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 5, 2001.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to .
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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 12,155,722 shares of Class A voting, no par value common
stock outstanding as of June 8, 2001, which shares have not been adjusted for
June stock split.
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 5, 2001 and February 3, 2001 3
Consolidated Statements of Income
for the Thirteen Weeks Ended May 5, 2001
and April 29, 2000 4
Consolidated Statements of Cash Flows
for the Thirteen Weeks Ended May 5, 2001
and April 29, 2000 5
Notes to Consolidated Financial Statements 6 - 9
Item 2 - Management's Discussion and
Analysis of Financial Condition and
Results of Operations 10 - 12
Item 3 - Quantitative and Qualitative Disclosure
about Market Risk 12
Part II - Other Information 13
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Signatures 14
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FRED'S, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except for number of shares)
May 5, February 3,
2001 2001
-------- ------------
ASSETS:
Current assets:
Cash and cash equivalents $2,605 $2,569
Receivables, less allowance for doubtful
Accounts of $350 ($516 at February 3, 2001) 14,604 15,430
Inventories 159,609 149,602
Deferred income taxes 1,080 2,022
Other current assets 2,409 2,306
-------- --------
Total current assets 180,307 171,929
Property and equipment, at depreciated cost 77,478 76,360
Equipment under capital leases, less accumulated
amortization of $1,426 ($1,305 at February 3,2001) 1,609 1,387
Deferred income taxes 720 98
Other noncurrent assets 4,980 5,021
-------- --------
Total assets $265,094 $254,795
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $42,625 $40,432
Current portion of indebtedness 2,160 2,175
Current portion of capital lease obligations 564 503
Accrued liabilities 10,846 14,012
Income taxes payable 3,034 4,278
------ ------
Total current liabilities 59,229 61,400
------ ------
Long term portion of indebtedness 38,884 30,475
Capital lease obligations 1,390 1,230
Other noncurrent liabilities 2,022 2,003
------ ------
Total liabilities 101,525 95,108
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Shareholders' equity:
Common stock, Class A voting, no par value,
12,090,679 shares issued and outstanding
(12,068,518 shares at February 3, 2001) 68,851 68,557
Retained earnings 94,896 91,342
Deferred compensation on restricted
Stock incentive plan (178) (212)
------ ------
Total shareholders' equity 163,569 159,687
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Total liabilities and shareholders equity $265,094 $254,795
======== ========
See accompanying notes to consolidated financial statements.
FRED'S, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
Thirteen Weeks Ended
--------------------
(restated)
May 5, April 29,
2001 2000
-------- --------
Net Sales $207,359 $176,132
Cost of goods sold 149,601 127,142
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Gross Profit 57,758 48,990
Selling, general and administrative
Expenses 50,721 43,162
------ ------
Operating income 7,037 5,828
Interest expense 630 673
----- -----
Income before income taxes 6,407 5,155
Provision for income taxes 2,248 1,810
----- -----
Net income $4,159 $3,345
====== ======
Net income per share:
Basic $ .35 $ .28
===== =====
Diluted $ .34 $ .28
===== =====
Weighed average shares outstanding:
Basic 12,016 11,890
====== ======
Diluted 12,304 12,080
====== ======
See accompanying notes to consolidated financial statements.
