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 2, 1998.
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 11,909,006 shares of Class A voting, no par value common
stock outstanding as of June 8, 1998.
FRED'S, INC.
INDEX
Page No.
Part I - Financial Information
Item 1 - Financial Statements (unaudited):
Consolidated Balance Sheets as of
May 2, 1998 and January 31, 1998 3
Consolidated Statements of Income
for the Thirteen Weeks Ended May 2, 1998
and May 3, 1997 4
Consolidated Statements of Cash Flows
for the Thirteen Weeks Ended May 2, 1998
and May 3, 1997 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
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Signatures 11
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Item 1. Financial Statements (unaudited)
FRED'S, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except for number of shares)
May 2, January 31,
1998 1998
------ -----------
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 159 $ 5,303
Receivables, less allowance for doubtful
accounts .......................................... 6,772 7,086
Inventories ........................................ 117,134 115,021
Deferred income taxes .............................. 5,026 5,441
Other current assets ............................... 1,085 1,005
-------- --------
Total current assets ............................. 130,176 133,856
Property and equipment, at depreciated cost .......... 56,288 53,099
Equipment under capital leases, less
accumulated amortization ............................ 1,287 1,352
Deferred income taxes ................................ 3,038 3,284
Other noncurrent assets .............................. 3,925 3,816
-------- --------
$194,714 $195,407
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................... $ 42,696 $ 49,438
Current portion of capital lease obligations ....... 222 214
Accrued liabilities ................................ 12,939 11,817
Income taxes payable ............................... 3,193 1,716
-------- --------
Total current liabilities ........................ 59,050 63,185
Capital lease obligations ............................ 1,309 1,368
Other noncurrent liabilities ......................... 1,553 1,495
-------- --------
Total liabilities ................................ 61,912 66,048
-------- --------
Shareholders' equity:
Common stock, Class A voting, no par value,
11,899,514 shares issued and outstanding
(11,866,789 shares at January 31, 1998) .......... 66,143 65,700
Retained earnings ................................. 67,311 64,147
Deferred compensation on restricted
stock incentive plan ............................. (652) (488)
-------- --------
Total shareholders' equity ..................... 132,802 129,359
-------- --------
$194,714 $195,407
======== ========
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 2, May 3,
1998 1997
----------- ----------
Net sales ..................................... $ 144,156 $ 112,668
Cost of goods sold ............................ 103,989 81,594
--------- ---------
Gross profit ................................ 40,167 31,074
Selling, general and administrative
expenses ..................................... 34,165 26,807
--------- ---------
Operating income ............................ 6,002 4,267
Interest expense (income), net ................ 46 (21)
--------- ---------
Income before income taxes .................. 5,956 4,288
Provision for income taxes .................... 2,204 1,608
--------- ---------
Net income .................................... $ 3,752 $ 2,680
========= =========
Net income per share:
Basic ....................................... $ .32 $ .23
========= =========
Diluted ..................................... $ .31 $ .23
========= =========
Weighted average shares outstanding:
Basic ....................................... 11,778 11,634
========= =========
Diluted ..................................... 12,104 11,662
========= =========
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 2, May 3,
1998 1997
------ ------
Cash flows from operating activities:
Net income $ 3,752 $ 2,680
Adjustments to reconcile net income
to net cash flows from operating
activities:
Depreciation and amortization 2,318 1,600
Deferred income taxes 661 482
Amortization of deferred compensation on
restricted stock incentive plan 60 60
(Increase) decrease in assets:
Receivables 314 (512)
Inventories (2,113) (4,409)
Other current assets (80) (491)
Increase (decrease) in liabilities:
Accounts payable (6,742) (509)
Accrued liabilities 1,122 2,089
Income taxes payable 1,477 491
Other noncurrent liabilities 58 57
-------- --------
Net cash provided by operating activities 827 1,538
-------- --------
Cash flows from investing activities:
Additions to property and equipment (5,178) (1,385)
Additions to intangible assets (373) (257)
------- ------
Net cash used in investing activities (5,551) (1,642)
------- -------
Cash flows from financing activities:
Reduction of capital lease
obligations (51) (458)
Proceeds from exercise of options 224 -
Cash dividends paid (593) (466)
----- -----
Net cash used in financing activities (420) (924)
----- -----
Increase (decrease) in cash and cash equivalents (5,144) (1,028)
Beginning of period cash and cash equivalents 5,303 8,569
-------- --------
End of period cash and cash equivalents $ 159 $ 7,541
======== ========
Supplemental disclosures of cash flow information
Interest paid (earned) $ 61 $ (36)
======== ========
Income taxes paid $ 315 $ -
======== =======
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 January
31, 1998 incorporated into the Company's Annual Report on Form 10-K.
The results of operations for the thirteen week period ended May 2, 1998 are not
necessarily indicative of the results to be expected for the full fiscal year.
