UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): March 21, 2005
FRED'S, INC.
(Exact Name of Registrant as Specified in Charter)
Commission File Number 00-19288
Tennessee 62-0634010
(State or other jurisdiction (I. R. S. Employer
of incorporation or organization) Identification No.)
4300 New Getwell Road, Memphis, TN 38118
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(901) 365-8880
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the Registrant under any of the
following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
Item 2.02. Results of Operations and Financial Condition
On March 22, 2005, Fred's, Inc. issued a press release announcing its financial
results for the fourth fiscal quarter and the fiscal year ended January 29,
2005. A copy of the press release is furnished as Exhibit 99.1 to this report
and is incorporated herein by reference.
The information in this report, including the exhibit attached hereto, is
furnished pursuant to Item 2.02 and shall not be deemed to be "filed" for the
purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or
otherwise subject to the liabilities of that section.
Item 4.02. Non-reliance on Previously Issued Financial Statements or a Related
Audit Report or Completed Interim Review
On March 21, 2005, the Audit Committee of Fred's, Inc. (the "Company")
determined, because the Company has changed its accounting for its leases,
including the accounting for leasehold improvements, the straight-line
accounting of lease payments, and contingent lease related payments, that the
restatement of prior period financial statements is appropriate for the first
three quarters of 2004 and for the fiscal years 2003 and 2002, and that the
Company's previously filed financial statements for those periods should no
longer be relied upon. The Company has made these changes, together with
numerous other retailers, following the issuance on February 7, 2005, by the
Office of the Chief Accountant of the Securities and Exchange Commission ("SEC")
of a letter to the American Institute of Certified Public Accountants expressing
its views regarding certain operating lease accounting issues and their
application under generally accepted accounting principles ("GAAP").The effects
of the restatement have not yet been finalized and accordingly are not reflected
in the previously filed financial results for 2004 and prior years, or in the
financial results reflected in the press release attached hereto as Exhibit
99.1. Management currently believes that the impact on the earnings of 2004,
2003, and 2002 will be approximately $0.01 to $0.02 reduction per share each
year. Additionally, the balance sheet will include adjustments to net property
and equipment, other current and noncurrent liabilities, and retained earnings.
The adjustments for the total restatement will be included in the filing of the
Form 10-K for 2004 (its fiscal year ended January 29, 2005). Accordingly, such
previously filed financial statements and the related independent auditors'
reports should no longer be relied upon.
The Audit Committee of the Company and its authorized officers have discussed
the matters disclosed herein with the Company's current independent auditors as
well as its auditors for the affected periods, and has provided such auditors
with copies hereof.
Item 9.01. Financial Statements, Pro Forma Financial Information and Exhibits.
(c) Exhibits:
Exhibit
Number Description
------------- --------------------------------------------------------
99.1 Press release issued by Fred's, Inc., dated March 22, 2005
2
SIGNATURE
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.
(Registrant)
By: /s/ Jerry A. Shore
--------------------------
Jerry A. Shore,
Executive Vice President and
Chief Financial Officer
Date: March 22, 2005
3
INDEX TO EXHIBITS
Exhibit
Number Description
- --------------- ---------------------------------------------------------------
99.1 Press release issued by Fred's, Inc., dated March 22, 2005
4
Exhibit 99.1
FRED'S 4300 New Getwell Road, Memphis, Tennessee 38118
Contact: Jerry A. Shore
Executive Vice President and
Chief Financial Officer
(901) 362-3733, Ext. 2217
FRED'S REPORTS FISCAL 2004 RESULTS
COMPANY TO ADJUST ITS ACCOUNTING FOR LEASES
MEMPHIS, Tenn. (March 22, 2005) - Fred's Inc. (NASDAQ/NM: FRED) today reported
preliminary, unaudited operating results for the fourth fiscal quarter and year
ended January 29, 2005. The Company also noted, like many companies in the
retail industry and as discussed later in this release, it will adjust its
accounting for leases in light of recent correspondence between the Office of
the Chief Accountant of the Securities and Exchange Commission and the American
Institute of Certified Public Accountants. The effects of the restatement have
not yet been finalized and, accordingly, are not reflected in these financial
results for 2004 and prior years. Management currently believes that the impact
on the earnings of 2004, 2003, and 2002 will be a reduction of approximately
$0.01 to $0.02 per diluted share in each year. Additionally, the balance sheet
will include adjustments to net property and equipment, other current and
non-current liabilities, and retained earnings.
