x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
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TENNESSEE
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62-0634010
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(State or Other Jurisdiction of
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(I.R.S. Employer
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Incorporation or Organization)
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Identification Number)
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Large accelerated filer ¨
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Accelerated filer x
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Non-accelerated filer ¨
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Smaller reporting company ¨
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Page No.
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Part I - Financial Information
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Item 1 - Financial Statements:
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Condensed Consolidated Balance Sheets as of July 30, 2011 (unaudited) and January 29, 2011
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3
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Condensed Consolidated Statements of Income for the Thirteen Weeks and Twenty-Six Weeks Ended July 30, 2011 (unaudited) and July 31, 2010 (unaudited)
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4
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Condensed Consolidated Statements of Cash Flows for the Twenty-Six Weeks Ended July 30, 2011 (unaudited) and July 31, 2010 (unaudited)
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5
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Notes to Condensed Consolidated Financial Statements (unaudited)
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6-11
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Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
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12-17
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Item 3 – Quantitative and Qualitative Disclosure about Market Risk
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18
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Item 4 – Controls and Procedures
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18
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Part II - Other Information
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18-19
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Item 1. Legal Proceedings
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Item 1A. Risk Factors
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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Item 6. Exhibits
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Signatures
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19
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Ex-31.1 Section 302 Certification of the CEO
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Ex-31.2 Section 302 Certification of the CFO
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Ex-32. Section 906 Certification of the CEO and CFO
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July 30, 2011
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January 29,
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|||||||
(unaudited)
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2011
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|||||||
ASSETS
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||||||||
Current assets:
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||||||||
Cash and cash equivalents
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$ | 46,799 | $ | 49,182 | ||||
Receivables, less allowance for doubtful accounts of $1,253 and $1,218, respectively
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28,727 | 28,146 | ||||||
Inventories
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325,438 | 313,384 | ||||||
Other non-trade receivables
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25,457 | 26,378 | ||||||
Prepaid expenses and other current assets
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10,595 | 12,723 | ||||||
Total current assets
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437,016 | 429,813 | ||||||
Property and equipment, at depreciated cost
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157,657 | 139,931 | ||||||
Equipment under capital leases, less accumulated amortization of $5,025 and $4,967,
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||||||||
respectively
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117 | - | ||||||
Intangibles
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21,716 | 22,193 | ||||||
Other noncurrent assets, net
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3,221 | 3,591 | ||||||
Total assets
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$ | 619,727 | $ | 595,528 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY
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||||||||
Current liabilities:
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||||||||
Accounts payable
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$ | 97,512 | $ | 81,002 | ||||
Current portion of indebtedness
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360 | 201 | ||||||
Accrued expenses and other
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43,728 | 45,371 | ||||||
Capital lease obligation
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131 | - | ||||||
Deferred income taxes
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22,245 | 21,142 | ||||||
Total current liabilities
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163,976 | 147,716 | ||||||
Long-term portion of indebtedness
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7,107 | 3,969 | ||||||
Deferred income taxes
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1,702 | 2,069 | ||||||
Other noncurrent liabilities
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17,149 | 17,886 | ||||||
Total liabilities
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189,934 | 171,640 | ||||||
Commitments and Contingencies
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||||||||
Shareholders’ equity:
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||||||||
Preferred stock, nonvoting, no par value, 10,000,000 shares authorized, none outstanding
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- | - | ||||||
Preferred stock, Series A junior participating nonvoting, no par value, 224,594 shares authorized, none outstanding
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- | - | ||||||
Common stock, Class A voting, no par value, 60,000,000 shares authorized, 39,309,107 and 39,363,462 shares issued and outstanding, respectively
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126,608 | 131,367 | ||||||
Common stock, Class B nonvoting, no par value, 11,500,000 shares authorized, none outstanding
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- | - | ||||||
Retained earnings
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302,313 | 291,649 | ||||||
Accumulated other comprehensive income
