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Can Strategic Efforts Aid Fred’s to Achieve a Turnaround?


With underperforming stores, cancellation of dividends and continued bottom-line loses, Fred's, Inc.’s FRED troubles have been aggravating and denting its business for a while. However, to cater to consumers’ rapidly changing preferences and sustain market competition, the company has been focusing on pharmacy organization for driving scripts into its stores. Additionally, it has been putting much effort to reduce operating expenses.

Let’s take a look into the factors that have been bruising this discount retailer and discuss the growth plans it has put into place for achieving recovery.

Factors Denting the Stock

Fred’s comps have long been ailing from store closures, thanks to receding store traffic. To top it, comps have also been bearing the brunt of continued increase in generic dispensing rate and sale of low productive discontinued inventory. Persistent challenges in the front store business and competitive consumable categories have also affected overall sales figures. Due to these downsides, comps dipped 1.2%, 0.3% and 0.8% during the first, second and third quarters, respectively. In addition to dismal comps, increased promotional activity to drive store traffic has been denting business. Incidentally, the company has been reporting bottom-line losses for six straight quarters.

Moreover, the company’s business expansion plans were eclipsed by the cancelled Walgreens Boots Alliance WBA and Rite Aid Corporation RAD merger in June 2017. If the deal were to materialize, it would have positioned Fred’s as the third-largest drugstore chain in the nation after Walgreens and CVS Health Corporation CVS. However, obstacles such as antitrust concerns cancelled the deal and kept Fred’s far behind industry leaders.

To make matters worse, management announced the cancellation of dividend alongside a dismal third quarter results. In combination, all such factors have gravely affected the company’s price performance. The stock has lost 80% in the past year, against the industry’s rally of 15%.

Can Efforts Revive Performance?

Fred’s strives to improve store traffic and has accordingly shifted focus to pharmacy organization. This is likely to drive scripts into its stores and improve services for patients. Fred’s Retail Pharmacy business seems to be stable, benefiting from the company’s shift to profitable generic prescriptions. In order to improve retail pharmacy business, the company has been expanding flu shots capacity along with aggressive inventory management and marketing initiatives.

Further, management continues to build momentum in the Specialty Pharmacy business through investing in sales team, therapy diversification and technology. Owing to such efforts, the company expects its specialty business to gain access to 5 million new patients across different markets in the forthcoming periods. Additionally, such efforts position the company for new drug introductions, improve data flow and thereby increase efficiency in patient care.

Fred’s also initiated several measures for reducing excess inventory and improving technology to better manage product-life cycle. During the third quarter, the company witnessed a turnaround in its tobacco business as well as improved sales of its beer and cosmetics businesses. Further, the company expects improved trends in these categories in the forthcoming periods.

Along with strengthening pharmacy operations, expense reduction is also listed amongst Fred’s efforts to achieve profitability. During the third quarter, management successfully reduced selling, general and administrative (SG&A) expenses by 7% to $133.4 million. Further, management expects lower SG&A costs to help augment free cash flows. The company expects to pass the gains from the reduced cost structure to its customers and drive store traffic. Moreover, management plans to allocate funds derived from the cancelled dividend toward curtailing debt load, buyback shares and undertake other corporate initiatives.

With such prospective endeavors in place, all is not gloomy for this Zacks Rank # 3 (Hold) stock and we can still hope for its revival from the shambles. We hope that such dedicated efforts will help the company to uplift investors’ confidence in the stock in the long run.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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