Exhibit 99.1
Fred's Reports Year-End Results
MEMPHIS, Tenn.--(BUSINESS WIRE)--March 23, 2006--Fred's Inc.
(NASDAQ/NM: FRED) today reported financial results for the fourth
fiscal quarter and year ended January 28, 2006.
Net income for the fourth quarter of 2005 totaled $9.6 million or
$0.24 per diluted share versus $10.4 million or $0.27 per diluted
share in the year-earlier period, representing declines of 8% in net
income and 11% in net income per diluted share. For the year ended
January 28, 2006, net income was $26.1 million or $0.66 per diluted
share compared with $28.0 million or $0.71 per diluted share last
year.
Commenting on the results, Michael J. Hayes, Chief Executive
Officer, said, "While net income for the fourth quarter and year
declined from year-earlier periods, we are pleased with the upturn
evident in our operating income as the year came to a close - a 16%
increase in the fourth quarter. This operating improvement, despite
the many unusual challenges we encountered during 2005, reflected the
positive impact of our initiatives implemented in 2005."
Continuing, Hayes said, "Achieving a 16% operating improvement in
the fourth quarter was no small feat considering the unfavorable
regulatory changes we encountered in the pharmacy department,
beginning with drastic reductions to Tennessee's TennCare program in
July and more recently, the implementation of a new Medicare Part D
program, including a shift in coverage for the dual-eligible. On top
of these pressures, we had the impact on our merchandising efforts
from the changing shopping habits of our customers as they adapted to
reduced discretionary income due to higher energy costs.
"The effect of these factors, especially the weakness they created
in our pharmacy sales, was evident in missed expectations in the
fourth quarter," Hayes continued. "Our gross margin came under
pressure due to continued mix shift and lower soft-line sales. It also
was affected by a larger-than-budgeted increase in our LIFO index,
which exceeded last year's increase. Similar to the experience our
customers have confronted, Fred's operating expenses were adversely
affected in January by higher fixed and semi-fixed costs, reflecting
high rate and usage increases of utilities, tax increases throughout
our region, and insurance reserve requirements.
"We knew the year would be a challenging one for Fred's, given the
economic pressures on our customers," he added. "To help improve our
competitive position, we moved forward with several new initiatives
during the year that helped counter these forces. We implemented our
new cooler program, completed on time, on budget, and now successfully
building new sales for us. We added the Merchandising Refresher
program to improve mix quality and square-foot performance, along with
an aggressive labor expense management program. We opened 65 stores
and 20 pharmacies during 2005 and managed our inventories throughout
the year, which improved cash flow and inventory turnover, contributed
to store expense leverage of 70 basis points as a percent of sales,
and allowed us to reduce long-term debt by $17 million at year-end. We
think these initiatives will continue to produce positive results for
us in the coming year, contributing to ongoing growth in our business,
better operational performance and improved earnings."
Retail sales by Company stores for the fourth quarter of 2005
increased 11% and total sales for the quarter also rose 11% to $456.5
million versus $410.3 million in the same period last year. On a
comparable store basis, sales rose 2.5% for the quarter. For 2005,
retail sales by Company stores increased 10% and total sales for the
period also rose 10% to $1.589 billion from $1.442 billion in the
prior year. Comparable store sales for 2005 increased 1.2% over the
same period last year.
Fred's gross profit for the fourth quarter increased 11% to $125.7
million from $113.3 million in the prior-year period. Gross margin for
the quarter was 27.5% versus 27.6% last year. The decline for the
quarter resulted from the product mix being more toward basic and
consumable products, as well as increased freight-in costs on
purchases. Additionally, the LIFO index on pharmacy department
inventory increased more this quarter than the fourth quarter of last
year. Gross profit for 2005 increased 11% to $448.2 million from
$405.3 million in 2004. Gross margin for 2005 was 28.2% versus 28.1%
last year.
