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 August 2, 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 9,428,813 shares of common stock outstanding as
of September 12, 1997.
<PAGE>
FRED'S, INC.
INDEX
Page No.
Part I - Financial Information
- ------------------------------
Item 1 - Financial Statements (unaudited):
Consolidated Balance Sheets as of
August 2, 1997 and February 1, 1997 3
Consolidated Statements of Operations
for the Thirteen Weeks Ended and the
Twenty-Six Weeks Ended August 2, 1997
and August 3, 1996 4
Consolidated Statements of Cash Flows
for the Twenty-Six Weeks Ended August 2, 1997
and August 3, 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 10
- ---------------------------
Signatures 11
- ----------
- 2 -<PAGE>
FRED'S, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except for number of shares)
<TABLE>
<CAPTION>
August 2, February 1,
1997 1997
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,000 $ 8,569
Receivables, less allowance
for doubtful accounts 4,392 4,493
Inventories 89,620 88,505
Deferred income taxes 4,557 4,152
Other current assets 776 895
---------- --------
Total current assets 105,345 106,614
Property and equipment,
at depreciated cost 49,175 48,379
Equipment under capital leases, less
accumulated amortization 1,483 320
Deferred income taxes 3,729 3,921
Other noncurrent assets,
net of accumulated
amortization 1,954 1,914
--------- --------
$161,686 $161,148
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 22,747 $ 27,862
Current portion of indebtedness 479 1,278
Current portion of capital
lease obligations 198 363
Accrued liabilities 12,171 8,935
Income taxes payable 460 1,648
-------- --------
Total current liabilities 36,055 40,086
Capital lease obligations 1,479 138
Other noncurrent liabilities 1,459 1,345
-------- --------
Total liabilities 38,993 41,569
-------- --------
Commitments and contingencies
Shareholders' equity:
Common stock, Class A voting,
no par value, 9,387,291 shares
issued and outstanding(9,328,822
shares at February 1, 1997) 63,890 63,369
Retained earnings 59,358 56,364
Deferred compensation on restricted
stock incentive plan (555) (154)
--------- ---------
Total shareholders' equity 122,693 119,579
--------- ---------
$161,686 $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 Twenty-Six Weeks Ended
August 2, August 3, August 2, August 3,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 110,196 $ 99,028 $ 222,864 $ 200,786
Cost of goods sold 80,017 72,583 161,611 146,559
--------- --------- --------- --------
Gross profit 30,179 26,445 61,253 54,227
Selling, general
and administrative
expenses 28,233 25,636 55,040 50,103
--------- --------- --------- --------
Operating income 1,946 809 6,213 4,124
Interest (income)
expense, net (55) 117 (76) 211
--------- --------- --------- --------
Income before
income taxes 2,001 692 6,289 3,913
Provision for
income taxes 750 278 2,358 1,447
--------- --------- --------- --------
Net income $ 1,251 $ 414 $ 3,931 $ 2,466
========= ========= ========= ========
Net income per share $ .13 $ .04 $ .42 $ .26
======== ======= ======== ========
Weighted average number
of common shares and
common equivalent
shares outstanding 9,456 9,330 9,396 9,330
===== ===== ===== =====
</TABLE>
See accompanying notes to consolidated financial statements
- 4 -<PAGE>
FRED'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended
August 2, August 3,
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,931 $ 2,466
Adjustments to reconcile net income
to net cash flows from operating
activities:
Depreciation and amortization 3,250 2,995
Contribution to ESOP to reduce
ESOP loan balance - 143
Amortization of deferred compensation on
restricted stock incentive plan 108 (74)
Deferred income taxes (212) 434
(Increase) decrease in assets:
Receivables 101 1,198
Inventories (1,114) (8,062)
Other current assets 119 (11)
Other noncurrent assets - -
Increase (decrease) in liabilities:
Accounts payable (5,114) (7,599)
Accrued liabilities 3,236 448
Income taxes payable (1,188) 489
Other noncurrent liabilities 114 109
-------- --------
Net cash (used in) provided by
operating activities 3,231 (7,464)
-------- --------
Cash flows from investing activities:
Additions to property and equipment (3,674) (1,662)
Additions to intangible assets (286) (737)
-------- --------
Net cash (used in) provided by
investing activities (3,960) (2,399)
-------- --------
