UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_____________
FORM 8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date
of Report (Date of earliest event reported): December 6, 2017 (December
6, 2017)
FRED'S,
INC.
(Exact
Name of Registrant as Specified in Charter)
Commission
File Number 001-14565
|
Tennessee |
62-0634010 |
|
(State or Other Jurisdiction of Incorporation) |
(I.R.S. Employer Identification No.) |
|
4300 New Getwell Road, Memphis, Tennessee 38118 |
|
(Address of principal executive offices) |
(901) 365-8880
Registrant’s
telephone number, including area code
Not
Applicable
(Former
Name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
⃞ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
⃞ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
⃞ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
⃞ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
|
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter). ⃞
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financing accounting standards provided pursuant to Section 13(a) of the Exchange Act. ⃞ |
ITEM 2.02. RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
On December 6, 2017, Fred’s, Inc. (the “Company”) issued a press release announcing the Company’s financial results for the quarter ended October 28, 2017. The full text of the press release is furnished as Exhibit 99.1 and is incorporated herein by reference.
The information in this Current Report on Form 8-K (including Exhibit 99.1) is being furnished pursuant to Item 2.02 of Form 8-K and shall not be deemed to be “filed” for any purpose, including for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or otherwise subject to the liabilities of that section, nor shall it be deemed to be incorporated by reference into any previous or future filings by the Company under the Exchange Act or the Securities Act of 1933, as amended.
ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.
| (d) | Exhibits. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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FRED'S, INC. |
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(Registrant) |
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Date: |
December 6, 2017 |
By: |
/s/ Jason Jenne |
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Name: |
Jason Jenne |
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Title: |
Executive Vice President, Chief Financial |
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Exhibit 99.1
Fred’s Inc. Reports Third Quarter 2017 Results
Accelerating strategic turnaround; focused on driving traffic, reducing SG&A, generating free cash flow and lowering debt
MEMPHIS, Tenn.--(BUSINESS WIRE)--December 6, 2017--Fred’s Inc. (“Fred’s” or “Company”) (NASDAQ:FRED) today reported financial results for the third quarter and nine months ended October 28, 2017.
For the third quarter ended October 28, 2017, Fred’s recorded a net loss of approximately $51.8 million or $1.38 per share, which included the following charges totaling $45.0 million, or $0.96 per share after tax:
Fred’s third quarter loss compares to a net loss of $38.4 million or $1.05 per share for the third quarter of 2016.
Commenting on today’s results, Michael K. Bloom, Chief Executive Officer, said, “We recognize that our EPS results are below expectations; however, the management team, working closely with the Board of Directors, is taking the actions necessary to ensure Fred’s achieves profitability and growth over the long-term. Our third quarter EPS and EBITDA, excluding non-operating charges, was negatively impacted by a more aggressive inventory reduction and timing of shipments for higher margin seasonal merchandise, which led to inventory levels nearly $50 million below the prior year, as well as investments in our overall pricing strategy to ensure we remain competitive in the market. While these initiatives impacted our gross margins, our cash flow plan remains on track as we streamline our business for the benefit of the Company’s long-term success.”
Mr. Bloom continued, “In the third quarter, we furthered our efforts to turn around the Company, and we are encouraged by our positive front store comp sales in both October and November. We are focused on driving traffic, reducing SG&A, generating free cash flow and lowering our debt. We are aggressively executing our turnaround strategy to accomplish these goals, and we are seeing traction in both front store and pharmacy. We have witnessed a complete turnaround in our tobacco business, significantly enhanced cosmetics and successfully rolled out beer to approximately 150 stores and wine to approximately 50 stores. We have also kicked off a reduced price endcap test, which is showing promising results, and we intend to roll it out to all stores. We are not yet at the point of presenting positive quarterly comp sales and traffic improvement; however, we are improving month-by-month as our initiatives are yielding results. We recognize that there is more work to be done, but we are encouraged by the traction our initiatives are gaining and look forward to capitalizing on that momentum in the coming quarters.”