Selling, general and administrative expenses for the fourth
quarter of 2005 declined to 24.3% of sales versus 24.5% of sales in
the year-earlier period. The improvement in the fourth quarter
resulted primarily from leveraging labor expenses in the stores by 70
basis points. Offsetting expense increases, which were higher than
planned, included those for utilities, taxes, and insurance reserve
requirements. In 2005, selling, general and administrative expenses
increased to 25.7% of sales compared with 25.4% of sales in 2004. The
increase in full-year expenses as a percentage of sales resulted from
fuel-related costs, utilities, and Hurricane Katrina repairs and
maintenance.
Operating income for the fourth quarter of 2005 increased 16% to
$14.5 million from $12.5 million in the year-earlier period. Operating
income improved to 3.2% of sales in the fourth quarter of 2005
compared with 3.1% of sales in the fourth quarter of 2004. Operating
income for 2005 increased 2% to $40.1 million from $39.4 million in
the prior-year period. Operating income for 2005 was 2.5% of sales
compared with 2.7% of sales last year.
Looking ahead, the Company expects earnings per diluted share to
be in the range of $0.71 to $0.77 for 2006. These estimates include
charges of $0.03 per diluted share relating to the expensing of stock
options. Excluding the effect of expensing stock options, earnings per
diluted share for 2006 are expected to be 12%-21% higher than actual
earnings per diluted share for 2005. Fred's expects earnings per
diluted share in the first quarter of 2006 to be in the range of $0.16
to $0.18. Fred's bases these earnings estimates on following
assumptions:
-- Comparable store sales for the first quarter are expected to
increase in the range of 1%-3% and are anticipated to increase
for the full year in the range of 3%-5%. Total sales are
expected increase in the range of 8%-11% for the first quarter
and 11%-15% for the year.
-- The Company expects to open 60-70 new stores and 20-25 new
pharmacies in 2006 and close 5-10 stores and 5-10 pharmacies,
with the net effect being an increase selling space in the
range of 8%-10%.
-- A net effect of $0.05-$0.06 per diluted share (included in
2006 guidance) from the implementation of Medicare Part D,
reflecting a lower margin on pharmacy sales, which contains a
partial offset from increasing Part D scripts.
-- Excludes any estimated potential impact from the federally
approved Average Manufacturer's Price (AMP) program that will
become effective in 2007, which could be initiated earlier by
individual states.
-- Depreciation and amortization expense is expected to be
approximately $30 million. Planned capital expenditures in
2006 are expected to be approximately $30-$35 million.
Fred's Inc. operates 648 discount general merchandise stores,
including 24 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 fourth
quarter conference call may be accessed at the Company's web site or
at www.earnings.com. The simulcast will begin at approximately 9:00
a.m. Eastern Time today and a replay of the call will be available
beginning at approximately 12:00 p.m. Eastern Time and will run until
April 23, 2006.
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
Jan. 28, Jan. 29, Percent
2006 2005 Change
--------- --------- -------
Net sales $ 456,531 $ 410,306 11.3%
Operating income $ 14,529 $ 12,520 16.0%
Net income $ 9,568 $ 10,412 -8.1%
Net income per share:
Basic $ 0.24 $ 0.27 -11.1%
Diluted $ 0.24 $ 0.27 -11.1%
Average shares outstanding:
Basic 39,681 39,399
Diluted 39,807 39,532
52 Weeks 52 Weeks
Ended Ended
Jan. 28, Jan. 29, Percent
2006 2005 Change
--------- --------- -------
Net sales $1,589,342 $1,441,781 10.2%
Operating income $ 40,081 $ 39,426 1.7%
Net income $ 26,094 $ 27,952 -6.6%
Net income per share:
Basic $ 0.66 $ 0.71 -7.0%
Diluted $ 0.66 $ 0.71 -7.0%
Average shares outstanding:
Basic 39,632 39,252
Diluted 39,772 39,532
FRED'S INC.
