FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended October 28, 1995.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to .
Commission file number 000-19288
FRED'S, INC.
(Exact name of registrant as specified in its charter)
Tennessee 62-0634010
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4300 New Getwell Rd., Memphis, Tennessee 38118
(Address of principal executive offices) (zip code)
(901) 365-8880
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X . No .
The registrant had 9,335,256 shares of common stock outstanding as
of October 28, 1995.
FRED'S, INC.
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited):
Consolidated Balance Sheets as of
October 28, 1995 and January 28, 1995 3
Consolidated Statements of Income
for the Thirteen Weeks Ended and the
Thirty-Nine Weeks Ended October 28, 1995
and October 29, 1994 4
Consolidated Statements of Cash Flows
for the Thirty-Nine Weeks Ended October 28,
1995 and October 29, 1994 5
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and
Analysis of Financial Condition and
Results of Operations 7 - 9
PART II - OTHER INFORMATION 10
Signatures 11
FRED'S, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except for number of shares)
OCTOBER 28, JANUARY 28,
1995 1995
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 1,417 $ 5,944
Receivables, less allowance for
doubtful accounts 6,647 4,033
Inventories 101,259 82,163
Deferred income taxes 1,470 1,590
Other current assets 1,446 756
-------- --------
Total current assets 112,239 94,486
Property and equipment, at depreciated cost 51,252 49,550
Equipment under capital leases, less
accumulated amortization 620 951
Deferred income taxes 5,063 5,170
Other noncurrent assets 1,726 1,428
-------- --------
$170,900 $151,585
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 38,415 $ 24,324
Current portion of indebtedness 8,835 1,629
Current portion of capital lease obligations 285 408
Accrued liabilities 4,592 5,030
Income taxes payable 300 1,042
-------- --------
Total current liabilities 52,427 32,433
-------- --------
Indebtedness 1,658 2,938
Capital lease obligations 584 802
Other noncurrent liabilities 1,081 955
-------- --------
Total liabilities 3,323 37,128
-------- --------
Commitments and contingencies
Shareholders' equity:
Common stock, Class A voting, no par value,
9,335,256 shares and outstanding (9,307,373
shares at January 28, 1995 63,458 63,185
Retained earnings 52,105 51,555
Loan to ESOP (140) (283)
Deferred compensation on
restricted stock incentive plan (273) -
-------- --------
Total shareholders' equity 115,150 114,457
-------- --------
$170,900 $151,585
======== ========
See accompanying notes to consolidated financial statements
FRED'S, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
-------------------- -----------------------
OCTOBER OCTOBER OCTOBER OCTOBER
28, 1995 29, 1994 28, 1995 29, 1994
-------- -------- -------- --------
Net sales $ 95,598 $ 91,376 $285,943 $270,388
Cost of goods sold 70,687 66,466 212,552 197,142
-------- -------- -------- --------
Gross profit 24,911 24,910 73,391 73,246
Selling, general and
administrative expenses 24,582 22,331 69,954 64,203
-------- -------- -------- --------
Operating income 329 2,579 3,437 9,043
Interest expense, net 137 154 353 216
Other expenses - 37 - 37
-------- -------- -------- --------
Income before income taxes 192 2,388 3,084 8,790
Provision for income taxes 71 865 1,135 3,176
-------- -------- -------- --------
Net income $ 121 $ 1,523 $ 1,949 $ 5,614
======== ======== ======== ========
Net income per shares $ .01 $ .16 $ .21 $ .60
======== ======== ======== ========
Weighted average number of
common shares and common
equivalent shares outstanding 9,335 9,307 9,332 9,307
======== ======== ======== ========
See accompanying notes to consolidated financial statements
FRED'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
THIRTY-NINE WEEKS ENDED
-------------------------
OCTOBER 28, OCTOBER 29,
1995 1994
---------- ----------
Cash flows from operating activities:
Net income $ 1,949 $ 5,614
Adjustments to reconcile net income
to net cash flows from operating
activities:
Depreciation and amortization 3,994 3,157
Contribution to ESOP to reduce
ESOP loan balance 143 142
Deferred income taxes 227 1,354
(Increase) decrease in assets:
Receivables (2,614) (1,936)
Inventories (19,096) (28,292)
Other current assets (690) (256)
Other noncurrent assets (560) (43)
Increase (decrease) in liabilities:
Accounts payable 14,091 12,059
Accrued liabilities (438) (443)
Income taxes payable (742) (34)
Other noncurrent liabilities 126 108
-------- --------
Net cash (used in) provided by
operating activities (3,610) (8,570)
-------- --------
Cash flows from investing activities:
