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 August 3, 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 9,326,732 shares of common stock outstanding as
of August 3, 1996.
FRED'S, INC.
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INDEX
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Page No.
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Part I - Financial Information
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Item 1 - Financial Statements (unaudited):
Consolidated Balance Sheets as of
August 3, 1996 and February 3, 1996 3
Consolidated Statements of Operations
for the Thirteen Weeks Ended and the
Twenty-Six Weeks Ended August 3, 1996
and July 29, 1995 4
Consolidated Statements of Cash Flows
for the Twenty-Six Weeks Ended August 3, 1996
and July 29, 1995 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
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FRED'S, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except for number of shares)
August 3, February 3,
1996 1996
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ASSETS
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Current assets:
Cash and cash equivalents $ 2,666 $ 5,496
Receivables, less allowance for doubtful
accounts 3,917 5,115
Inventories 93,273 85,211
Deferred income taxes 1,300 2,125
Other current assets 967 956
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Total current assets 102,123 98,903
Property and equipment, at depreciated cost 50,715 51,681
Equipment under capital leases, less
accumulated amortization 440 560
Deferred income taxes 5,377 4,986
Other noncurrent assets 2,383 1,893
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$161,038 $158,023
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LIABILITIES AND SHAREHOLDERS' EQUITY
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Current liabilities:
Accounts payable $ 22,194 $ 29,793
Current portion of indebtedness 10,570 1,660
Current portion of capital lease obligations 330 301
Accrued liabilities 7,435 6,987
Income taxes payable 1,302 813
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Total current liabilities 41,831 39,554
Indebtedness 479 1,278
Capital lease obligations 328 501
Other noncurrent liabilities 1,229 1,120
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Total liabilities 43,867 42,453
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Commitments and contingencies
Shareholders' equity:
Common stock, Class A voting, no par value,
9,326,732 shares issued and outstanding
(9,335,239 shares at February 3, 1996) 63,348 63,458
Retained earnings 53,956 52,424
Deferred compensation on restricted
stock incentive plan (133) (169)
Loan to ESOP - (143)
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Total shareholders' equity 117,171 115,570
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$161,038 $158,023
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See accompanying notes to consolidated financial statements
FRED'S, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
Thirteen Weeks Twenty-Six Weeks
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Ended Ended
August 3, July 29, August 3, July 29,
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1996 1995 1996 1995
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Net sales $99,028 $93,295 $200,786 $190,345
Cost of goods sold 72,583 70,353 146,559 141,865
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Gross profit 26,445 22,942 54,227 48,480
Selling, general and administrative
expenses 25,636 23,520 50,103 45,372
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Operating income (loss) 809 (578) 4,124 3,108
Interest expense, net 117 98 211 216
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Income (loss) before taxes 692 (676) 3,913 2,892
Provision (benefit) for income taxes 278 (249) 1,447 1,064
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Net income (loss) $ 414 $ (427) $ 2,466 $ 1,828
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Net income (loss) per share $ .04 $ (.05) $ .26 $ .20
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Weighted average number of common shares
and common equivalent shares
outstanding 9,330 9,335 9,330 9,330
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See accompanying notes to consolidated financial statements
FRED'S, INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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(unaudited)
(in thousands)
Twenty-Six Weeks Ended
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August 3, July 29,
1996 1995
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Cash flows from operating activities:
Net income $ 2,466 $ 1,828
Adjustments to reconcile net income
to net cash flows from operating
activities:
Depreciation and amortization 2,995 2,611
Contribution to ESOP to reduce
ESOP loan balance 143 141
Amortization of deferred compensation on
restricted stock incentive plan (74) -
Deferred income taxes 434 220
(Increase) decrease in assets:
Receivables 1,198 (1,146)
Inventories (8,062) (4,568)
Other current assets (11) (126)
Other noncurrent assets - 29
Increase (decrease) in liabilities:
Accounts payable (7,599) 3,515
Accrued liabilities 448 (129)
Income taxes payable 489 (703)
Other noncurrent liabilities 109 84
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Net cash (used in) provided by operating
activities (7,464) 1,756
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Cash flows from investing activities:
Additions to property, equipment and
equipment under capital leases (1,662) (3,978)
Additions to intangible assets (737) -
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Net cash (used in) provided by
investing activities (2,399) (3,978)
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Cash flows from financing activities:
Net borrowings under revolving credit agreements 9,000 -
Reduction of indebtedness and
capital lease obligations (1,033) (1,192)
Cash dividends paid (934) (932)
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Net cash (used in) provided by
financing activities 7,033 (2,124)
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Increase (decrease) in cash and
cash equivalents (2,830) (4,346)
Cash and cash equivalents:
Beginning of period 5,496 5,944
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End of period $ 2,666 $ 1,598
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Supplemental disclosures of cash flow information:
Interest paid $ 142 $ 213
Income taxes paid $ 524 $ 1,547
See accompanying notes to consolidated financial statements
FRED'S, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1: BASIS OF PRESENTATION
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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
February 3, 1996 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 August 3, 1996 are not necessarily indicative of the
results to be expected for the full fiscal year.
