Exhibit 99.1
Fred's Reports Second Quarter Net Income Up 19%
MEMPHIS, Tenn.--(BUSINESS WIRE)--Aug. 25, 2005--Fred's Inc.
(NASDAQ/NM:FRED) today reported financial results for the second
fiscal quarter and six-month period ended July 30, 2005.
Net income for the second quarter of 2005 totaled $3.5 million or
$0.09 per diluted share versus $2.9 million or $0.07 per diluted share
(as restated) in the year-earlier period, representing an increase of
19% in net income and 29% in net income per diluted share. For the
first half of 2005, net income was $10.2 million or $0.26 per diluted
share compared with $10.1 million or $0.26 per diluted share (as
restated) in the same period last year.
Retail sales by Company stores for the second quarter of 2005
increased 10% and total sales for the quarter also rose 10% to $373.3
million versus $340.9 million in the same period last year. On a
comparable store basis, sales increased 0.8% for the quarter. For the
first half of 2005, retail sales by Company stores increased 11% and
total sales for the period also rose 11% to $756.1 million compared
with $682.3 million in the year-earlier period. Comparable store sales
for the first six months of 2005 increased 2.1% over the same period
last year.
Commenting on the results, Michael J. Hayes, Chief Executive
Officer, said, "We are pleased that Fred's posted solidly higher
earnings for the second quarter versus the same period last year. The
improvement reflects the progress made on the initiatives being
implemented throughout the Company. Our refrigerated foods program
rollout is on schedule and will be completed by November 1.
Improvements in store-level inventory have helped us reduce labor
costs 30 basis points as a percentage of sales. At the same time,
we've gained increased expense leverage in our distribution centers,
with controllable cost down 20 basis points during the quarter. These
factors should continue to have a positive influence on our operations
throughout the balance of the year.
"Despite the progress we have made with these important
initiatives, external factors continue to take a toll on our
business," Hayes continued. "There is little question that our
customers are feeling the pressure of soaring fuel and utility prices
and competition is very aggressive. In a surprising settlement, on
August 1 the State of Tennessee initiated significant cuts to its
Medicaid program, TennCare - eliminating approximately 230,000
recipients and reducing the allowed prescriptions for all other
enrollees from an unlimited number to just five per month. This has
had a dramatic impact on the pharmacy sales of our almost 100 stores
in the state. We had understood that this change would be phased in
and we planned accordingly for a gradual drop of ineligible recipients
from the TennCare roll over a 12-month period. The impact of this
sales loss to earnings is expected to be approximately two cents in
both the third and fourth quarters. Our customers' needs have not
vanished, however, so we are hopeful that some of this business will
come back to us as alternatives to TennCare emerge."
Because of the impact of TennCare cuts on pharmacy sales in
Tennessee, the economic factors affecting the Company's general
merchandise sales from back-to-school, and the increasing utility and
fuel costs, Fred's has revised its earnings outlook to ranges of $0.19
to $0.22 per diluted share for the third quarter and $0.74 to $0.79
per diluted share for the full 2005 fiscal year.
Fred's gross profit for the second quarter increased 11% to $104.7
million from $94.0 million in the prior-year period. Gross margin for
the quarter was 28.1% versus 27.6% last year, reflecting higher
pharmacy gross margins, related to the increasing use of generic
drugs, and a reduction in double-coupon expense on general
merchandise. Gross profit for the first six months of 2005 increased
12% to $213.8 million from $190.8 million in the first half of 2004.
Gross margin for the 2005 year-to-date period was 28.3% versus 28.0%
in the same period last year.
Selling, general and administrative expenses for the second
quarter of 2005 increased to 26.6% of sales versus 26.2% of sales in
the year-earlier period. On a year-to-date basis in 2005, selling,
general and administrative expenses increased to 26.2% of sales
compared with 25.6% of sales in the first half of 2004. Increases in
store and pharmacy expenses as a percent of sales more than offset
productivity gains in the Company's distribution centers and in store
staffing. During the quarter, distribution center productivity
improved by 20 basis points relative to sales despite an increase in
fuel costs on outbound shipments. Store labor improved 30 basis points
relative to sales during the second quarter.
Operating income for the second quarter of 2005 increased 17% to
$5.5 million from $4.7 million in the year-earlier period. Operating
income increased to 1.5% of sales in the second quarter of 2005
compared with 1.4% of sales in the second quarter of 2004. Operating
income for the first half of 2005 declined 1% to $15.7 million from
$15.8 million in the prior-year period. Operating income for the first
half of 2005 was 2.1% of sales compared with 2.4% of sales in the
first six months of last year.