Additions to property, equipment and
equipment under capital leases (5,103) (7,787)
-------- --------
Net cash (used in) provided by
investing activities (5,103) (7,787)
-------- --------
Cash flows from financing activities:
Proceeds from borrowings and
increase in capital lease obligations 7,200 30,800
Reduction of indebtedness and
capital lease obligations (1,615) (20,447)
Cash dividends paid (1,399) (1,396)
-------- --------
Net cash (used in) provided by
financing activities 4,186 8,957
-------- --------
Increase (decrease) in cash and cash equivalents (4,527) (7,400)
Beginning of period cash and cash equivalents 5,944 8,070
-------- --------
End of period cash and cash equivalents $ 1,417 $ 670
======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 288 $ 168
Income taxes paid $ 1,650 $ 1,856
See accompanying notes to consolidated financial statements
FRED'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------
NOTE 1: BASIS OF PRESENTATION
- ------------------------------------------------------------------
The accompanying unaudited consolidated financial statements of
Fred's, Inc. ("Fred's" or the "Company") have been prepared in
accordance with the instructions to 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 generally accepted accounting principles. The
statements do 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 generally accepted accounting principles. The
statements should be read in conjunction with the Notes to the
Consolidated Financial Statements for the fiscal year ended January
28, 1995 included in the Company's Annual Report on Form 10-K.
The results of operations for the thirteen week and thirty-nine
week periods ended October 28, 1995 are not necessarily indicative
of the results to be expected for the full fiscal year.
- ------------------------------------------------------------------
NOTE 2: NET INCOME PER SHARE
- ------------------------------------------------------------------
Net income per share is based on the weighted average number of
common shares and common equivalent shares outstanding. See
Exhibit 11.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- ------------------------------------------------------------------
FINANCIAL CONDITION
- ------------------------------------------------------------------
Fred's operates 203 discount general merchandise stores in ten
states in the southeastern United States, including 18 stores
acquired from Southern Wholesale Company during the thirteen week
period ended October 28, 1995. Eighty-seven of the stores have
full service pharmacies, and there are four Fred's Xpress stand-
alone pharmacies.
Due to the seasonality of Fred's 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. As shown on the consolidated statement of cash
flows, inventories increased $19,096,000 during the thirty-nine
week period ended October 28, 1995. In addition, cash was used to
fund accounts receivable ($2,614,000), capital expenditures
incurred primarily in connection with opening/acquiring new stores
and pharmacies and installing enhanced point-of-sale cash
registers, ($5,103,000), and cash dividends ($1,399,000). The
increased inventory levels and other cash outlays were financed
from net income ($1,949,000), increased accounts payable
($14,091,000), seasonal bank borrowings ($7,200,000) and existing
cash. The Company believes 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.
The Company has a $12,000,000 revolving credit commitment and a
$4,500,000 line of credit commitment available from two banks. At
October 28, 1995, $7,200,000 was outstanding under the revolving
credit agreement and $3,151,000 was outstanding under the line of
credit agreement.
- ------------------------------------------------------------------
RESULTS OF OPERATIONS
- ------------------------------------------------------------------
Thirteen Weeks Ended October 28, 1995 and October 29, 1994
- ----------------------------------------------------------
Net sales increased from $91.4 million in 1994 to $95.6 million in
1995, an increase of $4.2 million or 4.6%. The increase was
attributable to comparable store sales increases of 1.4% ($1.0
million) and sales by stores not yet included as comparable stores
($3.3 million). Wholesale sales to franchisees and independents
decreased $.1 million or 1.1% in 1995.
Gross profit decreased from 27.3% of sales in 1994 to 26.1% in 1995
primarily due to price reductions associated with the
implementation of an everyday competitive pricing strategy. This
strategy was implemented in December 1994 and included an initial
wave of price reductions on highly recognizable items.
Subsequently, additional price reductions have been taken on other
items in an effort to stimulate sluggish sales.