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872 | 872 | ||||||
Total shareholders’ equity
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429,793 | 423,888 | ||||||
Total liabilities and shareholders’ equity
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$ | 619,727 | $ | 595,528 |
Thirteen Weeks Ended
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Twenty-Six Weeks Ended
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|||||||||||||||
July 30,
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July 31,
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July 30,
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July 31,
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|||||||||||||
2011
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2010
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2011
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2010
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|||||||||||||
Net sales
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$ | 452,690 | $ | 449,467 | $ | 937,089 | $ | 921,114 | ||||||||
Cost of goods sold
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325,759 | 323,531 | 672,216 | 658,229 | ||||||||||||
Gross profit
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126,931 | 125,936 | 264,873 | 262,885 | ||||||||||||
Depreciation and amortization
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8,076 | 7,227 | 15,849 | 14,190 | ||||||||||||
Selling, general and administrative expenses
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110,587 | 110,473 | 225,633 | 227,277 | ||||||||||||
Operating income
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8,268 | 8,236 | 23,391 | 21,418 | ||||||||||||
Interest income
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(58 | ) | (60 | ) | (115 | ) | (120 | ) | ||||||||
Interest expense
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151 | 117 | 278 | 227 | ||||||||||||
Income before income taxes
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8,175 | 8,179 | 23,228 | 21,311 | ||||||||||||
Provision for income taxes
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3,089 | 3,221 | 8,628 | 8,162 | ||||||||||||
Net income
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$ | 5,086 | $ | 4,958 | $ | 14,600 | $ | 13,149 | ||||||||
Net income per share
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||||||||||||||||
Basic
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$ | 0.13 | $ | 0.13 | $ | 0.37 | $ | 0.34 | ||||||||
Diluted
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$ | 0.13 | $ | 0.13 | $ | 0.37 | $ | 0.34 | ||||||||
Weighted average shares outstanding
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||||||||||||||||
Basic
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39,134 | 39,179 | 39,118 | 39,164 | ||||||||||||
Effect of dilutive stock options
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113 | 61 | 104 | 53 | ||||||||||||
Diluted
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39,247 | 39,240 | 39,222 | 39,217 | ||||||||||||
Dividends per common share
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$ | 0.05 | $ | 0.04 | $ | 0.10 | $ | 0.08 | ||||||||
Comprehensive income:
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||||||||||||||||
Net income
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$ | 5,086 | $ | 4,958 | $ | 14,600 | $ | 13,149 | ||||||||
Other comprehensive income (expense), net of tax postretirement plan adjustment
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- | - | - | - | ||||||||||||
Comprehensive income
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$ | 5,086 | $ | 4,958 | $ | 14,600 | $ | 13,149 |
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Twenty-Six Weeks Ended
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|||||||
July 30, 2011
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July 31, 2010
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|||||||
Cash flows from operating activities:
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||||||||
Net income
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$ | 14,600 | $ | 13,149 | ||||
Adjustments to reconcile net income to net cash flows from operating activities:
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||||||||
Depreciation and amortization
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15,903 | 14,190 | ||||||
Net loss on asset disposition
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253 | 258 | ||||||
Provision for store closures and asset impairment
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185 | - | ||||||
Stock-based compensation
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897 | 896 | ||||||
Provision for uncollectible receivables
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35 | 212 | ||||||
LIFO reserve increase
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1,092 | 944 | ||||||
Deferred income tax expense (benefit)
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627 | (833 | ) | |||||
Income tax benefit upon exercise of stock options
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15 | 6 | ||||||
(Increase) decrease in operating assets:
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||||||||
Trade and non-trade receivables
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(266 | ) | (3,913 | ) | ||||
Insurance receivables
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26 | 13 | ||||||
Inventories
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(13,331 | ) | (21,722 | ) | ||||
Other assets
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2,388 | 545 | ||||||
Increase (decrease) in operating liabilities:
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||||||||
Accounts payable and accrued expenses
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15,011 | 6,833 | ||||||
Income taxes payable
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708 | 5,507 | ||||||
Other noncurrent liabilities
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(806 | ) | (13 | ) | ||||
Net cash provided by operating activities
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37,337 | 16,072 | ||||||
Cash flows from investing activities:
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||||||||
Capital expenditures
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(27,372 | ) | (13,245 | ) | ||||
Proceeds from asset dispositions
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17 | 140 | ||||||
Insurance recoveries for replacement assets
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- | 47 | ||||||
Asset acquisition, net (primarily intangibles)
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(2,559 | ) | (4,405 | ) | ||||
Net cash used in investing activities
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(29,914 | ) | (17,463 | ) | ||||
Cash flows from financing activities:
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||||||||
Payments of indebtedness and capital lease obligations
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(213 | ) | (609 | ) | ||||
Excess tax charges from stock-based compensation
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(15 | ) | (6 | ) | ||||
Proceeds from exercise of stock options and employee stock purchase plan