FRED'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Thirteen Weeks Ended
--------------------
(restated)
May 5, April 29,
2001 2000
---- ----
Cash flows from operating activities:
Net income $4,159 $3,345
Adjustments to reconcile net income
To net cash flows from operating activities:
Depreciation and amortization 4,110 3,335
Provision for uncollectible receivables (165) ---
Lifo reserve 200 200
Deferred income taxes 320 265
Amortization of deferred compensation on
restricted stock incentive plan 34 38
Cancellation of restricted stock --- (202)
(Increase)decrease in assets:
Receivables 991 183
Inventories (10,207) (4,127)
Other assets (103) 408
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities (973) (2,512)
Income taxes payable (1,243) 1,575
Other noncurrent liabilities 19 44
------ -----
Net cash (used in) provided by operating
activities (2,858) 2,552
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Cash flows from investing activities:
Capital expenditures (4,682) (3,620)
Asset acquisition, net of cash acquired
(primarily intangibles) (383) (768)
---- ----
Net cash used in investing activities (5,065) (4,388)
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Cash flows from financing activities:
Reduction of indebtedness and capital lease
obligations (662) (102)
Proceeds from revolving line of credit,
net of payments 8,931 3,896
Proceeds from exercise of options 293 92
Cash dividends paid (603) (600)
---- ----
Net cash provided by financing activities 7,959 3,286
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Increase in cash and cash equivalents 36 1,450
Beginning of period cash and cash equivalents 2,569 3,036
----- -----
End of period cash and cash equivalents $2,605 $4,486
======= ======
Supplemental disclosures of cash flow information:
Interest paid $361 $361
==== ====
Non cash investing and financing activities:
Assets acquired through capital lease obligations $344 $---
==== ====
See accompanying notes to consolidated financial statements.
FRED'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1: BASIS OF PRESENTATION
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Fred's, Inc. ("Fred's" or the "Company") operates 357 discount general
merchandise stores, including 26 franchised Fred's stores, in eleven states in
the southeastern United States. One hundred and ninety-nine of the stores have
full service pharmacies.
The accompanying unaudited consolidated financial statements of Fred's 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, 2001 incorporated into the
Company's Annual Report on Form 10-K.
The results of operations for the thirteen-week period ended May 5, 2001
are not necessarily indicative of the results to be expected for the full fiscal
year.
Certain prior quarter amounts have been reclassified to conform to the 2001
presentation.
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NOTE 2: INVENTORIES
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Wholesale inventories are stated at the lower of cost or market using the
FIFO (first-in, first-out) method. Retail inventories are stated at the lower of
cost or market as determined by the retail inventory method. For pharmacy
inventories, which comprise approximately 19% of the retail inventories at May
5, 2001, cost was determined using the LIFO (last-in, first-out) method. The
current cost of inventories exceeded the LIFO cost by approximately $4,161,000
and $3,961,000 at May 5, 2001 and February 3, 2001, respectively.
LIFO inventory costs can only be determined annually when inflation rates and
inventory levels are finalized; therefore, LIFO inventory costs for interim
financial statements are estimated.
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NOTE 3: NET INCOME PER SHARE
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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.
COMPUTATION OF NET INCOME PER SHARE
(unaudited)
(in thousands, except per share amounts)
Thirteen Weeks Ended
--------------------
(restated)
May 5, April 29,
2001 2000
---- ----
Basic net income per share
--------------------------
Net income $4,159 $3,345
====== ======
Weighted average number of common shares
Outstanding during the period 12,016 11,890
====== ======
Net income per share $ .35 $ .28
===== =====
Diluted net income per share
----------------------------
Net income $4,159 $3,345
====== ======
Weighted average number of common shares
Outstanding during the period 12,016 11,890
Additional shares attributable to common
Stock equivalents 288 190
------ ------
12,304 12,080
====== ======
Net income per share $ .34 $ .28
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NOTE 4: LAYAWAY SALES
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In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements" (SAB 101). SAB
101 identifies various revenue recognition issues, several of which are common
within the retail industry including treatment of revenue recognition on layaway
sales. In the fourth quarter of 2000, the Company revised its revenue
recognition for layaway sales to defer revenue recognition until all terms of
the sale have been satisfied and the customer takes delivery of the merchandise.
Under the prior method of accounting, net sales were recognized at the time the
customer put the merchandise into layaway. The effects of this restated change
on the previously reported quarter ended April 29, 2000 are as follows:
(as reported) (restated)
April 29, April 29,
2000 2000
-------- --------
Net Sales $176,660 $176,132
Gross profit 49,122 48,990
Net income 3,432 3,345
Net income per share
Basic 0.29 0.28
Diluted 0.28 0.28
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NOTE 5: PRO FORMA NET INCOME PER SHARE
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On May 24, 2001, the Company announced that its Board of Directors approved a
five-for-four stock split, to be effected as a 25% stock dividend, of its common
stock, class A voting, no par value. The new shares, one additional share for
each four shares currently held by stockholders, will be distributed on June 18,
2001 to stockholders of record on June 4, 2001.