Third Quarter 2017
Net sales for the third quarter were $493.6 million, down 4.5% from $516.6 million in the same period last year mainly driven by the closure or 39 underperforming stores earlier in 2017. Comparable store sales for the third quarter declined 0.8% versus a decrease of 3.8% in the third quarter last year. Comparable store sales in the third quarter of 2017 included a negative 36 BPS impact as a result of the sale of low productive discontinued inventory versus the third quarter of 2016.
Gross profit for the third quarter of 2017 decreased to $94.6 million from $111.2 million in the prior-year period, primarily explained by a decrease in sales resulting from the closure of 39 underperforming stores and an increase in the promotional activity to drive traffic and decrease inventory balances. Gross margin for the quarter decreased 230 basis points to 19.2% from 21.5% in the same quarter last year, reflecting the contribution of incremental sales of low margin specialty drugs and tobacco products, and a shift in timing of shipments to our stores of high margin seasonal items.
Fred’s recorded a LIFO reserve increase of $1.5 million in the third quarter of 2017 compared with an increase of $2.1 million in the same quarter last year.
Selling, general and administrative (“SG&A”) expenses for the quarter, including depreciation and amortization, decreased to $144.4 million or 29.3% of sales from $155.3 million or 30.0% of sales in the prior-year quarter. The decrease in expenses was primarily driven by our increased focus on expense controls, the closure of 39 underperforming stores in early 2017, and the change in asset impairments recorded in the third quarter of 2017 versus the third quarter of 2016.
For the third quarter of 2017, operating loss, which is equivalent to earnings before interest and taxes, or EBIT, a non-GAAP financial measure, was a loss of $49.8 million compared with operating loss of $44.1 million in the same quarter last year.
In the third quarter of 2017, EBITDA, a non-GAAP financial measure that further excludes depreciation and amortization from EBIT, was a loss of $38.8 million. Third quarter EBITDA included charges totaling $24.9 million, including:
First Nine Months Ended October 28, 2017
For the first nine months ended October 28, 2017, Fred’s recorded a net loss of approximately $117.8 million or $3.14 per share, which included the following charges totaling $120.0 million, or $2.51 per share after tax:
Fred’s loss for the first nine months ended October 28, 2017 compares to a net loss of $44.1 million or $1.20 per share for the first nine months of 2016.
Net sales for the first nine months were $1.534 billion, down 3.9% from $1.596 billion in the same period last year mainly driven by the closure or 39 underperforming stores earlier in 2017. Comparable store sales for the first nine months declined 0.8% versus a decrease of 1.7% in the first nine months last year. Comparable store sales in the first nine months of 2017 included a negative 87 BPS impact as a result of the sale of low productive discontinued inventory versus the same period in 2016.
Gross profit for the first nine months decreased to $353.5 million from $380.7 million in the prior-year period, primarily explained by a decrease in sales resulting from the closure of 39 underperforming stores and an increase in promotional activity to drive traffic and decrease inventory balances. Gross margin for the first nine months decreased 80 basis points to 23.1% from 23.9% in the same period last year, reflecting the contribution of incremental sales of low margin specialty drugs and tobacco products, and a shift in timing of shipments to our stores of high margin seasonal items.
Fred’s recorded a LIFO reserve increase of $0.3 million in the first nine months of 2017 compared with an increase of $3.2 million in the same period last year.
SG&A expenses, including depreciation and amortization, increased to $465.6 million or 30.4% of sales from $433.2 million or 27.2% of sales in the prior-year period. The increase in expenses was primarily driven by professional, bank and legal advisory fees recorded in 2017 in connection with the proposed acquisition or Rite Aid stores and the development and implementation of the Company's turnaround strategy; offset somewhat by our increased focus on expense controls and the closure of 39 underperforming stores in early 2017.
For the first nine months of 2017, operating loss, which is equivalent to earnings before interest and taxes, or EBIT, a non-GAAP financial measure, was a loss of $112.0 million compared with operating loss of $52.5 million in the same period last year.
