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 May 4, 1996.
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 .
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The registrant had 9,335,232 shares of Class A voting, no par
value
common stock outstanding as of May 4, 1996.
FRED'S, INC.
INDEX
Page No.
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Part I - Financial Information
Item 1 - Financial Statements (unaudited):
Consolidated Balance Sheets as of
May 4, 1996 and February 3, 1996 3
Consolidated Statements of Income
for the Thirteen Weeks Ended May 4, 1996
and April 29, 1995 4
Consolidated Statements of Cash Flows
for the Thirteen Weeks Ended May 4, 1996
and April 29, 1995 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
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FRED'S, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except for number of shares)
May 4, February 3,
1996 1996
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,011 $ 5,496
Receivables, less allowance for
doubtful accounts 4,969 5,115
Inventories 93,566 85,211
Deferred income taxes 1,500 2,125
Other current assets 869 956
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Total current assets 101,915 98,903
Property and equipment, at
depreciated cost 51,126 51,681
Equipment under capital leases, less
accumulated amortization 500 560
Deferred income taxes 5,258 4,986
Other noncurrent assets 1,890 1,893
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$160,689 $158,023
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 27,512 $ 29,793
Current portion of indebtedness 5,585 1,660
Current portion of capital lease
obligations 316 301
Accrued liabilities 5,988 6,987
Income taxes payable 1,636 813
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Total current liabilities 41,037 39,554
Indebtedness 882 1,278
Capital lease obligations 416 501
Other noncurrent liabilities 1,169 1,120
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Total liabilities 43,504 42,453
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Commitments and contingencies
Shareholders' equity:
Common stock, Class A voting, no
par value, 9,335,232 shares issued
and outstanding (9,335,239 shares
at February 3, 1996) 63,458 63,458
Retained earnings 54,009 52,424
Deferred compensation on restricted
stock incentive plan (139) (169)
Loan to ESOP (143) (143)
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Total shareholders' equity 117,185 115,570
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$160,689 $158,023
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See accompanying notes to consolidated financial statements
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FRED'S, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
Thirteen Weeks Ended
------------------------
May 4, April 29,
1996 1995
------------------------
Net sales $101,758 $97,050
Cost of goods sold 73,976 71,512
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Gross profit 27,782 25,538
Selling, general and administrative
expenses 24,467 21,852
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Operating income 3,315 3,686
Interest expense, net 94 118
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Income before income taxes 3,221 3,568
Provision for income taxes 1,169 1,313
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Net income $ 2,052 $ 2,255
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Net income per share $ .22 $ .24
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Weighted average number of common
shares and common equivalent
shares outstanding 9,326 9,307
======= ======
See accompanying notes to consolidated financial statements
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FRED'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Thirteen Weeks Ended
--------------------
May 4, April 29,
1996 1995
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Cash flows from operating activities:
Net income $ 2,052 $ 2,255
Adjustments to reconcile net income
to net cash flows from operating
activities:
Depreciation and amortization 1,470 1,254
Deferred income taxes 353 277
Amortization of deferred compensation on
restricted stock incentive plan 30
(Increase) decrease in assets:
Receivables 146 (1,266)
Inventories (8,355) (5,787)
Other current assets 87 85
Increase (decrease) in liabilities:
Accounts payable (2,281) 3,208
Accrued liabilities (999) (57)
Income taxes payable 823 977
Other noncurrent liabilities 49 42
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Net cash (used in) provided by
operating activities (6,625) 988
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Cash flows from investing activities:
Additions to property, equipment and
equipment under capital leases (736) (2,196)
Additions to intangible assets (116) (73)
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Net cash (used in) provided by
investing activities (852) (2,269)
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Cash flows from financing activities:
Proceeds from borrowings and
increase in capital lease obligations 3,900
Reduction of indebtedness and
capital lease obligations (441) (495)
Cash dividends paid (467) (465)
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Net cash (used in) provided by
financing activities 2,992 (960)
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Increase (decrease) in cash and cash
equivalents (4,485) (2,241)
Beginning of period cash and cash
equivalents 5,496 5,944
------ ------
End of period cash and cash equivalents $ 1,011 $ 3,703
====== ======
Supplemental disclosures of cash
flow information:
Interest paid $ 70 $ 51
Income taxes paid $ - $ 60
See accompanying notes to consolidated financial statements
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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
February 3, 1996 incorporated into the Company's Annual Report on
Form 10-K.
The results of operations for the thirteen week period ended May
4,
1996 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.
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Management's Discussion and Analysis of Financial
Condition and Results of Operations
FINANCIAL CONDITION
Fred's operates 205 discount general merchandise stores in ten
states in the southeastern United States. Eighty-seven of the
stores have full service pharmacies, and six of Fred's stores are
stand-alone Fred's Xpress 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 $8,355,000 during the thirteen week
period ended May 4, 1996. In addition, cash was used to reduce
balances with trade vendors ($2,281,000), and fund capital
expenditures ($736,000) and cash dividends ($467,000). The
increased inventory levels and other cash outlays were financed
from net income ($2,052,000), seasonal bank borrowings
($3,900,000)
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 line of credit commitment available from two banks.
At
May 4, 1996, $3,900,000 was outstanding under the revolving
credit
agreement and $2,425,000 was outstanding under the line of credit
agreement.
RESULTS OF OPERATIONS
Thirteen Weeks Ended May 4, 1996 and April 29, 1995
Net sales increased from $97.1 million in 1995 to $101.8 million
in
1996, an increase of $4.7 million or 4.8%. The increase was
attributable to comparable store sales increases of 1.2% ($1.0
million) and sales by stores not yet included as comparable
stores
($4.6 million). Wholesale sales to franchisees and independents
decreased $.9 million in 1996.
Gross profit increased from 26.3% of sales in 1995 to 27.3% in
1996
primarily due to a reduction in the Company's reliance on sale
events to drive sales growth. With fewer promotional incentives,
Fred's sales growth has moderated somewhat, but sales are now
more
profitable. Another factor in the higher gross margin was an
increase in the proportion of retail sales, which carry higher
margins than wholesale sales.
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Selling, general and administrative expenses increased from $21.9
million in 1995 to $24.5 million in 1996. As a percentage of
sales, expenses increased from 22.5% to 24.0% because normal
expense inflation outpaced the 1.2% increase in comparable store
sales. In addition, competitive increases in the Company's
compensation program for its distribution center, implemented
last
summer, and the final costs of phasing in a new pharmacy
management
system, which was completed in April 1996, continued to impact
expenses. Lastly, expenses increased with the greater proportion
of retail sales, which carry higher expense percentages than
wholesale sales.
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.
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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 10.25 - Agreement and Plan of Merger
Dated as of May 7, 1996 By and Among Fred's,
Inc., FR Acquisition Corp. and Rose's Stores,
Inc.
Exhibit 11 - Computation of Net Income Per
Share
Exhibit 27 - Financial Data Schedules
Reports on Form 8-K:
A report on Form 8-K was filed on March 1,
1996 regarding the proposed acquisition by
merger of Rose's Stores, Inc. by Fred's.
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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
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Michael J. Hayes
Date: June 17, 1996 Chief Executive Officer
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/s/ Bruce D. Smith
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Bruce D. Smith
Date: June 17, 1996 Chief Financial Officer
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