After beating earnings expectations and reporting solid gross margins for Q4, shares of pharmacy and general merchandise company Fred's (FRED 14.01, +1.46) trade about 11.6% higher.
For those who may not be familiar, FRED operates 601 pharmacy and general merchandise stores and three specialty pharmacy-only locations, including 14 franchised Fred’s Pharmacy locations. Back in December, 2016, speculation on FRED’s then Q3 earnings calls about a “pending transaction” piqued investors interest, and led to an eventual announcement that Rite Aid (RAD 4.66, +0.40 +9.39%) would acquire 865 stores and certain assets from FRED for $950 million.
Why this matters is FRED made comments with its Q4 earnings release today that the company plans to purchase additional assets, including up to 1,200 RAD stores, to the extent necessary to obtain the FTC’s approval for the pending Walgreens Boots Alliance (WBA 81.78, +0.61 +0.75%) and Rite Aid (RAD) deal.
In addition to commentary about the store acquisitions, FRED reported strong earnings for Q4 of a loss per share of $0.11, ahead of market expectations. Revenues were mostly in-line, down 4.5% compared to last year to about $529.7 million.
FRED also reported a sales decline for the five-week fiscal month ended April 1, 2017 of 2.7% to $208.6 million from $214.3 million in March 2016. Comparable store sales for March decreased 0.5% versus an increase of 1.8% in the year-earlier month.
Further, comparable store sales were down 3.6% versus a 1.7% increase in comparable store sales in the fourth quarter of last year. Comparable store sales in the fourth quarter of 2016 included a negative 2.6% impact due to the sale of low productive discontinued inventory versus the fourth quarter of 2015.
Additionally, gross profit for the entire fiscal year 2016 decreased 6.2% to $510.3 million from $544.2 million the year before. Gross margin for fiscal year 2016 decreased 130 basis points to 24.0% of sales compared with 25.3% in the prior-year period. Most of the decrease was related to inventory write-downs during 2016 associated with store closures and discontinued unproductive inventory. In fiscal year 2016, Fred’s recorded LIFO adjustments of $5.1 million compared with $7.6 million last year.
On the conference call, management commented that FRED will not be giving 2017 guidance at this time. However, the company does expect to continue to incur a number of charges similar to those discussed this quarter including those related to acquisition integration, store closures and valuation allowances. Absent those charges, FRED expects sequential improvement in core quarterly earnings per share in 2017.