All results presented in this press release are unaudited and such results,
including any forward-looking information, exclude the impact of any restatement
that will result from the Company's review of its lease accounting practices.
The Company currently believes that such adjustments will not change historical
or future cash flows, revenues, and comparable store sales.
Net income for the fourth quarter of 2004 declined 15% to $10.5 million or
$0.27 per diluted share from $12.5 million or $0.31 per diluted share in the
year-earlier period. For fiscal 2004, net income totaled $28.6 million or $0.72
per diluted share, or down 15% from $33.7 million or $0.85 per diluted share for
fiscal 2003.
Retail sales by Company stores for the fourth quarter of 2004 increased 9%
and total sales for the quarter also rose 9% to $410.3 million versus $378.0
million in the same period last year. On a comparable store basis, sales
increased 0.3% for the quarter. For fiscal 2004, retail sales by Company stores
increased 11% and total sales for the period also rose 11% to $1.442 billion
compared with $1.303 billion in fiscal 2003. Comparable store sales for fiscal
2004 increased 2.2% over the prior year.
Commenting on the results, Michael J. Hayes, Chief Executive Officer, said,
"Throughout much of fiscal 2004, we witnessed slower overall sales and a shift
in sales mix to lower-margin products. Missed sales goals also affected our
store-level operating efficiency, as staffing plans were based on the
expectation of better sales performance. Earnings for both the fourth quarter
and year reflect the impact of these adverse trends.
-MORE-
FRED Reports Fourth Quarter, Year-end Results
Page 2
March 22, 2005
"Although fiscal 2004 was challenging, we were pleased to see indications
of improving conditions as the year came to an end," Hayes continued. "In
January, both comparable store sales growth and traffic returned to plan, and
this upturn in our performance continued in February, providing optimistic start
to 2005. Looking ahead to the coming fiscal year, we believe we are better
positioned in many areas to build on this momentum."
Fred's gross profit for the fourth quarter of 2004 was $113.3 million
compared with $103.9 million in the prior-year period, representing an increase
of 9% for the period. Gross margin for the quarter was 27.6% compared with 27.5%
last year, reflecting a better initial margin on pharmacy sales and a lower
store shrinkage percentage, which offset a shift in product mix toward
lower-margin basic and consumable products. Gross profit for fiscal 2004
increased 10% to $405.3 million from $368.0 million for fiscal 2003. Gross
margin for fiscal 2004 was 28.1% versus 28.2% last year. The year's decline
primarily reflected a change in product mix.
Selling, general and administrative expenses for the fourth quarter of 2004
increased to 24.5% of sales from 22.7% of sales in the year-earlier period,
primarily as a result of labor expense and occupancy costs increases in the
stores and pharmacies, higher corporate professional and insurance expenses, as
well as fuel price increases affecting distribution costs. Expenses for the
fourth quarter of 2004 include a benefit of $1.3 million related to a change in
the estimated life of store fixtures and equipment. For fiscal 2004, selling,
general and administrative expenses increased to 25.3% of sales from 24.3% of
sales in 2003.
Operating income for the fourth quarter of 2004 declined 30% to $12.7
million from $18.1 million in the year-earlier period. Operating income was 3.1%
of sales in the fourth quarter of 2004, down from 4.8% in the fourth quarter of
2003. Operating income for fiscal 2004 declined 20% to $40.4 million from $50.6
million in the prior year. Operating income for fiscal 2004 was 2.8% of sales,
down from 3.9% of sales last year.
The Company's income tax rate was 28% for 2004 compared with 33% for 2003.
The lower tax rate for 2004 resulted primarily from tax credits that originated
in 2003 and 2004 related to the Company's distribution center in Dublin,
Georgia. These credits were recognized in 2004. Additional tax credits will
continue to benefit the Company in future years.
LEASE-RELATED ACCOUNTING ADJUSTMENTS
On February 7, 2005, the Office of the Chief Accountant of the Securities
and Exchange Commission issued a letter to the American Institute of Certified
Public Accountants expressing its views regarding certain operating lease
accounting issues and their application under generally accepted accounting
principles. In light of this letter, and like many other companies within the
retail industry that are correcting common lease accounting practices, the
Company will change the way it accounts for its leases, including the accounting
for leasehold improvements, the straight-line accounting of lease payments, and
contingent lease-related payments, and thus will be restating previously
reported financial statements.