COMPUTATION OF PRO FORMA NET INCOME PER SHARE
(unaudited)
(in thousands, except per share amounts)
Thirteen Weeks Ended
--------------------
(restated)
May 5, April 29,
2001 2000
Basic net income per share
--------------------------
Net income $4,159 $3,345
====== ======
Weighted average number of common shares
outstanding during the period (post-split) 15,020 14,863
====== ======
Net income per share (post-split) $ .28 $ .23
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Diluted net income per share
----------------------------
Net income $4,159 $3,345
====== ======
Weighted average number of common shares
outstanding during the period (post-split) 15,020 14,863
Additional shares attributable to common
stock equivalents (post-split) 360 237
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15,380 15,100
====== ======
Net income per share (post-split) $ .27 $ .22
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Management's Discussion and Analysis of Financial
Condition and Results of Operations
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GENERAL
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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 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
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Thirteen Weeks Ended May 5, 2001 and April 29, 2000
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Net sales increased to $207.4 million in 2001 from $176.1 million in 2000, an
increase of $31.3 million or 17.8%. The increase was attributable to comparable
store sales increases of 10.0% ($16.5 million) and sales by stores not yet
included as comparable stores ($15.1 million). Sales to franchisees decreased
$.3 million in 2001. The sales mix for the period was 48.2% Hardlines, 36.2%
Pharmacy, 11.9% Softlines, and 3.7% Franchise. This compares with 47.6%
Hardlines, 32.8% Pharmacy, 14.6% Softlines, and 5.0% Franchise for the same
period last year.
Gross profit increased to 27.9% of sales in 2001 compared with 27.8% of sales in
the prior-year period. Gross profit margins increased as a result of controlling
markdowns and improved company store initial markups.
Selling, general and administrative expenses increased to $50.7 million in 2001
from $43.2 million in 2000. As a percentage of sales, expenses were 24.5% of
sales unchanged from the percentage for the same quarter last year. The fact
that operating expenses were unchanged as a percentage of sales was especially
noteworthy considering that fuel and utilities costs have advanced significantly
since the first quarter of 2000.
Interest expense decreased to $.6 million in 2001 from $.7 million in 2000,
reflecting lower average revolver borrowings and lower interest rates than last
year.
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LIQUIDITY AND CAPITAL RESOURCES
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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 flows used in operating activities totaled $2.9 million during the
thirteen-week period ended May 5, 2001. Cash was primarily used to increase
inventories. Total inventories increased approximately $10.2 million in the
first quarter of 2001. This increase was primarily attributable to 11 new
stores, 4 major upgrades and 1 new pharmacy in the first quarter of 2001,
coupled with the additional inventory necessary to open an additional 15 to 20
stores in the second quarter.
Cash flows used in investing activities totaled $5.1 million, and consisted
primarily of capital expenditures associated with the Company's store and
pharmacy expansion program. During the first quarter, the Company opened 11
stores and 1 pharmacy. The Company expects to open 15 to 20 stores in the second
quarter, and approximately 30 to 35 stores for the year. The Company's capital
expenditure plan for the year 2001 is in the $18 million dollar range and will
approximate depreciation expense for the year.
Cash flows provided by financing activities totaled $8.0 million and included
$8.9 million of borrowings under the Company's revolver for inventory and
accounts payable needs.
On April 3, 2000, the Company and a bank entered into a new Revolving Loan and
Credit Agreement (the "Agreement") to replace the May 15, 1992 Revolving Loan
and Credit Agreement, as amended. The Agreement provides the Company with an
unsecured revolving line of credit commitment of up to $40 million and bears
interest at the lesser of 1.5% below prime rate or a LIBOR-based rate. Under the
most restrictive covenants of the Agreement, the Company is required to maintain
specified shareholder's equity and net income levels. The Company is required to
pay a commitment fee to the bank at a rate per annum equal to .18% on the
unutilized portion of the revolving line commitment over the term of the
agreement. The term of the Agreement extends to April 3, 2003. The borrowings
outstanding under this Agreement totaled $31,554,000 at May 5, 2001 and
$32,540,000 at April 29, 2000.
