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 November 2, 1996.
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 9,328,822 shares of common stock outstanding as
of December 1, 1996.
FRED'S, INC.
INDEX
Page No.
Part I - Financial Information
Item 1 - Financial Statements (unaudited):
Consolidated Balance Sheets as of
November 2, 1996 and February 3, 1996 3
Consolidated Statements of Operations
for the Thirteen Weeks Ended and the
Thirty-Nine Weeks Ended November 2, 1996
and October 28, 1995 4
Consolidated Statements of Cash Flows
for the Thirty-Nine Weeks Ended November 2,
1996 and October 28, 1995 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)
<TABLE>
<CAPTION>
November 2, February 3,
1996 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,401 $ 5,496
Receivables, less allowance
for doubtful accounts 5,497 5,115
Inventories 101,628 85,211
Deferred income taxes 1,200 2,125
Other current assets 1,316 956
------- -------
Total current assets 111,042 98,903
Property and equipment, at
depreciated cost 50,481 51,681
Equipment under capital leases,
less accumulated amortization 380 560
Deferred income taxes 5,255 4,986
Other noncurrent assets 1,940 1,893
------- -------
$169,098 $158,023
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 34,208 $ 29,793
Current portion of indebtedness 4,594 1,660
Current portion of capital lease
obligations 346 301
Accrued liabilities 8,531 6,987
Income taxes payable 1,791 813
------- -------
Total current liabilities 49,470 39,554
Indebtedness 173 1,278
Capital lease obligations 236 501
Other noncurrent liabilities 1,286 1,120
------- -------
Total liabilities 51,165 42,453
------- -------
Commitments and contingencies
Shareholders' equity:
Common stock, Class A voting,
no par value, 9,329,072 shares
issued and outstanding (9,335,239
shares at February 3, 1996) 63,370 63,458
Retained earnings 54,750 52,424
Deferred compensation on
restricted stock incentive plan (187) (169)
Loan to ESOP - (143)
------- -------
Total shareholders' equity 117,933 115,570
------- -------
$169,098 $158,023
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
FRED'S, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
------------------------ ------------------------
November 2, October 28, November 2, October 28,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $99,283 $95,598 $300,069 $285,943
Cost of goods sold 71,100 70,687 217,659 212,552
------ ------ ------- -------
Gross profit 28,183 24,911 82,410 73,391
Selling, general and
administrative expenses 25,648 24,582 75,751 69,954
------ ------ ------- -------
Operating income 2,535 329 6,659 3,437
Interest expense, net 104 137 315 353
Other expenses 429 - 429 -
------ ------ ------- -------
Income before taxes 2,002 192 5,915 3,084
Provision for income
taxes 741 71 2,188 1,135
------ ------ ------- -------
Net income $ 1,261 $ 121 $ 3,727 $ 1,949
====== ====== ======= =======
Net income per share $ .14 $ .01 $ .40 $ .21
====== ====== ======= =======
Weighted average number
of common shares and
common equivalent
shares outstanding 9,322 9,335 9,331 9,332
====== ====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
FRED'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
------------------------
November 2, October 28,
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,727 $ 1,949
Adjustments to reconcile net
income to net cash flows from
operating activities:
Depreciation and amortization 4,396 3,994
Contribution to ESOP to reduce
ESOP loan balance 143 143
Amortization of deferred
compensation on restricted stock
incentive plan (106) -
Deferred income taxes 656 227
(Increase) decrease in assets:
Receivables (382) (2,614)
Inventories (16,417) (19,096)
Other current assets (360) (690)
Other noncurrent assets - (560)
Increase (decrease) in liabilities:
Accounts payable 4,415 14,091
Accrued liabilities 1,544 (438)
Income taxes payable 978 (742)
Other noncurrent liabilities 165 126
------- -------
Net cash (used in) provided
by operating activities (1,241) (3,610)
------- -------
Cash flows from investing activities:
Additions to property, equipment
and equipment under capital leases (2,634) (5,103)
Additions to intangible assets (429) -
------- -------
Net cash (used in) provided