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211 | 257 | ||||||
Repurchase of shares
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(5,852 | ) | (2,977 | ) | ||||
Cash dividends paid
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(3,936 | ) | (3,144 | ) | ||||
Net cash used in financing activities
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(9,805 | ) | (6,479 | ) | ||||
Increase in cash and cash equivalents
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(2,382 | ) | (7,870 | ) | ||||
Cash and cash equivalents:
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||||||||
Beginning of year
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49,181 | 54,742 | ||||||
End of year
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$ | 46,799 | $ | 46,872 | ||||
Supplemental disclosures of cash flow information:
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||||||||
Interest paid
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$ | 163 | $ | 57 | ||||
Income taxes paid
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$ | 7,210 | $ | 2,419 | ||||
Non-cash investing and financial activities:
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||||||||
Assets acquired through term loan
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$ | 3,497 | $ | - | ||||
Assets acquired through capital lease
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$ | 135 | $ | - |
Thirteen Weeks Ended
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Twenty-Six Weeks Ended
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|||||||||||||||
July 30, | ||||||||||||||||
July 30, 2011
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July 31, 2010
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2011
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July 31, 2010
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Stock option expense
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$ | 82 | $ | 152 | $ | 251 | $ | 323 | ||||||||
Restricted stock expense
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330 | 333 | 559 | 503 | ||||||||||||
ESPP expense
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43 | 35 | 87 | 70 | ||||||||||||
Total stock-based compensation
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$ | 455 | $ | 520 | $ | 897 | $ | 896 | ||||||||
Income tax benefit on stock-based compensation
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$ | 134 | $ | 139 | $ | 231 | $ | 235 |
Thirteen Weeks Ended
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Twenty-Six Weeks Ended
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|||||||||||||||
July 30, 2011
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July 31, 2010
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July 30, 2011
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July 31, 2010
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Stock Options
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||||||||||||||||
Expected volatility
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40.5 | % | 41.7 | % | 41.7 | % | 42.0 | % | ||||||||
Risk-free interest rate
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2.5 | % | 3.1 | % | 2.1 | % | 3.1 | % | ||||||||
Expected option life (in years)
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5.84 | 5.84 | 4.67 | 5.84 | ||||||||||||
Expected dividend yield
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0.86 | % | 0.61 | % | 0.93 | % | 0.63 | % | ||||||||
Weighted average fair value at grant date
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$ | 5.29 | $ | 4.84 | $ | 4.60 | $ | 4.86 | ||||||||
Employee Stock Purchase Plan
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||||||||||||||||
Expected volatility
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21.8 | % | 31.5 | % | 21.5 | % | 31.9 | % | ||||||||
Risk-free interest rate
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0.3 | % | 0.6 | % | 0.3 | % | 0.6 | % | ||||||||
Expected option life (in years)
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0.50 | 0.50 | 0.38 | 0.38 | ||||||||||||
Expected dividend yield
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0.68 | % | 0.46 | % | 0.51 | % | 0.35 | % | ||||||||
Weighted average fair value at grant date
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$ | 2.94 | $ | 2.43 | $ | 2.81 | $ | 2.31 |
Weighted Average
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Aggregate
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|||||||||||||||
Weighted
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Remaining
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Intrinsic
|
||||||||||||||
Average
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Contractual Life
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Value
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||||||||||||||
Options
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Exercise Price
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(Years)
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(Thousands)
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|||||||||||||
Outstanding at January 29, 2011
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918,462 | $ | 12.15 | 3.2 | $ | 1,524 | ||||||||||
Granted
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58,817 | $ | 13.21 | |||||||||||||
Forfeited / Cancelled
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(61,983 | ) | $ | 14.34 | ||||||||||||
Exercised
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(10,217 | ) | $ | 10.33 | ||||||||||||
Outstanding at July 30, 2011
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905,079 | $ | 12.08 | 2.9 | $ | 1,463 | ||||||||||
Exercisable at July 30, 2011
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597,905 | $ | 12.51 | 2.1 | $ | 780 |
Weighted Average
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||||||||
Grant Date Fair
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||||||||
Number of Shares
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Value
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|||||||
Non-vested Restricted Stock at January 29, 2011
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472,927 | $ | 12.55 | |||||
Granted
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155,676 | $ | 13.69 | |||||
Forfeited / Cancelled
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(44,782 | ) | $ | 12.99 | ||||
Vested
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(40,051 | ) | $ | 14.16 | ||||
Non-vested Restricted Stock at July 30, 2011
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543,770 | $ | 12.72 |
July 30, 2011
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January 29, 2011
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|||||||
Property and equipment, at cost:
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||||||||
Buildings and building improvements
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$ | 110,616 | $ | 96,923 | ||||
Leasehold improvements
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66,302 | 62,504 | ||||||
Automobiles and vehicles
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5,312 | 5,198 | ||||||
Airplane