Fred's Inc. operates 624 discount general merchandise stores,
including 25 franchised Fred's stores 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 second
quarter conference call may be accessed at the Company's Web site or
at www.earnings.com. The simulcast will begin at approximately 10:00
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
September 25, 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, 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
July 30, July 31, Percent
2005 2004 Change
-------- -------- -------
(as restated)
Net sales $373,319 $340,850 9.5%
Operating income $ 5,500 $ 4,698 17.1%
Net income $ 3,483 $ 2,922 19.2%
Net income per share:
Basic $ 0.09 $ 0.07 28.5%
Diluted $ 0.09 $ 0.07 28.5%
Average shares outstanding:
Basic 39,638 39,110
Diluted 39,791 39,520
26 Weeks 26 Weeks
Ended Ended
July 30, July 31, Percent
2005 2004 Change
-------- -------- -------
(as restated)
Net sales $756,057 $682,336 10.8%
Operating income $ 15,691 $ 15,816 -0.8%
Net income $ 10,205 $ 10,124 0.8%
Net income per share:
Basic $ 0.26 $ 0.26 0.0%
Diluted $ 0.26 $ 0.26 0.0%
Average shares outstanding:
Basic 39,593 39,085
Diluted 39,758 39,583
FRED'S INC.
Unaudited Fiscal 2005 Second Quarter Results
(in thousands, except per share amounts)
13 Weeks 13 Weeks
Ended Ended
July 30, % of July 31, % of
2005 Total 2004 Total
-------- ----- -------- -----
(as restated)
Net sales $373,319 100.0% $340,850 100.0%
Cost of goods sold 268,588 71.9% 246,880 72.4%
-------- ----- -------- -----
Gross profit 104,731 28.1% 93,970 27.6%
Selling, general and
administrative
expenses 99,231 26.6% 89,272 26.2%
-------- ----- -------- -----
Operating income 5,500 1.5% 4,698 1.4%
Interest expense,
net 302 0.1% 220 0.0%
-------- ----- -------- -----
Income before
income taxes 5,198 1.4% 4,478 1.4%
Provision for
income taxes 1,715 0.5% 1,556 0.5%
-------- ----- -------- -----
Net income $ 3,483 0.9% $ 2,922 0.9%
======== ===== ======== =====
Net income per share:
Basic $ 0.09 $ 0.07
======== ========
Diluted $ 0.09 $ 0.07
======== ========
Weighted average shares
outstanding:
Basic 39,638 39,110
======== ========
Diluted 39,791 39,520
======== ========
Unaudited Fiscal 2005 Six-Month Results
(in thousands, except per share amounts)
26 Weeks 26 Weeks
Ended Ended
July 30, % of July 31, % of
2005 Total 2004 Total
-------- ----- -------- -----
(as restated)
Net sales $756,057 100.0% $682,336 100.0%
Cost of goods sold 542,297 71.7% 491,572 72.0%
-------- ----- -------- -----
Gross profit 213,760 28.3% 190,764 28.0%
Selling, general and
administrative
expenses 198,069 26.2% 174,948 25.6%
-------- ----- -------- -----
Operating income 15,691 2.1% 15,816 2.4%
Interest expense, net 460 0.1% 282 0.1%
-------- ----- -------- -----
Income before
income taxes 15,231 2.0% 15,534 2.3%
Provision for
income taxes 5,026 0.7% 5,410 0.8%
-------- ----- -------- -----
Net income $ 10,205 1.3% $ 10,124 1.5%
======== ===== ======== =====
Net income per share:
Basic $ 0.26 $ 0.26
======== ========
Diluted $ 0.26 $ 0.26
======== ========
Weighted average shares
outstanding:
Basic 39,593 39,085
======== ========
Diluted 39,758 39,583
======== ========
FRED'S INC.
Unaudited Balance Sheet
(in thousands)
July 30, July 31,
2005 2004
-------- --------
ASSETS: (as restated)
Cash and cash equivalents $ 18,226 $ 5,264
Inventories 302,651 270,767
Receivables 19,434 16,533
Other non-trade receivables 15,538 3,829
Prepaid expenses and other current assets 8,082 4,691
-------- --------
Total current assets 363,931 301,084
Property and equipment, net 143,630 138,339
Other noncurrent assets 6,760 4,430
-------- --------
Total assets $514,321 $443,853
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable $ 88,944 $ 63,089
Current portion of indebtedness 18 36
Current portion of capital lease obligation 622 675
Accrued expenses and other 27,674 24,106
Deferred tax liability 17,995 11,420
Income taxes payable 3,934 2,984
-------- --------
Total current liabilities 139,187 102,310
Long-term portion of indebtedness 38,336 35,365
Deferred income taxes 8,579 5,287
Long-term portion of capital lease obligations 734 1,340
Other noncurrent liabilities 2,944 3,341
-------- --------
Total liabilities 189,780 147,643
Shareholders' equity 324,541 296,210
-------- --------
Total liabilities and shareholders'
equity $514,321 $443,853
======== ========
CONTACT: Fred's Inc.
Jerry A. Shore, 901-362-3733, Ext. 2217