by investing activities (3,063) (5,103)
------- -------
Cash flows from financing activities:
Net borrowings under revolving
credit agreements 3,100 7,200
Reduction of indebtedness and
capital lease obligations (1,491) (1,615)
Cash dividends paid (1,400) (1,399)
------- -------
Net cash (used in) provided
by financing activities 209 4,186
------- -------
Increase (decrease) in cash and
cash equivalents (4,095) (4,527)
Cash and cash equivalents:
Beginning of period 5,496 5,944
------- -------
End of period $ 1,401 $ 1,417
======= =======
Supplemental disclosures of cash
flow information:
Interest paid $ 240 $ 288
Income taxes paid $ 555 $ 1,650
</TABLE>
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 complete
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
February 3, 1996 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 November 2, 1996 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 209 discount general merchandise stores in ten
states in the southeastern United States. Eighty-seven of the
stores have full service pharmacies, and twelve of Fred's stores
are stand-alone Fred's Xpress 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 $16,417,000 during the thirty-nine
week period ended November 2, 1996. In addition, cash was used to
fund capital expenditures ($2,634,000),reduce indebtedness
($1,491,000) and pay cash dividends ($1,400,000). The increased
inventory levels and other cash outlays were financed primarily
from net income ($3,727,000), revolving bank borrowings
($3,100,000), trade vendors ($4,415,000), accrued liabilities
($1,544,000) 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 available
from a bank. In addition, a seasonal revolving credit commitment
of $9,000,000 is available through December 1996. At November 2,
1996, $3,100,000 was outstanding under the revolving credit
agreement, and no borrowings have been made under the seasonal
facility.
- ----------------------------------------------------------------
RESULTS OF OPERATIONS
- ----------------------------------------------------------------
Thirteen Weeks Ended November 2, 1996 and October 28, 1995
Net sales increased from $95.6 million in 1995 to $99.3 million in
1996, an increase of $3.7 million or 3.9%. The increase was
attributable to comparable store sales increases of 0.1% ($0.6
million) and sales by stores not yet included as comparable stores
($3.5 million). Wholesale sales to franchisees and independents
decreased $0.4 million or 4.2% in 1996.
Gross profit increased from 26.1% of sales in 1995 to 28.4% in 1996
primarily due to a reduction in the Company's reliance on sale
events to drive sales growth. With fewer promotional incentives,
Fred's sales growth has moderated somewhat, but sales are now more
profitable. Gross profit was also favorably impacted by improved
import merchandising strategies implemented earlier this year, and
by continued favorable inventory shrinkage compared to 1995.
Selling, general and administrative expenses increased from $24.6
million in 1995 to $25.6 million in 1996. As a percentage of
sales, expenses increased from 25.7% to 25.8%. Competitive
increases in the Company's compensation program for its
distribution center, implemented last summer, coupled with the most
recent minimum wage increase implemented in October 1996 caused the
increase in the expense percentage.
During the third quarter of 1996, the Company terminated
discussions relating to a previously announced merger agreement
with Rose's Stores, Inc. Other expenses includes $0.4 million in
non-recurring expenses related to this transaction.
Net income increased from $0.1 million in 1995 to $1.3 million in
1996 primarily resulting from the gross profit improvement
described.
Thirty-Nine Weeks Ended November 2, 1996 and October 28, 1995
Net sales increased from $285.9 million in 1995 to $300.1 million
in 1996, an increase of $14.2 million or 4.9%. The increase was
attributable to comparable store sales increases of 1.5% ($3.8
million) and sales by stores not yet included as comparable stores
($12.8 million). Wholesale sales to franchisees and independents
decreased $2.4 million or 7.9% in 1996.
Gross profit increased from 25.7% of sales in 1995 to 27.5% in 1996
for the aforementioned reason.