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4,697 | 4,697 | ||||||
Furniture, fixtures and equipment
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241,551 | 234,710 | ||||||
428,478 | 404,032 | |||||||
Less: Accumulated depreciation and amortization
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(279,429 | ) | (271,129 | ) | ||||
149,049 | 132,903 | |||||||
Construction in progress
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751 | 198 | ||||||
Land
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7,857 | 6,830 | ||||||
Total Property and equipment, at depreciated cost
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$ | 157,657 | $ | 139,931 |
Balance at
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Ending Balance
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|||||||||||||||
January 29, 2011
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Additions
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Utilization
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July 30, 2011
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|||||||||||||
Lease contract termination liability
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$ | 0.7 | $ | - | $ | 0.3 | $ | 0.4 |
Twenty-Six Weeks Ended
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Year Ended
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|||||||||||
(in thousands)
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July 30, 2011
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July 31, 2010
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January 29, 2011
|
|||||||||
Accumulated other comprehensive income
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$ | 872 | $ | 904 | $ | 872 | ||||||
Amortization of postretirement benefit
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- | - | - | |||||||||
Ending balance
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$ | 872 | $ | 904 | $ | 872 |
Thirteen Weeks Ended
|
||||||||
July 30, 2011
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July 31, 2010
|
|||||||
Pharmaceuticals
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34.7 | % | 33.6 | % | ||||
Household Goods
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23.4 | % | 23.9 | % | ||||
Food and Tobacco
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17.0 | % | 17.0 | % | ||||
Paper and Cleaning Supplies
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8.9 | % | 8.6 | % | ||||
Apparel and Linens
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6.7 | % | 7.2 | % | ||||
Health and Beauty Aids
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7.4 | % | 7.7 | % | ||||
Franchise
|
1.9 | % | 2.0 | % | ||||
100.0 | % | 100.0 | % |
Twenty-Six Weeks Ended
|
||||||||
July 30, 2011
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July 31, 2010
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|||||||
Pharmaceuticals
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34.2 | % | 33.8 | % | ||||
Household Goods
|
24.0 | % | 24.0 | % | ||||
Food and Tobacco
|
16.7 | % | 16.7 | % | ||||
Paper and Cleaning Supplies
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8.7 | % | 8.6 | % | ||||
Apparel and Linens
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7.1 | % | 7.5 | % | ||||
Health and Beauty Aids
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7.4 | % | 7.4 | % | ||||
Franchise
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1.9 | % | 2.0 | % | ||||
100.0 | % | 100.0 | % |
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·
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Economic and weather conditions which affect buying patterns of our customers and supply chain efficiency.
|
|
·
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Changes in consumer spending and our ability to anticipate buying patterns and implement appropriate inventory strategies.
|
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·
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Continued availability of capital and financing.
|
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·
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Competitive factors.
|
|
·
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Unemployment.
|
|
·
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Changes in reimbursement practices for pharmaceuticals.
|
|
·
|
Governmental regulation.
|
|
·
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Increases in fuel and utility rates.
|
|
·
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Potential adverse results in the litigation described under Legal Proceedings on page 18.
|
|
·
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Other factors affecting business beyond our control, including (but not limited to) those discussed under Part 1, ITEM 1A “Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2011.
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Total Number Of
Shares Purchased
|
Average Price
Paid Per Share
|
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Program
|
Maximum Number of
Shares That May Yet
Be Purchased Under
the Plans or Program
|
|||||||||||||
Balance at January 29, 2011
|
2,537.8 | |||||||||||||||
January 30 - February 26, 2011
|
- | $ | - | - | 2,537.8 | |||||||||||
February 27 - April 2, 2011
|
2.0 | $ | 12.50 | 2.0 | 2,535.8 | |||||||||||
April 3, - April 30, 2011
|
- | $ | - | - | 2,535.8 | |||||||||||
May 1, - May 28, 2011
|
- | $ | - | - | 2,535.8 | |||||||||||
May 29, - July 2, 2011
|
256.5 | $ | 13.99 | 256.5 | 2,279.3 | |||||||||||
July 3, - July 30, 2011
|
161.5 | $ | 13.86 | 161.5 | 2,117.8 |
31.1
|
Certification of Chief Executive Officer.
|
31.2
|
Certification of Chief Financial Officer.
|
32
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to rule 13a–14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
|
FRED'S, INC.
|
||
Date: September 8, 2011
|
/s/ Bruce A. Efird
|
|
Bruce A. Efird
|
||
Chief Executive Officer and President
|
||
Date: September 8, 2011
|
/s/ Jerry A. Shore
|
|
Jerry A. Shore
|
||
Executive Vice President and
|
||
Chief Financial Officer
|
|
1.
|
I have reviewed this quarterly report on Form 10-Q of Fred's, Inc.;
|
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
|
4.
|
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
|
a)
|
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
|
b)
|
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
|
c)
|
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
|
d)
|
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
|
5.
|
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:
|
|
a)
|
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
|
|
b)
|
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
|
Date: September 8, 2011
|
/s/ Bruce A. Efird
|
Bruce A. Efird
|
|
Chief Executive Officer and President
|
|
1.
|
I have reviewed this quarterly report on Form 10-Q of Fred's, Inc.
|
|
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
|
4.
|
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
|
a)
|
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
|
b)
|
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
|
c)
|
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
|
d)
|
Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
|
5.