In the first nine months of 2017, EBITDA, a non-GAAP financial measure that further excludes depreciation and amortization from EBIT, was a loss of $78.1 million. EBITDA included charges totaling $73.9 million, including:
In a separate press release issued today, the Company announced the cancelation of its dividend, an update to its share repurchase program and a review of alternatives for certain non-core assets. The Board of Directors determined to cancel the quarterly cash dividend in order to retain free cash flow for debt reduction, share repurchases and other general corporate purposes.
Webcast Information
A public, listen-only simulcast and replay of Fred’s third quarter 2017 conference call may be accessed at the Company’s web site. The simulcast will begin at 8:00 a.m. Eastern Time today; a replay of the call will be available beginning two hours after the conclusion of the live call and will remain available through January 4, 2018.
Non-GAAP Financial Measures
The Company's management believes that the disclosure of operating income (EBIT) and EBITDA provides useful information to investors because the measures present an alternative and more relevant method for measuring the Company's results of operations and financial condition, and, when viewed together with the Company's GAAP results and the accompanying reconciliations, provides a more complete understanding of the factors and trends affecting the Company than the GAAP results alone. Additionally, EBITDA is a common alternative measure of financial performance used by investors, financial analysts, and rating agencies. These groups use EBITDA, along with other measures, to estimate the value of a company and to compare the operating performance of a company to others in its industry. A reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measure appears in the financial tables attached to this news release.
About Fred’s Inc.
Tracing its history back to an original store in Coldwater, Mississippi, opened in 1947, today Fred’s, Inc. operates approximately 600 general merchandise and pharmacy stores, including 13 franchised locations, and three specialty pharmacy-only locations. With unique store formats and strategies that combine the best elements of a value-focused retailer with a healthcare-focused drug store, Fred’s stores offer frequently purchased items that address the everyday needs of its customers. This includes nationally recognized brands, proprietary Fred’s label products, and a full range of value-priced selections.
For more information about the Company, visit Fred’s website at www.fredsinc.com.
Forward Looking Statements
Comments in this news release that are not historical facts are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. A reader can identify forward-looking statements because they are not limited to historical facts or they use such words as “outlook,” “guidance,” “may,” “should,” “could,” “believe,” “anticipate,” “plan,” “expect,” “estimate,” “forecast,” “goal,” “intend,” “committed,” “continue,” or “will likely result” and similar expressions that concern the Company’s strategy, plans, intentions or beliefs about future occurrences or results. These risks and uncertainties include, but are not limited to (i) the competitive nature of the industries in which we operate; (ii) the implementation of our strategic plan, and its impact on our sales, costs and operations; (iii) utilizing our existing and new stores and increasing our pharmacy department presence in new and existing stores; (iv) our reliance on a single supplier of pharmaceutical products; (v) our pharmaceutical drug pricing; (vi) reimbursement rates and the terms of our agreements with pharmacy benefit management companies; (vii) our private brands; (viii) the seasonality of our business and the impact of adverse weather conditions; (ix) operational difficulties; (x) merchandise supply and pricing; (xi) consumer demand and product mix; (xii) delayed openings and operating new stores and distribution facilities; (xiii) our employees; (xiv) risks relating to payment processing; (xv) our computer system, and the processes supported by our information technology infrastructure; (xvi) our ability to protect the personal information of our customers and employees; (xvii) cyber-attacks; (xviii) changes in governmental regulations; (xix) the outcome of legal proceedings, including claims of product liability; (xx) insurance costs; (xxi) tax assessments and unclaimed property audits; (xxii) current economic conditions; (xxiii) changes in third-party reimbursements; (xxiv) the terms of our existing and future indebtedness; (xxv) our acquisitions and the ability to effectively integrate businesses that we acquire; (xxvi) our ability to pay dividends; and the factors listed under “Risk Factors” in the Company’s most recent Annual Report on Form 10-K and any subsequent quarterly filings on Form 10-Q filed with the Securities and Exchange Commission. Forward-looking statements speak only as of the date made. The Company undertakes no obligation to release revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unforeseen events, except as required to be reported under the rules and regulations of the Securities and Exchange Commission.