Selling, general and administrative expenses increased from $22.3
million in 1994 to $24.6 million in 1995 due primarily to expenses
associated with new stores and pharmacies. As a percentage of
sales, expenses increased from 24.4% to 25.7%. Expenses as a
percentage of sales increased due to several factors that included
changes to the Company's distribution center operations to
implement a more competitive wage program and convert from a four-
day to a five-day work week. In addition, higher expenses were
incurred in connection with the conversion to a new pharmacy
management system that provides the centralized controls necessary
to maximize the performance of a large chain of pharmacies. The
implementation of this new system from PDX, and the related
training, will be completed by the end of February 1996. Lastly,
the relative increase in expenses reflected costs associated with
the third quarter acquisition of 18 stores and the initial steps
taken to conform these stores to the Fred's concept. These
factors, combined with the lack of expense leverage caused by weak
comparable store sales growth, resulted in a higher expense ratio.
Thirty-Nine Weeks Ended October 28, 1995 and October 29, 1994
- -------------------------------------------------------------
Net sales increased from $270.4 million in 1994 to $285.9 million
in 1995, an increase of $15.5 million or 5.7%. The increase was
attributable to comparable store sales increases of 2.3% ($5.2
million) and sales by stores not yet included as comparable stores
($9.9 million). Wholesale sales to franchisees and independents
increased $.4 million or 1.3% in 1995.
Gross profit decreased from 27.1% of sales in 1994 to 25.7% in 1995
primarily as a result of the everyday competitive price reductions
discussed above and because of markdowns that were necessary in
order to sell slow-moving inventory during the second quarter.
Selling, general and administrative expenses increased from $64.2
million in 1994 to $70.0 million in 1995 due primarily to expenses
associated with new stores and pharmacies. As a percentage of
sales, expenses increased from 23.7% to 24.5% primarily because of
the reasons outlined in the third quarter discussion above.
- ------------------------------------------------------------------
EFFECT OF INFLATION
- ------------------------------------------------------------------
The impact of inflation on labor and occupancy costs can
significantly affect Fred's operations. Many of Fred's employees
are paid hourly rates related to the federal minimum wage and,
accordingly, any increase affects Fred's. In addition, payroll
taxes, employee benefits and other employee-related costs continue
to increase. Occupancy costs, including rent, maintenance, taxes
and insurance, also continue to rise. Fred's believes that
maintaining adequate operating margins through a combination of
price adjustments and cost controls, careful evaluation of
occupancy needs, and efficient purchasing practices is the most
effective tool for coping with increasing costs and expenses.
- ------------------------------------------------------------------
SEASONALITY
- ------------------------------------------------------------------
Fred's business is subject to seasonal influences, but the Company
has tended to experience less seasonal fluctuation than many other
retailers due to the Company's mix of everyday basic merchandise.
The fourth quarter is typically the most profitable quarter because
it includes the Christmas selling season. The overall strength of
the fourth quarter is partially mitigated, however, by the
inclusion of the month of January, which is generally the least
profitable month of the year.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Securities Holders
Not Applicable.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
Exhibit 11 - Computation of Net Income Per Share
Reports on Form 8-K:
Not Applicable.
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 thereunto duly authorized.
FRED'S, INC.
/s/Michael J. Hayes
------------------------------
Michael J. Hayes
Date: December 4, 1995 Chief Executive Officer
/s/Bruce D. Smith
------------------------------
Bruce D. Smith
Date: December 4, 1995 Chief Financial Officer
EXHIBIT 11
FRED'S, INC.
COMPUTATION OF NET INCOME PER SHARE
(unaudited)
(in thousands, except per share amounts)
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
-------------------- -----------------------
OCTOBER OCTOBER OCTOBER OCTOBER
28, 1995 29, 1994 28, 1995 29, 1994
-------- -------- ---------- --------
PRIMARY NET INCOME PER SHARE
Net income $ 121 $1,523 $1,949 $5,614
====== ====== ====== ======
Weighted average number of
common shares outstanding
during the period 9,335 9,307 9,332 9,307
Additional shares attributable
to common stock equivalents - - - -
------ ------ ------ ------
9,335 9,307 9,332 9,307
====== ====== ====== ======
Net income per share $ .01 $ .16 $ .21 $ .60
====== ====== ====== ======
FULLY DILUTED NET INCOME
PER SHARE
Net income $ 121 $1,523 $1,949 $5,614
====== ====== ====== ======
Weighted average number of
common shares outstanding
during the period 9,335 9,307 9,332 9,307
Additional shares attributable
to common stock equivalents - - - -
------ ------ ------ ------
9,335 9,307 9,332 9,307
====== ====== ====== ======
Net income per share $ .01 $ .16 $ .21 $ .60
====== ====== ====== ======
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROMTHE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF OCTOBER 28, 1995 AND THECONDENSED
CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED OCTOBER28, 1995
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