|
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:
|
|
a)
|
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
|
|
b)
|
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
|
Date: September 8, 2011
|
/s/ Jerry A. Shore
|
Jerry A. Shore
|
|
Executive Vice President and
|
|
Chief Financial Officer
|
Date: September 8, 2011
|
/s/ Bruce A. Efird
|
Bruce A. Efird
|
|
Chief Executive Officer and President
|
|
/s/ Jerry A. Shore
|
|
Jerry A Shore
|
|
Executive Vice President and Chief Financial
|
|
Officer
|
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Thousands, except Share data |
Jul. 30, 2011
|
Jan. 29, 2011
|
---|---|---|
Receivables, allowance for doubtful accounts | $ 1,253 | $ 1,218 |
Equipment under capital leases, accumulated amortization | $ 5,025 | $ 4,967 |
Preferred stock, nonvoting
|
 |  |
Preferred stock, par value | $ 0 | $ 0 |
Preferred stock, shares authorized | 10,000,000 | 10,000,000 |
Preferred stock, outstanding | 0 | 0 |
Preferred stock, Series A junior participating nonvoting
|
 |  |
Preferred stock, par value | $ 0 | $ 0 |
Preferred stock, shares authorized | 224,594 | 224,594 |
Preferred stock, outstanding | 0 | 0 |
Common stock, Class A voting
|
 |  |
Common stock, par value | $ 0 | $ 0 |
Common stock, shares authorized | 60,000,000 | 60,000,000 |
Common stock, shares issued | 39,309,107 | 39,363,462 |
Common stock, shares outstanding | 39,309,107 | 39,363,462 |
Common stock, Class B nonvoting
|
 |  |
Common stock, par value | $ 0 | $ 0 |
Common stock, shares authorized | 11,500,000 | 11,500,000 |
Common stock, shares outstanding | 0 | 0 |
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (USD $)
In Thousands, except Per Share data |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jul. 30, 2011
|
Jul. 31, 2010
|
Jul. 30, 2011
|
Jul. 31, 2010
|
|
Net sales | $ 452,690 | $ 449,467 | $ 937,089 | $ 921,114 |
Cost of goods sold | 325,759 | 323,531 | 672,216 | 658,229 |
Gross profit | 126,931 | 125,936 | 264,873 | 262,885 |
Depreciation and amortization | 8,076 | 7,227 | 15,849 | 14,190 |
Selling, general and administrative expenses | 110,587 | 110,473 | 225,633 | 227,277 |
Operating income | 8,268 | 8,236 | 23,391 | 21,418 |
Interest income | (58) | (60) | (115) | (120) |
Interest expense | 151 | 117 | 278 | 227 |
Income before income taxes | 8,175 | 8,179 | 23,228 | 21,311 |
Provision for income taxes | 3,089 | 3,221 | 8,628 | 8,162 |
Net income | 5,086 | 4,958 | 14,600 | 13,149 |
Net income per share | Â | Â | Â | Â |
Basic | $ 0.13 | $ 0.13 | $ 0.37 | $ 0.34 |
Diluted | $ 0.13 | $ 0.13 | $ 0.37 | $ 0.34 |
Weighted average shares outstanding | Â | Â | Â | Â |
Basic | 39,134 | 39,179 | 39,118 | 39,164 |
Effect of dilutive stock options | 113 | 61 | 104 | 53 |
Diluted | 39,247 | 39,240 | 39,222 | 39,217 |
Dividends per common share | $ 0.05 | $ 0.04 | $ 0.10 | $ 0.08 |
Comprehensive income: | Â | Â | Â | Â |
Net income | 5,086 | 4,958 | 14,600 | 13,149 |
Other comprehensive income (expense), net of tax postretirement plan adjustment | ||||
Comprehensive income | $ 5,086 | $ 4,958 | $ 14,600 | $ 13,149 |
Document and Entity Information
|
6 Months Ended | |
---|---|---|
Jul. 30, 2011
|
Sep. 01, 2011
|
|
Document Type | 10-Q | Â |
Amendment Flag | false | Â |
Document Period End Date | Jul. 30, 2011 | |
Document Fiscal Year Focus | 2011 | Â |
Document Fiscal Period Focus | Q2 | Â |
Trading Symbol | FRED | Â |
Entity Registrant Name | FREDS INC | Â |
Entity Central Index Key | 0000724571 | Â |
Current Fiscal Year End Date | --01-28 | Â |
Entity Filer Category | Accelerated Filer | Â |
Entity Common Stock, Shares Outstanding | Â | 38,543,422 |
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RELATED PARTY TRANSACTIONS
|
6 Months Ended |
---|---|
Jul. 30, 2011
|
|
RELATED PARTY TRANSACTIONS | NOTE
7: RELATED PARTY TRANSACTIONS
Atlantic
Retail Investors, LLC, which is partially owned by Michael J.
Hayes, a director of the Company, owned the land and buildings
occupied by twelve Fred’s stores, until March 2011 when, as
described below, a portion of these properties were purchased by
the Company. The terms and conditions regarding the
leases on these locations were consistent in all material respects
with other stores leases of the Company with unrelated
landlords.
