Fred's Inc. (FRED) filed Quarterly Report for the period ended 2009-05-02.

Date AddedJune 12, 2009 04:14:39 AM

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Fred's Inc. operates discount general merchandise stores in a number states in the southeastern United States. Fred's stores generally serve low middle and fixed income families located in small to medium s ized towns. The majority of the company's stores have full service pharmacies. The company also markets goods and services to franchised ''Fred's'' stores. Fred's Inc. has a market cap of $526.2 million; its shares were traded at around $13.15 with a P/E ratio of 19.9 and P/S ratio of 0.3. The dividend yield of Fred's Inc. stocks is 0.6%. Fred's Inc. had an annual average earning growth of 14.9% over the past 10 years. GuruFocus rated Fred's Inc. the business predictability rank of 3-star.

Highlight of Business Operations:

Net sales for the first quarter of 2009 decreased to $458.4 million in 2009 from $464.3 million in 2008, a quarter-over-quarter decline of $5.9 million or 1.3%, reflecting the Company's store closing program coupled with the ongoing economic challenges impacting our customers' disposable income. Excluding sales from stores closed in 2008 ($25.7 million), sales increased 4.5% over the first quarter last year. This increase was attributable to an increase in comparable store sales of 2.8% ($11.8 million) and an increase in non-comparable store sales of 1.7% ($8.0 million).

The Company's pharmacy sales were 33.3% of total sales in the first quarter of 2009 compared to 31.8% of total sales in the same quarter last year and continue to rank as the largest sales category within the Company. The total sales in this department, including the Company's mail order operation which we closed during the first quarter of 2009, increased 3.6% over 2008, with third party prescription sales representing approximately 93% of total pharmacy sales, the same as in the prior year. The Company's pharmacy department continues to benefit from an ongoing program of purchasing prescription files from independent pharmacies and the addition of pharmacy departments in existing store locations.

The sales mix for the period was 33.3% Pharmaceuticals, 23.5% Household Goods, 16.1% Food and Tobacco, 9.1% Paper and Cleaning Supplies, 7.9% Apparel and Linens, 7.8% Health and Beauty Aids, and 2.2% Franchise. The sales mix for the period the same period last year was 31.8% Pharmaceuticals, 24.4% Household Goods, 8.7% Apparel and Linens, 15.5% Food and Tobacco, 9.2% Paper and Cleaning Supplies, 8.2% Health and Beauty Aids, and 2.2% Franchise.

Gross margin for the first quarter of 2009 decreased to $129.0 million from $132.5 million in 2008, a quarter-over-quarter decline of 2.6%. As a percent of sales, gross margin for the quarter decreased to 28.1% from 28.5% in the same quarter last year. Gross margin was unfavorably impacted by continued pricing pressures, an unfavorable shift in the product mix toward

Selling, general and administrative expenses, including depreciation and amortization, decreased to $115.3 million in 2009 (25.1% of sales) from $120.7 million in 2008 (26.0% of sales). This 90 basis point expense leverage resulted primarily from managing costs in our stores by increasing labor efficiencies, lowering distribution costs and the effect of our store closures in fiscal 2008. Our stores labor efficiencies resulted in an 18 basis point reduction in store labor as a percentage of store sales from 8.59% for the first quarter of 2008 to 8.41% for the first quarter of 2009. Additionally, overall expense efficiencies in store operations reduced store expenses from 22.7% of sales in the first quarter of 2008 to 22.1% in the same period in 2009.

As a result of the fluctuations described in the preceding sections, net income increased to $8.5 million (or $.21 per diluted share) in the first quarter of 2009 from $7.3 million (or $.18 per diluted share) during the same period last year. While net sales decreased by 1.3% and gross margin decreased 2.6% over the same period last year, the improvement in selling, general and administrative expenses (4.5%) more than offset this unfavorability, driving an increase in operating income of 16.6%. Finally, net income benefited from a lower tax rate due to increased benefits of federal wage credits.

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