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Fred’s appoints new chairman, posts 2Q net loss

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MEMPHIS, Tenn. — Fred’s Inc. has named recently added board member Heath Freeman, president and founding member of Alden Global Capital LLC, as chairman.

Also on Wednesday, Fred‘s reported a net loss for its fiscal 2017 second quarter. Adjusted earnings per share (EPS) were in line with Wall Street’s forecast.

Freeman, who joined the Fred’s board as a director on Aug. 14, succeeds Thomas Tashjian, who is retiring.

“I am pleased to assume the role of chairman of the Fred‘s board,” Freeman said in a statement. “Fred’s has a strong platform, and I look forward to continuing to work together with our board members to support the management team as it executes the company’s strategy to drive free cash flow and generate value for all shareholders.”

The addition of Freeman to board stemmed from an amended and restated cooperation agreement with Alden, dated Aug. 11, that extends the term of the companies‘ agreement into 2019 and updates terms regarding their efforts to maximize value for Fred‘s shareholders. Late last year, Fred’s announced the adoption of a poison pill plan after Alden became its single largest shareholder, with approximately a 25% stake in the retailer.

“Heath brings significant retail, turnaround and financial expertise, and we determined that, as chairman, Heath will bring invaluable insights and experience as the company continues to execute its turnaround strategy,” Fred‘s chief executive officer and board member Michael Bloom stated. “Additionally, as president of Alden, the company’s largest investor, Heath brings a strong shareholder perspective to the role of chairman. I am confident that under his leadership, coupled with the oversight of our high-quality and experienced board, we will be well-positioned to drive Fred‘s long-term success.”

For the second quarter ended July 29, Fred’s posted a net loss of $29.5 million, or 78 cents per share, compared with a net loss of $6.9 million, or 18 cents per share, a year earlier.

Excluding charges of $30.1 million, or 63 cents per share after tax, Fred‘s had a net loss of 15 cents per share for the quarter. Analysts, on average, had projected a net loss of 19 cents per share (adjusted), with estimates ranging from a loss of 15 cents to 22 cents, according to Thomson Reuters.

Fred‘s said second-quarter charges included $15.2 million (26 cents per share) after tax for bank fees, financing termination fees, prior-period deferred expenses for contract terminations and amendments, and other professional and legal advisory fees from the proposed acquisition of Rite Aid stores, as well as for the development and implementation of Fred‘s growth strategy and other professional and legal advisory fees.

Other quarterly charges included $11.3 million (30 cents per share) after tax for a valuation allowance against its deferred tax asset, resulting from a pretax loss; $2.8 million (5 cents per share) after tax for asset impairments and other expenses from the planned closing of 13 stores and certain pharmacy departments; and $800,000 (2 cents per share) after tax for other nonrecurring charges.

On the revenue side, second-quarter sales totaled $507.8 million, down 4.1% from $529.5 million a year ago.

Fred’s, though, continued to see improvement in same-store sales. Comparable-store sales for the second quarter dipped 0.3% year over year, compared with a 2% decline in the 2016 quarter. The company noted that comp-store sales in the 2017 quarter reflect a negative impact of 0.8% from the sale of low productive discontinued inventory.

“Our overall comparable-store sales represent the best quarterly performance in the past year. In addition, EPS and EBITDA, excluding non-operating charges, improved over the prior-year period. We are starting to gain momentum and are seeing progress across the business,” Bloom commented.

“Our retail pharmacy business continues to improve, delivering flat comp scripts year-to-date adjusted for 90 days and increases in our generic dispensing rate and our overall gross profit dollars per script,” he explained. “In specialty pharmacy, we continue to drive sales growth through geographic expansion into new markets and diversification within our existing therapies. Despite ongoing headwinds in consumables in the front store, we experienced a 60-basis-point improvement in comparable sales in our general merchandise division over the same quarter last year.”

Fred’s saw its operating loss in the second quarter rise to $28.1 million, or 5.5% of sales, from $10.9 million, or about 2.1% of sales, in the prior-year period. Gross profit in the 2017 quarter declined to $126 million from $128.1 million a year earlier, mainly due to the closure of 39 underperforming stores, Fred‘s said. Gross profit margin rose 60 basis points to 24.8% from 24.2% a year ago, lifted by key turnaround initiatives to drive profitability and cash flow, the company reported.

“While we are encouraged by our progress and performance trends, we recognize there is more work to be done,” Bloom added. “Our work over the past few quarters — including investing in technology, people and processes — was integral to stabilizing our infrastructure and creating a foundation to build upon. Our turnaround strategy is now expanded to focus on reducing SG&A and driving free cash flow. By lowering our SG&A to be more in line with our peers and embracing our roots of succeeding in small to midsized rural markets where we have a track record of generating free cash flow, we are well-positioned to grow our bottom line and enhance shareholder value.”

Fred‘s operates 600 discount general merchandise stores, including 14 franchised locations, in the Southeast. The company has about 350 in-store Fred’s Pharmacy locations and three specialty pharmacy-only locations.