In
February 2011, Atlantic Retail Investors, LLC, purchased the land
and building occupied by one of Fred’s stores, bringing the
total related party leases to thirteen. The store was purchased by
Atlantic Retail Investors, LLC, from an independent
landlord/developer. On March 30, 2011, Fred’s purchased
ten of the thirteen properties leased from Atlantic Retail
Investors, LLC, one of which has an additional parcel that is
leased to an unrelated party, for $7.5 million in cash and assumed
mortgage debt of $3.5 million. The Board of Directors approved
these transactions based on an evaluation by an independent real
estate broker, who concluded that all were acquired at comparable,
and favorable, purchase prices to market value and were financially
beneficial to Fred’s as the depreciation expense for the
newly acquired assets will be less than the future value of the
lease payments that would have been due.
In
May 2011, Atlantic Retail Investors, LLC, purchased land and
buildings occupied by four Fred’s stores, bringing the number
of locations leased from Atlantic Retail Investors, LLC to
seven. These stores were purchased by Atlantic Retail
Investors, LLC, from a lender who had foreclosed on the independent
landlord/developer. The terms and conditions regarding the leases
on these locations are consistent in all material respects with the
Company’s other store leases.
In
June 2011, Fred’s purchased four of the seven leased
properties from Atlantic Retail Investors, LLC together with an
additional parcel at an existing owned location, for a total
consideration of $2.4 million in cash. No mortgage debt was assumed
in this transaction. The Board of Directors approved these
transactions based on the financial terms that were more favorable
to market value and financially beneficial to Fred’s as a
result of the depreciation expense on the newly acquired assets
being less than the future value of lease payments that would have
been due.
As
of July 30, 2011, Fred’s is leasing three properties from
Atlantic Retail Investors, LLC. The total rental
payments related to related party leases were $276.3 thousand
and $639.7 thousand for the twenty-six weeks ended July 30, 2011
and July 31, 2010, respectively.
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STOCK-BASED COMPENSATION
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Jul. 30, 2011
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STOCK-BASED COMPENSATION | NOTE
3: STOCK-BASED COMPENSATION
The
Company accounts for its stock-based compensation plans in
accordance with FASB ASC 718 “Compensation – Stock
Compensation”. Under FASB ASC 718, stock-based
compensation expense is based on awards ultimately expected to
vest, and therefore has been reduced for estimated
forfeitures. Forfeitures are estimated at the time of
grant based on the Company’s historical forfeiture experience
and will be revised in subsequent periods if actual forfeitures
differ from those estimates.
FASB
ASC 718 also requires the benefits of income tax deductions in
excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as
required prior to FASB ASC 718. A summary of the
Company’s stock-based compensation (a component of selling
and general and administrative expenses) and related income tax
benefit is as follows (in
thousands):
The
fair value of each option granted during the thirteen and
twenty-six week periods ended July 30, 2011 and July 31, 2010,
respectively, are estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted
average assumptions:
The
following is a summary of the methodology applied to develop each
assumption:
Expected Volatility - This is a measure of the amount by
which a price has fluctuated or is expected to fluctuate. The
Company uses actual historical changes in the market value of our
stock to calculate expected price volatility because management
believes that this is the best indicator of future volatility. The
Company calculates weekly market value changes from the date of
grant over a past period representative of the expected life of the
options to determine volatility. An increase in the expected
volatility will increase compensation expense.
Risk-free Interest Rate - This is the yield of a U.S.
Treasury zero-coupon bond issue effective at the grant date with a
remaining term equal to the expected life of the option. An
increase in the risk-free interest rate will increase compensation
expense.
Expected Lives - This is the period of time over which the
options granted are expected to remain outstanding and is based on
historical experience. Options granted have a maximum term of seven
and one-half years. An increase in the expected life will increase
compensation expense.
Dividend Yield – This is based on the historical yield
for a period equivalent to the expected life of the
option. An increase in the dividend yield will decrease
compensation expense.
Forfeiture Rate - This is the estimated percentage of
options granted that are expected to be forfeited or cancelled
before becoming fully vested. This estimate is based on historical
experience. An increase in the forfeiture rate will decrease
compensation expense.
Employee Stock Purchase Plan
The
2004 Employee Stock Purchase Plan (the “2004 Plan”),
which was approved by Fred’s stockholders, permits eligible
employees to purchase shares of our common stock through payroll
deductions at the lower of 85% of the fair market value of the
stock at the time of grant or 85% of the fair market value at the
time of exercise. There were 24,026 shares issued during
the twenty-six weeks ended July 30, 2011. There are
1,410,928 shares approved to be issued under the 2004 Plan and as
of July 30, 2011, there were 1,002,807 shares
available.