On April 23, 1999, the Company and a bank entered into a Loan Agreement (the
"Loan Agreement"). The Loan Agreement provided the Company with a four-year
unsecured term loan of $2.3 million to finance the replacement of the Company's
mainframe computer system. The Loan Agreement bears interest of 6.15% per annum
and matures on April 15, 2003. The borrowings outstanding under this Loan
Agreement totaled $1,125,000 at May 5, 2001 and $1,734,000 at April 29, 2000.
On May 5, 1998, the Company and a bank entered into a Loan Agreement (the "Term
Loan Agreement"). The Term Loan Agreement provided the Company with an unsecured
term loan of $12 million to finance the modernization and automation of the
Company's distribution center and corporate facilities. The Term Loan Agreement
bears interest of 6.82% per annum and matures on November 1, 2005. The
borrowings outstanding under this Term Loan Agreement totaled $8,365,000 at May
5, 2001 and $9,954,000 at April 29, 2000.
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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RECENT ACCOUNTING PRONOUNCEMENTS
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In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 "Revenue Recognition in Financial Statements" (SAB 101). SAB
101 identifies various revenue recognition issues, several of which are common
within the retail industry including treatment of revenue recognition on layaway
sales. In the fourth quarter of 2000, the Company revised its revenue
recognition for layaway sales to defer revenue recognition until all terms of
the sale have been satisfied and the customer takes delivery of the merchandise.
Under the prior method of accounting, net sales were recognized at the time the
customer put the merchandise into layaway. The effects of this restated change
on previously reported net sales, gross profit, net income and net income per
share (basic & diluted) was a decrease of $528,000, $132,000, $87,000 and $.01,
respectively, for the first quarter ended April 29, 2000. Annual financial
results were not affected.
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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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The Company has no holdings of derivative financial or commodity instruments as
of May 5, 2001. The Company is exposed to financial market risks, including
changes in interest rates. All borrowings under the Company's Revolving Credit
Agreement bear interest at 1.5% below prime rate or a LIBOR-based rate. An
increase in interest rates of 100 basis points would not significantly affect
the Company's income. All of the Company's business is transacted in U.S.
dollars and, accordingly, foreign exchange rate fluctuations have never had a
significant impact on the Company, and they are not expected to in the
foreseeable future
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
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Statements, other than those based on historical facts, are forward-looking
statements which are based upon a number of assumptions concerning future
conditions that may ultimately prove to be inaccurate. Actual events and results
may materially differ from anticipated results described in such statements. The
Company's ability to achieve such results is subject to certain risks and
uncertainties, including, but not limited to, economic and weather conditions
which affect buying patterns of the Company's customers, changes in consumer
spending and the Company's ability to anticipate buying patterns and implement
appropriate inventory strategies, continued availability of capital and
financing, competitive factors, changes in reimbursement practices for
pharmaceuticals, government regulations, increases in fuel and utility rate and
other factors affecting business beyond the Company's control. Consequently, all
of the forward-looking statements are qualified by these cautionary statements
and there can be no assurance that the results or developments anticipated by
the Company will be realized or that they will have the expected effects on the
Company or its business or operations.
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/A
Exhibits:
Exhibit 99.2 - Press release dated May 24, 2001,
announcing the Fred's stock split and dividend
(incorporated herein by reference to Exhibit 99.1 to
the Company's Current Report on Form 8-K/A dated June
5, 2001)
Reports on Form 8-K/A:
Current report on Form 8-K/A dated June 5, 2001 reporting under Item 5,
Other Events, information related to announcement by Board of Directors approval
of five-for-four stock split and declaration of quarterly cash dividend of $0.05
per share on a pre-split basis ($0.04 per share on a post-split basis).
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.
Date: June 11, 2001 /s/ Michael J. Hayes
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Michael J. Hayes
Chief Executive Officer
Date: June 11, 2001 /s/ Jerry A. Shore
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Jerry A. Shore
Chief Financial Officer