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 1, 1997.
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 9,464,657 shares of common stock outstanding as of December
5, 1997, which shares have not been adjusted for December stock split.
<PAGE>
FRED'S, INC.
INDEX
Page No.
Part I - Financial Information
Item 1 - Financial Statements (unaudited):
Consolidated Balance Sheets as of
November 1, 1997 and February 1, 1997 3
Consolidated Statements of Operations
for the Thirteen Weeks Ended and the
Thirty-Nine Weeks Ended November 1, 1997
and November 2, 1996 4
Consolidated Statements of Cash Flows
for the Thirty-Nine Weeks Ended November 1, 1997
and November 2, 1996 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 11
- ---------------------------
Signatures 13
- 2 -
<PAGE>
FRED'S, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except for number of shares)
<TABLE>
<CAPTION>
November 1, February 1,
1997 1997
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,531 $ 8,569
Receivables, less allowance for doubtful
accounts 5,752 4,493
Inventories 106,347 88,505
Deferred income taxes 4,181 4,152
Other current assets 994 895
-------- --------
Total current assets 120,805 106,614
Property and equipment, at depreciated cost 50,104 48,379
Equipment under capital leases, less
accumulated amortization 1,418 320
Deferred income taxes 3,340 3,921
Other noncurrent assets, net of accumulated
amortization 2,318 1,914
-------- --------
$177,985 $161,148
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 34,888 $ 27,862
Current portion of indebtedness 173 1,278
Current portion of capital lease obligations 208 363
Accrued liabilities 13,435 8,935
Income taxes payable 734 1,648
-------- --------
Total current liabilities 49,438 40,086
Capital lease obligations 1,425 138
Other noncurrent liabilities 1,516 1,345
-------- --------
Total liabilities 52,379 41,569
-------- --------
Commitments and contingencies
Shareholders' equity:
Common stock, Class A voting, no par value,
9,448,299 shares issued and outstanding
(9,328,822 shares at February 1, 1997) 64,878 63,369
Retained earnings 61,254 56,364
Deferred compensation on restricted
stock incentive plan (526) (154)
------- -------
Total shareholders' equity 125,606 119,579
-------- --------
$177,985 $161,148
</TABLE>
See accompanying notes to consolidated financial statements
- 3 -
<PAGE>
FRED'S, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales .............................. $ 114,021 $ 99,283 $ 336,885 $ 300,069
Cost of goods sold ..................... 80,659 71,100 242,270 217,659
--------- --------- --------- ---------
Gross profit ......................... 33,362 28,183 94,615 82,410
Selling, general and administrative
expenses .............................. 29,623 25,648 84,663 75,751
-------- --------- --------- ---------
Other expenses ......................... -- 429 -- 429
Operating income ..................... 3,739 2,535 9,952 6,659
Interest (income) expense, net ......... (49) 104 (125) 315
--------- --------- --------- ---------
Income before income taxes ........... 3,788 2,002 10,077 5,915
Provision for income taxes ............. 1,420 741 3,778 2,188
--------- --------- --------- ---------
Net income ............................. $ 2,368 $ 1,261 $ 6,299 $ 3,727
========= ========= ========= =========
Net income per share ................... $ .25 $ .14 $ .67 $ .40
========= ========= ========= =========
Weighted average number of common shares
and common equivalent shares
outstanding ........................... 9,569 9,322 9,456 9,331
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements
- 4 -
<PAGE>
FRED'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
November 1, November 2,
1997 1996
----------- ------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,299 $ 3,727
Adjustments to reconcile net income
to net cash flows from operating
activities:
Depreciation and amortization 5,081 4,396
Contribution to ESOP to reduce ESOP loan balance - 143
Amortization of deferred compensation on
restricted stock incentive plan 135 (106)
Deferred income taxes 553 656
(Increase) decrease in assets:
Receivables (1,258) (382)
Inventories (17,542) (16,417)
Other current assets (10) (360)
Increase (decrease) in liabilities:
Accounts payable 7,025 4,415
Accrued liabilities 4,500 1,544
Income taxes payable (914) 978
Other noncurrent liabilities 170 165
-------- --------
Net cash (used in) provided by
operating activities 3,949 (1,241)
-------- --------
Cash flows from investing activities:
Additions to property and equipment (6,129) (2,634)
Additions to intangible assets (889) (429)
Net cash (used in) provided by
investing activities (7,018) (3,063)
-------- --------
Cash flows from financing activities:
Proceeds from borrowings - 3,100
Reduction of indebtedness and
capital lease obligations (1,264) (1,491)
Proceeds and tax effect from exercise of
stock options 702 -
Cash dividends paid (1,407) (1,400)
-------- --------
Net cash (used in) provided by
financing activities (1,969) 209
-------- --------
Increase (decrease) in cash and cash equivalents (5,038) (4,095)
Cash and cash equivalents:
Beginning of period 8,569 5,496
-------- --------
End of period $ 3,531 $ 1,401
======== ========
Supplemental disclosures of cash flow information:
Interest paid (received) $ (123) $ 240
Income taxes paid $ 3,200 $ 555
</TABLE>
See accompanying notes to consolidated financial statements
- 5 -
<PAGE>
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
February 1, 1997 incorporated 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 1, 1997 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.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("FAS 128"). FAS 128
changes the computation, presentation and disclosure requirements of earnings
(loss) per share that has previously been followed by the Company. FAS 128 is
effective for years ending after December 15, 1997 and early adoption is not
permissible. If the provisions of FAS 128 were adopted for the thirteen and
thirty-nine weeks ended November 1, 1997, and November 2, 1996, respectively the
Company's proforma earnings per share would have been as follows:
<PAGE>
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
----------- ----------- ----------- -------
<S> <C> <C> <C> <C>
Basic earnings per share .25 .14 .67 .40
Diluted earnings per share .25 .14 .67 .40
</TABLE>
- 6 -
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
GENERAL
The Private Securities Litigation Reform Act of 1995 ("the Act") provides a safe
harbor for forward-looking statements made by or on behalf of the Company.