Stock Options
The
following table summarizes stock option activity during the
twenty-six weeks ended July 30, 2011:
The
aggregate intrinsic value in the table above represents the total
pre-tax intrinsic value (the difference between Fred’s
closing stock price on the last trading day of the period ended
July 30, 2011 and the exercise price of the option multiplied by
the number of in-the-money options) that would have been received
by the option holders had all option holders exercised their
options on that date. As of July 30, 2011, total
unrecognized stock-based compensation expense net of estimated
forfeitures related to non-vested stock options was approximately
$543.4 thousand, which is expected to be recognized over a weighted
average period of approximately 3.05 years. The total
fair value of options vested during the twenty-six weeks ended July
30, 2011 was $373.1 thousand.
Restricted Stock
The
following table summarizes restricted stock activity during the
twenty-six weeks ended July 30, 2011:
The
aggregate pre-tax intrinsic value of restricted stock outstanding
as of July 30, 2011 is $7.3 million with a weighted average
remaining contractual life of 4.3 years. The
unrecognized compensation expense net of estimated forfeitures,
related to the outstanding stock is approximately $3.94 million,
which is expected to be recognized over a weighted average period
of approximately 7.0 years. The total fair value of
restricted stock awards that vested during the twenty-six weeks
ended July 30, 2011 was $575.4 thousand.
|
BASIS OF PRESENTATION
|
6 Months Ended |
---|---|
Jul. 30, 2011
|
|
BASIS OF PRESENTATION | NOTE
1: BASIS OF PRESENTATION
Fred's,
Inc. and subsidiaries (“We”, “Our”,
“Us” or “Company”) operates, as of July 30,
2011, 674 discount general merchandise stores, including 22
franchised Fred's stores, in 15 states in the southeastern United
States. 310 of the stores have full service
pharmacies.
The
accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with U.S. generally accepted
accounting principles (“GAAP”) for interim financial
information and are presented in accordance with the requirements
of Form 10-Q and therefore do not include all information and notes
necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with GAAP. The
statements reflect all adjustments (consisting of only normal
recurring accruals) which are, in the opinion of management,
necessary for a fair presentation of financial position in
conformity with GAAP. The statements should be read in
conjunction with the Notes to the Consolidated Financial Statements
for the fiscal year ended January 29, 2011 incorporated into Our
Annual Report on Form 10-K.
The
results of operations for the thirteen week and twenty-six week
periods ended July 30, 2011 are not necessarily indicative of the
results to be expected for the full fiscal year.
|
PROPERTY AND EQUIPMENT
|
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Jul. 30, 2011
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PROPERTY AND EQUIPMENT | NOTE
4: PROPERTY AND EQUIPMENT
Property
and Equipment are carried at cost. Depreciation is
recorded using the straight-line method over the estimated useful
lives of the assets. Improvements to leased premises are
amortized using the straight-line method over the shorter of the
initial term of the lease or the useful life of the
improvement. Leasehold improvements added late in the
lease term are amortized over the shorter of the remaining term of
the lease (including the upcoming renewal option, if the renewal is
reasonably assured) or the useful life of the
improvement. Assets under capital leases are amortized
in accordance with the Company’s normal depreciation policy
for owned assets or over the lease term (regardless of renewal
options), if shorter, and the charge to earnings is included in
depreciation expense in the consolidated financial
statements. Gains or losses on the sale of assets are
recorded as a component of operating income.
The
following illustrates the breakdown of the major categories within
Property and Equipment (in thousands):
|
EXIT AND DISPOSAL ACTIVITIES
|
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jul. 30, 2011
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EXIT AND DISPOSAL ACTIVITIES | NOTE
5: EXIT AND DISPOSAL ACTIVITIES
Lease Termination
A
lease obligation still exists for some store closures that occurred
in 2008. We record the estimated future liability
associated with the rental obligation on the cease use date (when
the stores were closed). The lease obligations are
established at the cease use date for the present value of any
remaining operating lease obligations, net of estimated sublease
income, and at the communication date for severance and other exit
costs, as prescribed by FASB ASC 420, “Exit or Disposal Cost
Obligations”. Key assumptions in calculating the liability
include the timeframe expected to terminate lease agreements,
estimates related to the sublease potential of closed locations,
and estimates of other related exit costs. If actual timing and
potential termination costs or realization of sublease income
differ from our estimates, the resulting liabilities could vary
from recorded amounts. These liabilities are reviewed periodically
and adjusted when necessary.
During
the first half of fiscal 2011, we utilized $0.3 million of the
remaining lease liability for 2008 store closures, leaving $0.4
million in the reserve at July 30, 2011.
The
following table illustrates the exit and disposal activity related
to the store closures discussed in the previous paragraph (in
millions):
|
ACCUMULATED OTHER COMPREHENSIVE INCOME
|
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jul. 30, 2011
|
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ACCUMULATED OTHER COMPREHENSIVE INCOME | NOTE
6: ACCUMULATED OTHER COMPREHENSIVE INCOME
Comprehensive
income consists of two components, net income and other
comprehensive income (loss). Other comprehensive income
(loss) refers to gains and losses that under GAAP are recorded as
an element of shareholders’ equity but are excluded from net
income. The Company’s accumulated other
comprehensive income includes the unrecognized prior service costs,
transition obligations and actuarial gains/losses associated with
our postretirement benefit plan.