Cash flows from financing activities:
Proceeds from borrowings - 9,000
Reduction of indebtedness and
capital lease obligations (904) (1,033)
Cash dividends paid (936) (934)
-------- --------
Net cash (used in) provided by
financing activities (1,840) 7,033
-------- --------
Increase (decrease) in cash
and cash equivalents (2,569) (2,830)
Cash and cash equivalents:
Beginning of period 8,569 5,496
--------- ---------
End of period $ 6,000 $ 2,666
========= =========
Supplemental disclosures
of cash flow information:
Interest paid (received) $ (90) $ 102
Income taxes paid $ 2,985 $ 524
</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 twenty-six week
periods ended August 2, 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 twenty-six weeks ended August 2, 1997, and August 3,
1996, respectively the Company's proforma earnings per share would
have been as follows:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------- ----------------------
August 2, August 3, August 2, August 3,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic earnings per share .13 .04 .42 .26
Diluted earnings per share .13 .04 .42 .26
</TABLE>
- 6 -
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 224 discount general merchandise stores in ten
states in the southeastern United States. One hundred and ten 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 August 2, 1997 and August 3, 1996
- ------------------------------------------------------
Net sales increased from $99.0 million in 1996 to $110.2 million in
1997, an increase of $11.2 million or 11.3%. The increase was
attributable to comparable store sales increases of 8.1% ($7.3
million) and sales by stores not yet included as comparable stores
($3.6 million). Wholesale sales to franchisees and independents
increased $.3 million or 3.0% in 1997.
Gross profit increased from 26.7% of sales in 1996 to 27.4% in 1997
primarily due to strong quarterly sales without the need for
markdown levels experienced in prior years. This combined with a
slightly higher initial purchase margin resulting from improved
sourcing and opportunistic purchases, contributed to the overall
improved margins.
Selling, general and administrative expenses increased from $25.6
million in 1996 to $28.2 million in 1997. As a percentage of
sales, these expenses decreased from 25.9% to 25.6%. The
improvement in comparable store sales for the quarter contributed
to a higher leveraging of expenses and, therefore, an improved
expense ratio. Included in selling, general and administrative
expenses in the quarter were 33 additional store and pharmacy
locations added since the same quarter of 1996.
- 8 -
<PAGE>
Twenty-Six Weeks Ended August 2, 1997 and August 3, 1996
- --------------------------------------------------------
Net sales increased from $200.8 million in 1996 to $222.9 million
in 1997, an increase of $22.1 million or 11.0%. The increase was
attributable to comparable store sales increases of 8.3% ($15.1
million) and sales by stores not yet included as comparable stores
($6.6 million). Wholesale sales to franchisees and independents
increased $.4 million or 2.1% in 1997.
Gross profit increased from 27.0% of sales in 1996 to 27.5% in 1997
for the aforementioned reasons.
Selling, general and administrative expenses increased from $50.1
million in 1996 to $55.0 million in 1997. As a percentage of
sales, these expenses decreased from 25.0% to 24.7%. The
improvement in comparable store sales for the first half 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 half of 1997. Selling, general and
administrative expenses for the first half of 1997 also included an
additional 33 store and pharmacy locations than in the first half
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 $3,231,000
during the twenty-six week period ended August 2, 1997. Cash was
primarily used to increase inventories $1,114,000, and reduce trade
vendors by $5,114,000. These cash outlays were financed primarily
from net income $3,931,000 and higher levels of accrued liabilities
of $3,236,000.
Cash flows used by investing activities totaled ($3,960,000) which
was primarily used to fund upgrades to the distribution center
management system and new store and pharmacy capital expenditures
($3,674,000).
Cash flows used by financing activities totaled ($1,840,000) which
was used to pay cash dividends ($936,000) and reduce indebtedness
($904,000).