Certain statements contained in Management's Discussion and Analysis and in
other Company filings are forward-looking statements. These statements discuss
among other things, expected growth, future revenues, future cash flows and
future performance. The forward looking statements are subject to risks and
uncertainties including but not limited to competitive pressures, inflation,
consumer debt levels, currency exchange fluctuations, trade restrictions,
changes in tariff and freight rates, capital market conditions, and other risks
indicated in the Company's filings with the Securities and Exchange Commission.
Actual results may materially differ from anticipated results described in these
statements.
Fred's operates 261 discount general merchandise stores and Xpress units in ten
states in the southeastern United States. One hundred and thirty-nine of the
stores have full service pharmacies.
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 and pharmacy business. 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.
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.
- 7 -
<PAGE>
RESULTS OF OPERATIONS
In August 1996, the federal minimum wage law was changed to increase the minimum
wage from $4.25 per hour to $4.75 per hour effective October 1, 1996 and from
$4.75 per hour to $5.15 per hour effective September 1, 1997. The Company
estimates that these changes will result in an increase in wage expense during
fiscal 1998 of approximately $1.4 million. In anticipation of the impacts of
minimum wage on the Company's profitability, a consulting firm was engaged to
review the business processes and productivity within the Company's retail
operations. The improvements implemented as a result of this retail efficiency
project will be significant in offsetting the financial impacts of the minimum
wage increase.
During 1996, the Company performed an evaluation of the impact of the year 2000
as it relates to its Information Systems. Based upon the current plan of action,
management of the Company is of the opinion the required changes will not have a
material effect on the results of operation or the financial condition of the
Company.
Thirteen Weeks Ended November 1, 1997 and November 2, 1996
Net sales increased from $99.3 million in 1996 to $114.0 million in 1997, an
increase of $14.7 million or 14.8%. The increase was attributable to comparable
store sales increases of 7.4% ($6.6 million) and sales by stores not yet
included as comparable stores ($8.2 million). Wholesale sales to franchisees and
independents decreased $.1 million or 0.7% in 1997.
Gross profit increased from 28.4% of sales in 1996 to 29.3% in 1997 primarily
due to strong quarterly sales in several higher margin departments, along with
an excellent sell through in seasonal and softline categories without the need
for markdown levels experienced in prior years.
Selling, general and administrative expenses increased from $25.6 million in
1996 to $29.6 million in 1997. As a percentage of sales, these expenses
increased from 25.8% to 26.0%. The improvement in comparable store sales for the
quarter contributed to a higher leveraging of expenses, however, the benefit was
offset by start-up costs associated with the 8% increase in our store base
during the third quarter, the impact from the minimum wage increase in
September, and non-recurring consulting fees associated with the development of
a new warehouse management system.
- 8 -
<PAGE>
Thirty-Nine Weeks Ended November 1, 1997 and November 2, 1996
Net sales increased from $300.0 million in 1996 to $336.9 million in 1997, an
increase of $36.9 million or 12.3%. The increase was attributable to comparable
store sales increases of 8.0% ($21.7 million) and sales by stores not yet
included as comparable stores ($14.9 million). Wholesale sales to franchisees
and independents increased $.3 million or 1.1% in 1997.
Gross profit increased from 27.5% of sales in 1996 to 28.1% in 1997 for the
aforementioned reasons due to lower levels of markdowns experienced in prior
years combined with a slightly higher initial purchase margin resulting from
improved sourcing and higher volumes of opportunistic purchases.
Selling, general and administrative expenses increased from $75.8 million in
1996 to $84.7 million in 1997. As a percentage of sales, these expenses
decreased from 25.2% to 25.1%. The improvement in comparable store sales for the
first nine months of 1997 contributed to higher leveraging of expenses and,
therefore, an improved expense ratio. This leveraging more than offset the
adverse impact of the recent minimum wage increase and the higher- than-expected
property, health, and workers compensation insurance costs compared with the
first nine months of 1997. Selling, general and administrative expenses for the
first nine months of 1997 also included an additional 50 store and pharmacy
locations than in the first nine months of 1996.
LIQUIDITY AND CAPITAL RESOURCES
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.