The
following table illustrates the activity in accumulated other
comprehensive income:
|
INVENTORIES
|
6 Months Ended |
---|---|
Jul. 30, 2011
|
|
INVENTORIES | NOTE
2: INVENTORIES
Merchandise
inventories are valued at the lower of cost or market using the
retail first-in, first-out (FIFO) method for goods in our
stores and the cost first-in, first-out (FIFO) method for goods in
our distribution centers. The retail inventory method is a reverse
mark-up, averaging method which has been widely used in the retail
industry for many years. This method calculates a cost-to-retail
ratio that is applied to the retail value of inventory to determine
the cost value of inventory and the resulting cost of goods sold
and gross margin. The assumption that the retail inventory method
provides for valuation at lower of cost or market and the inherent
uncertainties therein are discussed in the following paragraphs. In
order to assure valuation at the lower of cost or market, the
retail value of our inventory is adjusted on a consistent basis to
reflect current market conditions. These adjustments include
increases to the retail value of inventory for initial markups to
set the selling price of goods or additional markups to adjust
pricing for inflation and decreases to the retail value of
inventory for markdowns associated with promotional, seasonal or
other declines in the market value. Because these adjustments are
made on a consistent basis and are based on current prevailing
market conditions, they approximate the carrying value of the
inventory at net realizable value (market value). Therefore, after
applying the cost to retail ratio, the cost value of our inventory
is stated at the lower of cost or market as is prescribed by U.S.
GAAP.
Because
the approximation of net realizable value (market value) under the
retail inventory method is based on estimates such as markups,
markdowns and inventory losses (shrink), there exists an inherent
uncertainty in the final determination of inventory cost and gross
margin. In order to mitigate that uncertainty, the Company has a
formal review by product class which considers such variables as
current market trends, seasonality, weather patterns and age of
merchandise to ensure that markdowns are taken currently, or a
markdown reserve is established to cover future anticipated
markdowns. This review also considers current pricing trends and
inflation to ensure that markups are taken if necessary. The
estimation of inventory losses (shrink) is a significant element in
approximating the carrying value of inventory at net realizable
value, and as such the following paragraph describes our estimation
method as well as the steps we take to mitigate the risk of this
estimate in the determination of the cost value of
inventory.
The
Company calculates inventory losses (shrink) based on actual
inventory losses occurring as a result of physical inventory counts
during each fiscal period and estimated inventory losses occurring
between yearly physical inventory counts. The estimate for shrink
occurring in the interim period between physical counts is
calculated on a store-specific basis and is based on history, as
well as performance on the most recent physical count. It is
calculated by multiplying each store’s shrink rate, which is
based on the previously mentioned factors, by the interim
period’s sales for each store. Additionally, the overall
estimate for shrink is adjusted at the corporate level to a
three-year historical average to ensure that the overall shrink
estimate is the most accurate approximation of shrink based on the
Company’s overall history of shrink. The three-year
historical estimate is calculated by dividing the “book to
physical” inventory adjustments for the trailing
36 months by the related sales for the same period. In order
to reduce the uncertainty inherent in the shrink calculation, the
Company first performs the calculation at the lowest practical
level (by store) using the most current performance indicators.
This ensures a more reliable number, as opposed to using a higher
level aggregation or percentage method. The second portion of the
calculation ensures that the extreme negative or positive
performance of any particular store or group of stores does not
skew the overall estimation of shrink. This portion of the
calculation removes additional uncertainty by eliminating
short-term peaks and valleys that could otherwise cause the
underlying carrying cost of inventory to fluctuate unnecessarily.
Management believes that the Company’s retail inventory
method provides an inventory valuation which reasonably
approximates cost and results in carrying inventory at the lower of
cost or market.
For
pharmacy inventories, which were approximately $34.2 million
and $32.5 million at July 30, 2011 and January 29, 2011,
respectively, cost was determined using the retail LIFO (last-in,
first-out) method in which inventory cost is maintained using the
retail inventory method, then adjusted by application of the
Producer Price Index published by the U.S. Department of Labor for
the cumulative annual periods. The current cost of inventories
exceeded the LIFO cost by approximately $25.1 million at July
30, 2011 and $24.0 million at January 29, 2011.
The
Company has historically included an estimate of inbound freight
and certain general and administrative costs in merchandise
inventory as prescribed by GAAP. These costs include
activities surrounding the procurement and storage of merchandise
inventory such as merchandise planning and buying, warehousing,
accounting, information technology and human resources, as well as
inbound freight. The total amount of procurement and
storage costs and inbound freight included in merchandise inventory
at July 30, 2011 is $20.8 million, with the corresponding
amount of $19.5 million at January 29, 2011.
|