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FRED'S, INC. |
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Reconciliation of Unaudited Net Loss to EBITDA |
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A Non-GAAP Financial Measure |
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(In thousands) |
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13 Weeks Ended
October 28, 2017 |
13 Weeks Ended
October 29, 2016 |
39 Weeks Ended
October 28, 2017 |
39 Weeks Ended
October 29, 2016 |
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| Net loss | $ | (51,815 | ) | $ | (38,393 | ) | $ | (117,793 | ) | $ | (44,065 | ) | ||||
| Interest expense | 1,647 | 560 | 4,371 | 1,685 | ||||||||||||
| Income tax provision / (benefit) | 415 | (6,229 | ) | 1,394 | (10,162 | ) | ||||||||||
| Operating loss / EBIT | (49,753 | ) | (44,062 | ) | (112,028 | ) | (52,542 | ) | ||||||||
| Depreciation and amortization | 10,970 | 12,002 | 33,892 | 35,326 | ||||||||||||
| EBITDA | $ | (38,783 | ) | $ | (32,060 | ) | $ | (78,136 | ) | $ | (17,216 | ) | ||||
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FRED'S, INC. |
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Unaudited Financial Highlights |
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(In thousands, except per share amounts) |
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13 Weeks Ended October 28, 2017 |
13 Weeks Ended October 29, 2016 |
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| Net sales | $ | 493,585 | $ | 516,645 | ||||
| Operating loss | (49,753 | ) | (44,062 | ) | ||||
| Net loss | (51,815 | ) | (38,393 | ) | ||||
| Net loss per share, basic and diluted | $ | (1.38 | ) | $ | (1.05 | ) | ||
| Average shares outstanding: | ||||||||
| Basic | 37,626 | 36,810 | ||||||
| Diluted | 37,626 | 36,810 | ||||||
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39 Weeks Ended
October 28, 2017 |
39 Weeks Ended
October 29, 2016 |
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| Net sales | $ | 1,533,742 | $ | 1,595,696 | ||||
| Operating loss | (112,028 | ) | (52,542 | ) | ||||
| Net loss | (117,793 | ) | (44,065 | ) | ||||
| Net loss per share, basic and diluted | $ | (3.14 | ) | $ | (1.20 | ) | ||
| Average shares outstanding: | ||||||||
| Basic | 37,481 | 36,768 | ||||||
| Diluted | 37,481 | 36,768 | ||||||
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FRED'S, INC. |
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Unaudited Fiscal 2017 Third Quarter Results |
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(In thousands, except per share amounts) |
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13 Weeks Ended
October 28, 2017 |
% of
Total |
13 Weeks Ended
October 29, 2016 |
% of
Total |
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| Net sales | $ | 493,585 | 100.0 | % | $ | 516,645 | 100.0 | % | ||||||
| Cost of goods sold | 398,967 | 80.8 | % | 405,439 | 78.5 | % | ||||||||
| Gross profit | 94,618 | 19.2 | % | 111,206 | 21.5 | % | ||||||||
| Depreciation & amortization | 10,970 | 2.2 | % | 12,002 | 2.3 | % | ||||||||
| Selling, general and administrative expenses | 133,401 | 27.1 | % | 143,266 | 27.7 | % | ||||||||
| Operating loss | (49,753 | ) | (10.1 | )% | (44,062 | ) | (8.5 | )% | ||||||
| Interest expense, net | 1,647 | 0.3 | % | 560 | 0.1 | % | ||||||||
| Loss before income taxes | (51,400 | ) | (10.4 | )% | (44,622 | ) | (8.6 | )% | ||||||