-MORE-
FRED Reports Fourth Quarter, Year-end Results
Page 3
March 22, 2005
The effects of the restatement have not yet been finalized and,
accordingly, are not reflected in these financial results for 2004 and prior
years. Management currently believes that the impact on the earnings of 2004,
2003, and 2002 will be a reduction of approximately $0.01 to $0.02 per diluted
share in each year. Additionally, the balance sheet will include adjustments to
net property and equipment, other current and non-current liabilities, and
retained earnings.
GUIDANCE FOR 2005
For the first quarter of fiscal year 2005, the Company expects comparable
store sales to increase in the range of 2% to 4%, with the full-year increase
expected in the range of 4% to 6%. The expected increase in total sales for the
first quarter will be in the range of 11% to 14%, with a full-year increase
expected in the range of 11% to 15%, reflecting anticipated new store openings.
Earnings per diluted share for the first quarter are expected to range from
$0.18 to $0.20; for the full year, Fred's expects earnings per diluted share to
be in the range of $0.88 to $0.93.
For comparison purposes, the effect of adopting Statement of Financial
Accounting Standards No. 123 (Revised 2004), "Share-Based Payment" is not
included in the earnings per diluted share estimates. SFAS 123R will be adopted
during the second half of fiscal 2005.
The Company expects to open 60 to 80 new stores and 20 to 25 new pharmacies
in 2005. Planned capital expenditures in 2005 will be approximately $35 million,
inclusive of $10 million for the expanded refrigeration program.
ABOUT FRED'S
Fred's Inc. operates 595 discount general merchandise stores, including 25
franchised Fred's stores mainly in the southeastern United States. For more
information about the Company, visit Fred's website on the Internet at
www.fredsinc.com.
A public, listen-only simulcast and replay of Fred's year-end conference
call may be accessed at the Company's web site or at www.fulldisclosure.com. The
simulcast will begin at approximately 11:00 a.m. Eastern Time today and a replay
of the call will be available beginning at approximately 1:00 p.m. Eastern Time
and will run until April 22, 2005.
-MORE-
FRED Reports Fourth Quarter, Year-end Results
Page 4
March 22, 2005
Comments in this news release that are not historical facts are
forward-looking statements that involve risks and uncertainties which could
cause actual results to differ materially from those projected in the
forward-looking statements. These risks and uncertainties include, but are not
limited to, general economic trends, changes in consumer demand or purchase
patterns, delays or interruptions in the flow of merchandise between the
Company's distribution centers and its stores or between the Company's suppliers
and same, a disruption in the Company's data processing services, costs and
delays in acquiring or developing new store sites, finalization and completion
of the 2004 audit, the impact, risks and adjustments resulting from the
finalization and completion of the lease accounting review and the audit of such
adjustments and other contingencies discussed in the Company's Securities and
Exchange Commission filings. Fred's undertakes no obligation to release
revisions to these forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unforeseen events, except
as required to be reported under the rules and regulations of the Securities and
Exchange Commission.
FRED'S INC.
Unaudited Financial Highlights
(in thousands, except per share amounts)
13 Weeks* 13 Weeks*
Ended Ended
January 29, January 31, Percent
2005 2004 Change
------------- ------------- ---------
Net sales $ 410,306 $ 378,023 8.5%
Operating income $ 12,714 $ 18,071 -29.6%
Net income $ 10,530 $ 12,451 -15.4%
Net income per share:
Basic $ 0.27 $ 0.32 -15.6%
Diluted $ 0.27 $ 0.31 -12.9%
Average shares outstanding:
Basic 39,399 38,976
Diluted 39,532 39,823
52 Weeks* 52 Weeks*
Ended Ended
January 29, January 31, Percent
2005 2004 Change
------------- ------------- ---------
Net sales $ 1,441,781 $ 1,302,650 10.7%
Operating income $ 40,440 $ 50,621 -20.1%
Net income $ 28,569 $ 33,721 -15.3%
Net income per share:
Basic $ 0.73 $ 0.87 -16.1%
Diluted $ 0.72 $ 0.85 -15.3%
Average shares outstanding:
Basic 39,252 38,754
Diluted 39,532 39,652
* 2004 Actual is unaudited and unadjusted for lease accounting matters which
have not been finalized.