NOTE 2: NET INCOME PER SHARE
Basic income per share is based on the weighted average number of common shares
outstanding, and diluted 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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Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
GENERAL
The Private Securities Litigation Reform Act of 1995 ("the Act") provides a safe
harbor for forward-looking statements made by or on behalf of the Company.
Certain statements contained in Management's Discussion and Analysis and in
other Company filings are forward-looking statements. These statements discuss
among other things, expected growth, future revenues, future cash flows and
future performance. The forward looking statements are subject to risks and
uncertainties including but not limited to competitive pressures, inflation,
consumer debt levels, currency exchange fluctuations, trade restrictions,
changes in tariff and freight rates, capital market conditions, and other risks
indicated in the Company's filings with the Securities and Exchange Commission.
Actual results may materially differ from anticipated results described in these
statements.
Fred's operates 268 discount general merchandise stores and Xpress units in ten
states in the southeastern United States. One hundred and fifty-two of the
stores have full service pharmacies.
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 and pharmacy business. 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.
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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RESULTS OF OPERATIONS
Thirteen Weeks Ended May 2, 1998 and May 3, 1997
- ------------------------------------------------
Net sales increased from $112.7 million in 1997 to $144.2 million in 1998,
an increase of $31.5 million or 27.9%. The increase was attributable to
comparable store sales increases of 6.9% ($7.1 million) and sales by stores not
yet included as comparable stores ($24.3 million). Wholesale sales to
franchisees and independents increased $.1 million in 1998.
Gross profit increased from 27.6% of sales in 1997 to 27.9% in 1998, primarily
due to strong quarterly sales performances in our pharmacy and softlines
categories. Another factor in the higher gross margin was an increase in the
proportion of retail sales, which carry higher margins than wholesale sales.
Selling, general and administrative expenses increased from $26.8 million in
1997 to $34.2 million in 1998. As a percentage of sales, expenses decreased from
23.8% to 23.7%. The improvement in comparable store sales for the quarter
contributed to a higher leveraging of expenses and, therefore, an improved
expense ratio. Additional labor and supply costs associated with seven new store
openings and the remodeling and upgrading of 29 other locations offset most of
the first quarter expense ratio improvement.
LIQUIDITY AND CAPITAL RESOURCES
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.
Cash flow provided by operating activities netted $827,000 during the thirteen
week period ended May 2, 1998. Cash was primarily used to increase inventories
$2,113,000 and to decrease trade vendors by $6,742,000. These cash outlays were
financed primarily from net income $3,752,000 and higher levels of accrued
liabilities of $1,122,000.
Cash used in investing activities totaled ($5,551,000), and was primarily
used for progress payments related to automation and modernization of the
Company's distribution center ($1,900,000), and for store and pharmacy upgrades,
remodels and openings completed in the first quarter of 1998 ($3,278,000).
Cash used in financing activities totaled ($420,000) which was primarily
used to pay cash dividends and reduce indebtedness.
IMPACT OF RECENT ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 131, "Disclosure about Segments
of an Enterprise and Related Information". SFAS No. 131 revises the current
requirements for reporting business segments by redefining such segments as the
way management desegregates the business for purposes of making operating
decisions and allocating internal resources. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997, and although management believes
that SFAS No. 131 will not impact the Company's presentation, the Company has
adopted SFAS No. 131 in fiscal 1998.
In February 1998, the FASB issued SFAS No. 132, "Employers Disclosures about
Pensions and Other Postretirement Benefits". SFAS No. 132 standardizes the
disclosure requirements for pensions and other postretirement benefits. The
statement is effective for fiscal years beginning after December 15, 1997 and
has been adopted by the Company in fiscal 1998.
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The Company has a $12,000,000 revolving credit commitment available from a
bank. At May 2, 1998, no borrowings have been made under the revolving credit
agreement, and the renewal term of the agreement has been extended to August 1,
1998.
On May 5, 1998, the Company finalized a $12,000,000 term loan agreement
with a bank. The agreement provides the Company with up to $12,000,000 to
finance the automation and modernization of the Company's distribution center
and corporate facilities. The loan bears interest at 6.82% and requires interest
only payments during the initial six-month draw period and then monthly payments
sufficient to amortize the loan over 84 months. There were no borrowings
outstanding under the agreement at May 2, 1998.
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.
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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 10.16 - Term Loan Agreement between Fred's Inc.
and Union Planters National Bank dated as of May 5,
1998.
Exhibit 11 - Computation of Net Income Per Share
Exhibit 27 - Financial Data Schedule (Edgar Filing
only)
Reports on Form 8-K:
Not Applicable.
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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
-------------------------------------
Michael J. Hayes
Date: June 10, 1998 Chief Executive Officer
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/s/ Richard B. Witaszak
-------------------------------------
Richard B. Witaszak
Date: June 10, 1998 Chief Financial Officer
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