| Income tax provision (benefit) | 415 | 0.1 | % | (6,229 | ) | (1.2 | )% | |||||||
| Net loss | $ | (51,815 | ) | (10.5 | )% | $ | (38,393 | ) | (7.4 | )% | ||||
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Net loss per share, basic and diluted |
$ | (1.38 | ) | $ | (1.05 | ) | ||||||||
| Weighted average shares outstanding: | ||||||||||||||
| Basic |
37,626 |
36,810 |
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Diluted |
37,626 |
36,810 |
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39 Weeks Ended October 28, 2017 |
% of
Total |
39 Weeks Ended
October 29, 2016 |
% of
Total |
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| Net sales | $ | 1,533,742 | 100.0 | % | $ | 1,595,696 | 100.0 | % | ||||||
| Cost of goods sold | 1,180,213 | 76.9 | % | 1,215,030 | 76.1 | % | ||||||||
| Gross profit | 353,529 | 23.1 | % | 380,666 | 23.9 | % | ||||||||
| Depreciation & amortization | 33,892 | 2.2 | % | 35,326 | 2.2 | % | ||||||||
| Selling, general and administrative expenses | 431,665 | 28.2 | % | 397,882 | 25.0 | % | ||||||||
| Operating loss | (112,028 | ) | (7.3 | )% | (52,542 | ) | (3.3 | )% | ||||||
| Interest expense, net | 4,371 | 0.3 | % | 1,685 | 0.1 | % | ||||||||
| Loss before income taxes | (116,399 | ) | (7.6 | )% | (54,227 | ) | (3.4 | )% | ||||||
| Income tax provision (benefit) | 1,394 | 0.1 | % | (10,162 | ) | (0.6 | )% | |||||||
| Net loss | $ | (117,793 | ) | (7.7 | )% | $ | (44,065 | ) | (2.8 | )% | ||||
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Net loss per share, basic and diluted |
$ | (3.14 | ) | $ | (1.20 | ) | ||||||||
| Weighted average shares outstanding: | ||||||||||||||
| Basic | 37,481 | 36,768 | ||||||||||||
| Diluted | 37,481 | 36,768 | ||||||||||||
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FRED'S, INC. |
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Unaudited Balance Sheet |
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(In thousands) |
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October 28, 2017 |
October 29, 2016 |
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| ASSETS: | ||||||
| Cash and cash equivalents | $ | 5,113 | $ | 5,692 | ||
| Inventories | 317,220 | 366,575 | ||||
| Receivables | 56,922 | 52,740 | ||||
| Other non-trade receivables | 30,597 | 36,959 | ||||
| Prepaid expenses and other current assets | 10,898 | 12,634 | ||||
| Total current assets | 420,750 | 474,600 | ||||
| Property and equipment, net | 121,324 | 133,360 | ||||
| Goodwill | 41,490 | 41,490 | ||||
| Other intangible assets, net | 69,972 | 90,377 | ||||
| Other non-current assets | 999 | 1,050 | ||||
| Total assets | $ | 654,535 | $ | 740,877 | ||
| LIABILITIES AND SHAREHOLDERS' EQUITY: | ||||||
| Accounts payable | $ | 152,943 | $ | 214,818 | ||
| Current portion of indebtedness | 63 | 59 | ||||
| Accrued expenses and other | 83,897 | 71,071 | ||||
| Total current liabilities | 236,903 | 285,948 | ||||
| Long-term portion of indebtedness | 168,196 | 77,234 | ||||
| Deferred income taxes | 3,261 | - | ||||
| Other non-current liabilities | 27,873 | 21,797 | ||||
| Total liabilities | 436,233 | 384,979 | ||||
| Shareholders' equity | 218,302 | 355,898 | ||||
| Total liabilities and shareholders' equity | $ | 654,535 | $ | 740,877 | ||
CONTACT:
Fred’s Inc.
Jason Jenne, 901-238-2787
Executive
Vice President, Chief Financial Officer and Secretary
or
Joele
Frank, Wilkinson Brimmer Katcher
Ed Trissel / Dan Moore, 212-355-4449