-MORE-
FRED Reports Fourth Quarter, Year-end Results
Page 5
March 22, 2005
FRED'S INC.
Unaudited Fiscal 2004 Fourth Quarter Results
(in thousands, except per share amounts)
13 Weeks* 13 Weeks*
Ended Ended
January 29, % of January 31, % of
2005 Total 2004 Total
-------------- ------- ------------- -------
Net sales $ 410,306 100.0% $ 378,023 100.0%
Cost of goods sold 297,012 72.4% 274,121 72.5%
-------------- ------- ------------- -------
Gross profit 113,294 27.6% 103,902 27.5%
Selling, general and administrative expenses 100,580 24.5% 85,831 22.7%
-------------- ------- ------------- -------
Operating income 12,714 3.1% 18,071 4.8%
Interest expense, net 251 0.1% 108 0.0%
-------------- ------- ------------- -------
Income before income taxes 12,463 3.0% 17,963 4.8%
Provision for income taxes 1,933 0.4% 5,512 1.5%
-------------- ------- ------------- -------
Net income $ 10,530 2.6% $ 12,451 3.3%
============== ======= ============= =======
Net income per share:
Basic $ 0.27 $ 0.32
============== =============
Diluted $ 0.27 $ 0.31
============== =============
Weighted average shares outstanding:
Basic 39,399 38,976
============== =============
Diluted 39,532 39,823
============== =============
Unaudited Fiscal 2004 Results
(in thousands, except per share amounts)
52 Weeks* 52 Weeks*
Ended Ended
January 29, % of January 31, % of
2005 Total 2004 Total
-------------- ------ ------------- -------
Net sales $ 1,441,781 100.0% $ 1,302,650 100.0%
Cost of goods sold 1,036,474 71.9% 934,665 71.8%
-------------- ------ ------------- -------
Gross profit 405,307 28.1% 367,985 28.2%
Selling, general and administrative expenses 364,867 25.3% 317,364 24.3%
-------------- ------ ------------- -------
Operating income 40,440 2.8% 50,621 3.9%
Interest expense, net 793 0.1% 398 0.0%
-------------- ------ ------------- -------
Income before income taxes 39,647 2.7% 50,223 3.9%
Provision for income taxes 11,078 0.7% 16,502 1.3%
-------------- ------ ------------- -------
Net income $ 28,569 2.0% $ 33,721 2.6%
============== ====== ============= =======
Net income per share:
Basic $ 0.73 $ 0.87
============== =============
Diluted $ 0.72 $ 0.85
============== =============
Weighted average shares outstanding:
Basic 39,252 38,754
============== =============
Diluted 39,532 39,652
============== =============
* 2004 Actual is unaudited and unadjusted for lease accounting matters which
have not been finalized.
-MORE-
FRED Reports Fourth Quarter, Year-end Results
Page 6
March 22, 2005
FRED'S INC.
Unaudited Balance Sheet
(in thousands)
January 29, January 31,
2005* 2004*
------------- --------------
ASSETS:
Cash and cash equivalents $ 5,365 $ 4,741
Inventories 275,365 239,962
Receivables and other current assets 38,400 28,245
------------- --------------
Total current assets 319,130 272,948
Property and equipment, net 147,244 137,231
Other noncurrent assets 5,710 4,005
------------- --------------
Total assets $ 472,084 $ 414,184
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable $ 70,504 $ 74,799
Current portion of indebtedness 18 18
Current portion of capital lease obligation 666 725
Accrued expenses 26,546 18,477
Current deferred tax liability 18,262 11,486
Income taxes 0 1,251
------------- --------------
Total current liabilities 115,996 106,756
Indebtedness 23,181 5,603
Deferred tax liability 10,064 6,380
Capital lease obligations 1,031 1,686
Other noncurrent liabilities 2,386 2,441
------------- --------------
Total liabilities 152,658 122,866
Shareholders' equity 319,426 291,318
------------- --------------
Total liabilities and shareholders' equity $ 472,084 $ 414,184
============= ==============
* 2004 Actual is unaudited and unadjusted for lease accounting matters which
have not been finalized.