The Company has a $12,000,000 revolving credit commitment available
from a bank. At August 2, 1997, no borrowings have been made under
the revolving credit agreement.
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.
- 9 -<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
The Annual Meeting of the Shareholders of Fred's, Inc.
was held on June 18, 1997. Michael J. Hayes, David A.
Gardner, John R. Eisenman and Roger T. Knox were
elected to continue as directors of the Company. The
shareholders also ratified the appointment of Price
Waterhouse LLP as independent public accountants for
the fiscal year ending January 31, 1998.
The results of the voting were as follows:
<TABLE>
<CAPTION>
Abstain/
For Against Withheld Broker Non-Vote
--- ------- -------- ---------------
<S> <C> <C> <C> <C>
Election of Directors:
Michael J. Hayes 8,437,503 6,027 941,211
David A. Gardner 8,437,567 5,963 941,211
John R. Eisenman 8,437,033 6,497 941,211
Roger T. Knox 8,437,333 6,197 941,211
Appointment of Price
Waterhouse LLP 8,436,978 565 5,987 941,211
</TABLE>
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 27 - Financial Data Schedule (Edgar
Filing only)
Reports on Form 8-K:
Not Applicable.
- 10 -<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.
/s/ Michael J. Hayes
----------------------------
Michael J. Hayes
Date: September 15, 1997 Chief Executive Officer
/s/ Richard B. Witaszak
----------------------------
Richard B. Witaszak
Date: September 15, 1997 Chief Financial Officer
- 11 -
EXHIBIT 11
FRED'S, INC.
COMPUTATION OF NET INCOME PER SHARE
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
August 2, August 3, August 2, August 3,
1997 1996 1997 1996
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Primary net income per share
- ----------------------------
Net income $ 1,251 $ 414 $ 3,931 $ 2,466
======== ====== ======= =======
Weighted average number of
common shares outstanding
during the period 9,349 9,330 9,338 9,330
Additional shares attributable
to common stock equivalents 107 - 58 -
------ ----- ----- -----
9,456 9,330 9,396 9,330
====== ===== ===== =====
Net income per share $ .13 $ .04 $ .42 $ .26
====== ====== ===== =====
Fully diluted net income per share
- ----------------------------------
Net income $1,251 $ 414 $3,931 $2,466
====== ====== ====== ======
Weighted average number of
common shares outstanding
during the period 9,351 9,330 9,343 9,330
Additional shares attributable
to common stock equivalents 140 - 77 -
------ ------ ------- ------
9,491 9,330 9,420 9,330
====== ====== ======= ======
Net income per share $ .13 $ .04 $ .42 $ .26
====== ====== ======= ======
</TABLE>
<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.
/s/Michael J. Hayes
-------------------
Michael J. Hayes
Date: September 15, 1997 Chief Executive Officer
/s/Richard B. Witaszak
----------------------
Richard B. Witaszak
Date: September 15, 1997 Chief Financial Officer
- 11 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF FREDS, INC. FOR THE QUARTER ENDED AUGUST 2,
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> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-2-1997
<PERIOD-END> AUG-2-1997
<CASH> 6,000
<SECURITIES> 0
<RECEIVABLES> 4,960
<ALLOWANCES> (568)
<INVENTORY> 89,620
<CURRENT-ASSETS> 105,345
<PP&E> 111,365
<DEPRECIATION> (60,707)
<TOTAL-ASSETS> 161,686
<CURRENT-LIABILITIES> 36,055
<BONDS> 1,479
0
0
<COMMON> 63,890
<OTHER-SE> 58,803
<TOTAL-LIABILITY-AND-EQUITY> 161,686
<SALES> 222,864
<TOTAL-REVENUES> 222,864
<CGS> 161,611
<TOTAL-COSTS> 161,611
<OTHER-EXPENSES> 55,031
<LOSS-PROVISION> 9
<INTEREST-EXPENSE> (76)
<INCOME-PRETAX> 6,289
<INCOME-TAX> 2,358
<INCOME-CONTINUING> 3,931
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,931
<EPS-PRIMARY> $0.42
<EPS-DILUTED> $0.42
</TABLE>