Cash flows provided by operating activities totaled $3,949,000 during the
thirty-nine week period ended November 1, 1997. Cash was primarily used to
increase inventories $17,542,000. These cash outlays were financed primarily
from net income $6,299,000, higher levels of accrued liabilities of $4,500,000
and an increase in trade vendors by $7,025,000.
Cash flows used by investing activities totaled ($7,018,000) which was primarily
used to fund upgrades to the distribution center management system and new store
and pharmacy capital expenditures ($6,129,000).
Cash flows used by financing activities totaled ($1,969,000) which was used to
pay cash dividends ($1,407,000) and reduce indebtedness ($1,264,000).
The Company has a $12,000,000 revolving credit commitment available from a bank.
At November 1, 1997, no borrowings have been made under the revolving credit
agreement.
- 9 -
<PAGE>
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.
- 10 -
<PAGE>
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
Exhibit 2.1 - Asset Purchase Agreement between CVS
Revco D.S., Inc., Fred's Stores of
Tennessee, Inc., CVS corporation and
Fred's, Inc., dated as of October
10, 1997 (incorporated herein by
reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K
dated December 1, 1997)*
Exhibit 2.2 - Letter Agreement between CVS Revco
D.S., Inc. Fred's Stores of
Tennessee, Inc., CVS Corporation and
Fred's, Inc. dated as of November 1,
1997 (incorporated herein by
reference to Exhibit 2.2 to the
Company's Current Report on Form 8-K
dated December 1, 1997)
<PAGE>
Exhibit 27 - Financial Data Schedule (Edgar
Filing only)
Exhibit 99.1 - Press Release dated October 14, 1997
announcing the asset purchase
(incorporated herein by reference to
Exhibit 99.1 to the Company's
Current Report on Form 8-K dated
December 1, 1997)
- 11 -
<PAGE>
Exhibit 99.2 - Press Release dated November 24,
1997, announcing the completion of
the asset purchase and the Fred's
stock split and dividend
(incorporated herein by reference to
Exhibit 99.2 to the Company's
Current Report on Form 8-K dated
December 1, 1997)
*The Registrant hereby agrees to furnish supplementally a copy
of any omitted schedules to this Agreement to the Securities
and Exchange Commission upon its request.
Reports on Form 8-K:
Current Report on Form 8-K dated December 1, 1997
(filed December 2, 1997) reporting under Item 5, Other
Events, information related to the Company's
acquisition of 17 stores from CVS Revco, D.S., Inc.,
and announcement Board of Director approval of
five-for-four stock split and declaration of a
quarterly cash dividend of $.05 per share.
- 12 -
<PAGE>
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.
Michael J. Hayes
Date: December 12, 1997 Chief Executive Officer
- ------------------------
Richard B. Witaszak
Date: December 12, 1997 Chief Financial Officer
- ------------------------
- 13 -
<PAGE>
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
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
----------------------------- ------------------------
<S> <C> <C> <C> <C>
Primary net income per share
Net income $2,368 $1,261* $6,299 $3,727
====== ====== ====== ======
Weighted average number
of common shares
outstanding during the
period 9,386 9,322 9,357 9,331
Additional shares
attributable to common
stock equivalents 183 - 99 -
------ ------ ------ -----
9,569 9,322 9,456 9,331
====== ====== ====== =====
Net income per share $ .25 $ .14* $ .67 $ .40*
====== ====== ===== =====
Fully diluted net
income per share
Net income $2,368 $1,261 $6,299 $3,727*
====== ====== ====== ======
Weighted average
number of common shares
outstanding
during the period 9,386 9,322 9,359 9,331*
Additional shares
attributable to common
stock equivalents 194 - 117 -
------ ------ ------ ----
9,580 9,322 9,476 9,331
====== ====== ====== ======
Net income per share $ .25 $ .14* $ .67 $ .40*
====== ======= ====== =====
</TABLE>
<PAGE>
* Includes non-recurring merger-related costs totaling approximately
$270,000 or $.03 per share.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF OPERATIONS OF
FRED'S, INC. FOR THE QUARTER ENDED NOVEMBER 1, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000724571
<NAME> FRED'S, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-2-1997
<PERIOD-END> NOV-1-1997
<CASH> 3,531
<SECURITIES> 0
<RECEIVABLES> 6,280
<ALLOWANCES> (528)
<INVENTORY> 106,347
<CURRENT-ASSETS> 120,805
<PP&E> 113,715
<DEPRECIATION> (62,193)
<TOTAL-ASSETS> 177,985
<CURRENT-LIABILITIES> 49,438
<BONDS> 1,425
0
0
<COMMON> 64,878
<OTHER-SE> 60,728
<TOTAL-LIABILITY-AND-EQUITY> 177,985
<SALES> 336,885
<TOTAL-REVENUES> 336,885
<CGS> 242,270
<TOTAL-COSTS> 242,270
<OTHER-EXPENSES> 84,654
<LOSS-PROVISION> 9
<INTEREST-EXPENSE> (125)
<INCOME-PRETAX> 10,077
<INCOME-TAX> 3,778
<INCOME-CONTINUING> 6,299
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,299
<EPS-PRIMARY> $0.67
<EPS-DILUTED> $0.67
</TABLE>
