implemented in December 1994 included an initial wave of price
reductions primarily on highly recognizable items. The first
quarter results reflected a 30 basis point decline in gross margins
and only minimal sales increases. In an effort to stimulate
customer traffic and meet intense price competition during the
second quarter, Fred's initiated a substantial number of additional
price reductions and was very assertive in applying its competitive
pricing strategy to back-to-school supplies and apparel. In
addition, more markdowns were taken during this year's second
quarter due to an aggressive clearance of spring and summer
merchandise and efforts to reduce the number of items in various
departments that are being de-emphasized.
Selling, general and administrative expenses increased from $22.0
million in 1994 to $23.5 million in 1995 due primarily to expenses
associated with new stores and pharmacies. As a percentage of
sales, expenses increased from 25.0% to 25.2%.
Twenty-Six Weeks Ended July 29, 1995 and July 30, 1994
Net sales increased from $179.0 million in 1994 to $190.3 million
in 1995, an increase of $11.3 million or 6.3%. The increase was
attributable to comparable store sales increases of 2.7% ($4.2
million) and sales by stores not yet included as comparable stores
($6.6 million). Wholesale sales to franchisees and independents
increased $.5 million or 2.6% in 1995.
Gross profit decreased from 27.0% of sales in 1994 to 25.5% in 1995
for the aforementioned reasons.
Selling, general and administrative expenses increased from $41.9
million in 1994 to $45.4 million in 1995 due primarily to expenses
associated with new stores and pharmacies. As a percentage of
sales, expenses increased from 23.4% to 23.8%.
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
The Annual Meeting of the Shareholders of Fred's, Inc.
was held on June 15, 1995. Michael J. Hayes, David A.
Gardner, John R. Eisenman and Roger T. Knox were
elected to continue as directors of the Company. The
shareholders also ratified the appointment of Price
Waterhouse, LLP as independent public accountants for
the fiscal year ending February 3, 1996.
The results of the voting were as follows:
ABSTAIN
BROKER
FOR AGAINST WITHHELD NON-VOTE
Election of Directors:
Michael J. Hayes 7,450,012 86,392 1,798,963
David A. Gardner 7,448,580 87,824 1,798,963
John R. Eisenman 7,446,147 90,257 1,798,963
Roger T. Knox 7,443,376 93,028 1,798,963
Appointment of Price
Waterhouse, LLP 7,518,953 10,022 7,429 1,798,963
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
Exhibit 10.21 - Modification Agreement between
Fred's, Inc. and Union Planters
National Bank dated as of May
31, 1995 (modifies the
Revolving Loan and Credit
Agreement included as Exhibit
10.17)
Exhibit 10.22 - Second Modification Agreement
between Fred's, Inc. and Union
Planters National Bank dated as
of July 31, 1995 (modifies the
Revolving Loan and Credit
Agreement included as Exhibit
10.17)
Exhibit 10.23 - Seasonal Overline Revolving
Credit Agreement between
Fred's, Inc. and Union Planters
National Bank dated as of July
31, 1995
Exhibit 11 - Computation of Net Income
(Loss) Per Share
Exhibit 27 - Financial Data Schedule
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: September 6, 1995 Chief Executive Officer
/s/ Bruce D. Smith
Bruce D. Smith
Date: September 6, 1995 Chief Financial Officer