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| FRED > SEC Filings for FRED > Form 10-Q on 11-Jun-2009 | All Recent SEC Filings |
11-Jun-2009
Quarterly Report
• The continued product mix shift to basic and consumable items, coupled with intense pharmacy competition, will continue to negatively affect gross margin.
• The positive margin impact of our Own Brand initiatives as mentioned in previous paragraphs.
Key factors that will be critical to the Company's future success include
managing the strategy for opening new stores and pharmacies, including the
ability to open and operate efficiently, maintaining high standards of customer
service, maximizing efficiencies in the supply chain, controlling working
capital needs through improved inventory turnover, controlling the effects of
inflation or deflation, controlling product mix, increasing operating margin
through improved gross margin and leveraging operating costs, and generating
adequate cash flow to fund the Company's future needs.
Other factors that will affect Company performance in 2009 include the
continuing management of the impacts of the changing regulatory environment in
which our pharmacy department operates. Additionally, we believe that the
ongoing recession and accelerating unemployment rate continue to place
tremendous economic pressure on the consumer.
However, we also continue to believe that our affordable pricing and value
proposition make us an attractive destination to wary consumers.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's condensed financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The critical accounting matters that are particularly
important to the portrayal of the Company's financial condition and results of
operations and require some of management's most difficult, subjective and
complex judgments are described in detail in the Company's Annual Report on Form
10-K for the fiscal year ended January 31, 2009. The preparation of condensed
financial statements requires the Company to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenue and expenses, and
related disclosure of contingent assets and liabilities. On an ongoing basis,
the Company evaluates its estimates, including those related to inventories,
income taxes, insurance reserves, contingencies and litigation. The Company
bases its estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENED MAY 2, 2009 AND MAY 3, 2008
Sales
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 2009 front store (non-pharmacy) sales decreased 3.6% over 2008
front store sales. Excluding the front store sales from stores closed in 2008
($25.6 million), sales increased 5.1% over the first quarter last year. Although
front store sales growth declined in the quarter in categories such as home
furnishings, housewares, health and beauty and footwear, we did experience sales
increases in certain categories such as tobacco, lawn and garden, pets, food and
electronics.
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.
Sales to FRED'S 24 franchised locations were $10.2 million in the first quarter
of 2009 and 2008 and represented 2.2% of the Company's total sales in both
quarters. The unchanged quarter over quarter franchise sales were a result of
the ongoing economic challenges impacting our customers' disposable income. The
Company does not intend to expand its franchise network in the future.
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
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
lower margin basic and consumable products, the mix shift in the pharmacy
department from branded to generic drugs and higher inbound freight costs.
Selling, General and Administrative Expenses
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 percent of sales, selling, general and administrative expenses, excluding
depreciation and amortization, in the first quarter of 2009 were 23.7%, down
from 24.5% in the first quarter of 2008. This leveraging of selling, general and
administrative expenses resulted primarily from managing costs in our stores as
detailed in the previous paragraph.
Operating Income
Operating income increased to $13.7 million in the first quarter of 2009 (3.0%
of sales) from $11.7 million in 2008 (2.5% of sales) due primarily to a
reduction in selling, general and administrative expenses as the Company
continued to focus on managing costs in our stores, as described in the Selling,
General and Administrative Expenses section above. This increase was partially
offset by a net decrease in sales of $5.9 million driven by $25.7 million of
closed store related sales in the first quarter of 2008, an increase in
comparable store sales of $11.8 million and an increase in non-comparable store
sales of $8.0 million, as detailed in the Sales section above.
Interest Expense
For the first quarter of 2009, the Company incurred net interest expense of
$0.1 million compared to $.2 million in the first quarter of 2008. This
reduction in interest expense is due to less borrowing under our operational
line of credit.
Income Taxes
For the first quarter of 2009, the effective income tax rate was 37.0%, as
compared to 37.3% in the first quarter of 2008. The decrease in the effective
tax rate was primarily due to increased benefits of federal wage credits.
Net Income
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.
LIQUIDITY AND CAPITAL RESOURCES
Due to the seasonality of our business and the continued increase in the number
of stores and pharmacies, inventories are generally lower at year-end than at
each quarter-end of the following year.
Cash provided by operating activities totaled $20.8 million during the thirteen
week period ended May 2, 2009 compared to $7.0 million in the same period of the
prior year. While cash was used for the purchase of inventories, we generated
operating cash flow through our closing of 74 stores in fiscal 2008 and our
ongoing initiative to better manage our Accounts Payable processes.
Cash used in investing activities totaled $4.7 million, and consisted primarily
of expenditures related to existing stores ($3.4 million), capital expenditures
associated with the store and pharmacy expansion program ($.5 million) and
technology and other corporate expenditures ($.4 million). During the first
quarter of 2009, we opened 3 stores and 3 pharmacies and closed 3 pharmacies. We
expect to open 12 to 18 stores and 12 to 18 pharmacies for the year and estimate
the Company will close 3 to 10 stores and 5 to 10 pharmacies. In 2009, the
Company is planning capital expenditures totaling approximately $21.4 million.
Expenditures are planned totaling approximately $13.5 million for upgrades,
remodels, or new stores and pharmacies; $3.9 million for technology upgrades,
$2.4 million for distribution center equipment and capital replacements and
$1.6 million for other corporate expenditures. In addition, the Company also
plans expenditures of $5.0 million for the acquisition of customer lists and
other pharmacy related items. Depreciation expense for 2009 will be
approximately $26.0 million.
Cash used by financing activities totaled $0.7 million and included $0.8 million
for the payment of cash dividends and was offset by $0.1 million in proceeds
from the exercise of stock options and employee stock purchase plan. There were
$5.1 million in borrowings outstanding at May 2, 2009 related to real estate
transactions. This amount is unchanged from the year ending January 31, 2009.
We believe that sufficient capital resources are available in both the
short-term and long-term through currently available cash and cash generated
from future operations and, if necessary, the ability to obtain additional
financing.
FORWARD-LOOKING STATEMENTS
Other than statements based on historical facts, many of the matters discussed
in this Form 10-Q relate to events which we expect or anticipate may occur in
the future. Such statements are defined as "forward-looking statements" under
the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), 15
U.S.C. Sections 77z-2 and 78u-5. The Reform Act created a safe harbor to protect
companies from securities law liability in connection with forward-looking
statements. We intend to qualify both our written and oral forward-looking
statements for protection under the Reform Act and any other similar safe harbor
provisions.
The words "believe", "anticipate", "project", "plan", "expect", "estimate",
"objective", "forecast", "goal", "intend", "will likely result", or "will
continue" and similar expressions generally identify forward-looking statements.
All forward-looking statements are inherently uncertain, and concern matters
that involve risks and other factors that may cause the actual performance of
the Company to differ materially from the performance expressed or implied by
these statements. Therefore, forward-looking statements should be evaluated in
the context of these uncertainties and risks, including but not limited to:
• Economic and weather conditions which affect buying patterns of our
customers and supply chain efficiency.
• Changes in consumer spending and our ability to anticipate buying patterns and implement appropriate inventory strategies.
• Continued availability of capital and financing.
• Competitive factors.
• Changes in reimbursement practices for pharmaceuticals.
• Governmental regulation.
• Increases in fuel and utility rates.
• Potential adverse results in the Fair Labor Standards Act ("FSLA") litigation described under Legal Proceedings on page 17.
• 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 31, 2009.
Consequently, all forward-looking statements are qualified by this cautionary statement. Readers should not place undue reliance on any forward-looking statements. We undertake no obligation to update any forward-looking statement to reflect events or circumstances arising after the date on which it was made.
Item 3.
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