Unaudited Fiscal 2005 Fourth Quarter Results
(in thousands, except per share amounts)
13 Weeks 13 Weeks
Ended Ended
Jan. 28, % of Jan. 29, % of
2006 Total 2005 Total
-------------- --------- ------------- ---------
Net sales $ 456,531 100.0% $ 410,306 100.0%
Cost of goods sold 330,867 72.5% 297,012 72.4%
-------------- --------- ------------- ---------
Gross profit 125,664 27.5% 113,294 27.6%
Selling, general and
administrative
expenses 111,135 24.3% 100,774 24.5%
-------------- --------- ------------- ---------
Operating income 14,529 3.2% 12,520 3.1%
Interest expense, net 106 0.1% 251 0.1%
-------------- --------- ------------- ---------
Income before income
taxes 14,423 3.1% 12,269 3.0%
Provision for income
taxes 4,855 1.0% 1,857 0.5%
-------------- --------- ------------- ---------
Net income $ 9,568 2.1% $ 10,412 2.5%
============== ========= ============= =========
Net income per share:
Basic $ 0.24 $ 0.27
============== =============
Diluted $ 0.24 $ 0.27
============== =============
Weighted average
shares outstanding:
Basic 39,681 39,399
============== =============
Diluted 39,807 39,532
============== =============
Unaudited Fiscal 2005 Annual Results
(in thousands, except per share amounts)
52 Weeks 52 Weeks
Ended Ended
Jan. 28, % of Jan. 29, % of
2006 Total 2005 Total
-------------- --------- ------------- ---------
Net sales $ 1,589,342 100.0% $ 1,441,781 100.0%
Cost of goods sold 1,141,105 71.8% 1,036,474 71.9%
-------------- --------- ------------- ---------
Gross profit 448,237 28.2% 405,307 28.1%
Selling, general and
administrative
expenses 408,156 25.7% 365,881 25.4%
-------------- --------- ------------- ---------
Operating income 40,081 2.5% 39,426 2.7%
Interest expense, net 826 0.1% 793 0.1%
-------------- --------- ------------- ---------
Income before income
taxes 39,255 2.4% 38,633 2.6%
Provision for income
taxes 13,161 0.8% 10,681 0.7%
-------------- --------- ------------- ---------
Net income $ 26,094 1.6% $ 27,952 1.9%
============== ========= ============= =========
Net income per share:
Basic $ 0.66 $ 0.71
============== =============
Diluted $ 0.66 $ 0.71
============== =============
Weighted average
shares outstanding:
Basic 39,632 39,252
============== =============
Diluted 39,772 39,532
============== =============
FRED'S INC.
Unaudited Balance Sheet
(in thousands)
January 28, January 29,
2006 2005
--------- ---------
ASSETS:
Cash and cash equivalents $ 3,145 $ 5,365
Inventories 303,800 275,365
Receivables 20,622 19,449
Other non-trade receivables 11,181 11,821
Prepaid expenses and other current assets 10,790 6,967
--------- ---------
Total current assets 349,538 318,967
Property and equipment, net 139,899 140,547
Other noncurrent assets 8,704 5,710
--------- ---------
Total assets $ 498,141 $ 465,224
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable $ 78,491 $ 70,503
Current portion of indebtedness 510 18
Current portion of capital lease obligation 543 666
Accrued expenses and other 31,449 26,708
Deferred income taxes 18,329 17,490
Income taxes payable 6,196 0
--------- ---------
Total current liabilities 135,518 115,385
Long-term portion of indebtedness 6,338 23,181
Deferred income taxes 10,494 7,701
Long-term portion of capital lease
obligations 477 1,031
Other noncurrent liabilities 5,719 3,380
--------- ---------
Total liabilities 158,546 150,678
Shareholders' equity 339,595 314,546
--------- ---------
Total liabilities and
shareholders' equity $ 498,141 $ 465,224
========= =========
CONTACT: Fred's Inc.
Jerry A. Shore, 901-362-3733, Ext. 2217