Selling, general and administrative expenses increased from $70.0
million in 1995 to $75.8 million in 1996. As a percentage of
sales, these expenses increased from 24.5% to 25.3%. The 0.8%
increase in the expense percentage was due to a greater proportion
of retail sales, which carry higher expense ratios than wholesale
sales (0.2%), competitive increases in the Company's compensation
program for its distribution center (0.2%), the costs of phasing in
a new pharmacy management system, and other normal inflationary
factors throughout the Company that exceeded the 1.5% comparable
store sales increase.
Other expenses of $0.4 million represents non-recurring expenses as
mentioned above.
Net income increased from $1.9 million in 1995 to $3.7 million in
1996 primarily due to the gross profit improvements described
earlier.
- ----------------------------------------------------------------
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.
- ----------------------------------------------------------------
FORWARD-LOOKING STATEMENTS
- ----------------------------------------------------------------
Certain statements contained in this report that are not historical
facts are forward-looking statements that are subject to certain
risks and uncertainties that could cause actual results to differ
materially from those set forth in the forward-looking statement.
These risks and uncertainties include, but are not limited to,
changes in customer demand, changes in the competitive pricing for
products, the impact of competitor store openings and closings, the
availability of acceptable store locations, the availability of
merchandise, general economic conditions and other risk factors
discussed in documents filed by the Company with the Securities and
Exchange Commission.
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 (Loss) 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
----------------------------------
Date: December 9, 1996 Michael J. Hayes
- ----------------------- Chief Executive Officer
/s/ Richard B. Witaszak
----------------------------------
Date: December 9, 1996 Richard B. Witaszak
- ----------------------- Chief Financial Officer
EXHIBIT 11
FRED'S, INC.
COMPUTATION OF NET INCOME PER SHARE
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------- -----------------------
Nov. 2, Oct. 28, Nov. 2, Oct. 28,
1996 1995 1996 1995
------- -------- ------- --------
<S> <C> <C> <C> <C>
PRIMARY NET INCOME PER SHARE
Net income $1,261 $ 121 $3,727 $1,949
===== ===== ===== =====
Weighted average number
of common shares
outstanding during the
period 9,322 9,335 9,331 9,332
Additional shares
attributable to common
stock equivalents - - - -
----- ----- ----- -----
9,322 9,335 9,331 9,332
===== ===== ===== =====
Net income per share $ .14 $ .01 $ .40 $ .21
===== ===== ===== =====
FULLY DILUTED NET INCOME PER SHARE
Net income $1,261 $ 121 $3,727 $1,949
===== ===== ===== =====
Weighted average number of
common shares outstanding
during the period 9,322 9,335 9,331 9,332
Additional shares
attributable to common
stock equivalents - - - -
----- ----- ----- -----
9,322 9,335 9,331 9,332
===== ===== ===== =====
Net income per share $ .14 $ .01 $ .40 $ .21
===== ===== ===== =====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000724571
<NAME> FRED'S, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-END> NOV-02-1996
<CASH> 1,401,000
<SECURITIES> 0
<RECEIVABLES> 6,583,000
<ALLOWANCES> (1,086,000)
<INVENTORY> 101,628,000
<CURRENT-ASSETS> 111,042
<PP&E> 109,003,000
<DEPRECIATION> (58,142,000)
<TOTAL-ASSETS> 169,098,000
<CURRENT-LIABILITIES> 49,470,000
<BONDS> 490,000
0
0
<COMMON> 63,370,000
<OTHER-SE> 54,563,000
<TOTAL-LIABILITY-AND-EQUITY> 169,098,000
<SALES> 300,069,000
<TOTAL-REVENUES> 300,069,000
<CGS> 217,659,000
<TOTAL-COSTS> 217,659,000
<OTHER-EXPENSES> 75,522,000
<LOSS-PROVISION> 229,000
<INTEREST-EXPENSE> 315,000
<INCOME-PRETAX> 6,344,000
<INCOME-TAX> 2,188,000
<INCOME-CONTINUING> 4,156,000
<DISCONTINUED> 0
<EXTRAORDINARY> 429,000
<CHANGES> 0
<NET-INCOME> 3,727,000
<EPS-PRIMARY> $0.40
<EPS-DILUTED> $0.40
</TABLE>