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NOTE 2: NET INCOME PER SHARE
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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
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FINANCIAL CONDITION
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Fred's operates 207 discount general merchandise stores in ten
states in the southeastern United States. Eighty-six of the stores
have full service pharmacies, and ten 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 $8,062,000 during the twenty-six week
period ended August 3, 1996. In addition, cash was used to reduce
balances with trade vendors ($7,599,000), fund capital expenditures
($1,662,000),reduce indebtedness ($1,033,000) and pay cash
dividends ($934,000). The increased inventory levels and other
cash outlays were financed primarily from net income ($2,466,000),
revolving bank borrowings ($9,000,000), lower receivables
($1,198,000) 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 available
from a bank. In addition, a seasonal revolving credit commitment
ranging from $5,000,000 to $9,000,000 is available from July 1996
through December 1996. At August 3, 1996, $9,000,000 was
outstanding under the revolving credit agreement, and no borrowings
have been made under the seasonal facility.
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RESULTS OF OPERATIONS
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Thirteen Weeks Ended August 3, 1996 and July 29, 1995
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Net sales increased from $93.3 million in 1995 to $99.0 million in
1996, an increase of $5.7 million or 6.1%. The increase was
attributable to comparable store sales increases of 3.4% ($2.7
million) and sales by stores not yet included as comparable stores
($4.1 million). Wholesale sales to franchisees and independents
decreased $1.1 million or 11.2% in 1996.
Gross profit increased from 24.6% of sales in 1995 to 26.7% 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.
Selling, general and administrative expenses increased from $23.5
million in 1995 to $25.6 million in 1996. As a percentage of
sales, expenses increased from 25.2% to 25.9%. Approximately .4%
of the .7% increase in the expense percentage was attributable to
a greater proportion of retail sales, which carry higher expense
ratios than wholesale sales. Competitive increases in the
Company's compensation program for its distribution center,
implemented last summer, caused most of the remaining increase in
the expense percentage.
Twenty-Six Weeks Ended August 3, 1996 and July 29, 1995
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Net sales increased from $190.3 million in 1995 to $200.8 million
in 1996, an increase of $10.5 million or 5.5%. The increase was
attributable to comparable store sales increases of 2.3% ($3.7
million) and sales by stores not yet included as comparable stores
($8.7 million). Wholesale sales to franchisees and independents
decreased $1.9 million or 9.5% in 1996.
Gross profit increased from 25.5% of sales in 1995 to 27.0% in 1996
for the aforementioned reason.
Selling, general and administrative expenses increased from $45.4
million in 1995 to $50.1 million in 1996. As a percentage of
sales, expenses increased from 23.8% to 25.0%. The 1.2% increase
in the expense percentage was due to a greater proportion of retail
sales, which carry higher expense ratios than wholesale sales
(.4%), competitive increases in the Company's compensation program
for its distribution center (.3%), the costs of phasing in a new
pharmacy management system (.2%), and other normal inflationary
factors throughout the Company that exceeded the 2.3% comparable
store sales increase.
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EFFECT OF INFLATION
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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.
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SEASONALITY
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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 August 20, 1996. 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 1, 1997.
The results of the voting were as follows:
Abstain/
For Against Withheld Broker Non-Vote
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Election of Directors:
Michael J. Hayes 7,240,642 13,593 2,072,497
David A. Gardner 7,238,558 15,677 2,072,497
John R. Eisenman 7,240,679 13,556 2,072,497
Roger T. Knox 7,240,747 13,488 2,072,497
Appointment of Price
Waterhouse, LLP 7,240,707 4,829 8,699 2,072,497
Amendment to Fred's 1993
Long Term Incentive 5,029,988 1,553,627 15,478 2,727,639
Plan
Item 5. Other Information
On August 20, 1996, Fred's, Inc. and Rose's Stores, Inc.
announced that the previously announced merger agreement,
providing for the acquisition of Rose's Stores, Inc. by
Fred's, Inc. had been terminated.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
Exhibit 10.23 - Seasonal Overline Revolving Credit
Agreement between Fred's, Inc. and
Union Planters National Bank dated
as of July 23, 1996
Exhibit 11 - Computation of Net Income (Loss) Per
Share
Reports on Form 8-K:
Not Applicable.
SIGNATURES
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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: September 6, 1996 Chief Executive Officer
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/s/ Bruce D. Smith
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Bruce D. Smith
Date: September 6, 1996 Chief Financial Officer
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