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 May 3, 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 9,384,741 shares of Class A voting, no par value
common stock outstanding as of May 3, 1997.
<PAGE>
FRED'S, INC.
INDEX
Page No.
--------
Part I - Financial Information
- ------------------------------
Item 1 - Financial Statements (unaudited):
Consolidated Balance Sheets as of
May 3, 1997 and February 1, 1997 3
Consolidated Statements of Income
for the Thirteen Weeks Ended May 3, 1997
and May 4, 1996 4
Consolidated Statements of Cash Flows
for the Thirteen Weeks Ended May 3, 1997
and May 4, 1996 5
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and
Analysis of Financial Condition and
Results of Operations 7 - 8
Part II - Other Information 9
- ---------------------------
Signatures 10
- ----------
<PAGE>
FRED'S, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except for number of shares)
<TABLE>
<CAPTION>
May 3, February 1,
1997 1997
------- -----------
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 7,541 $ 8,569
Receivables, less allowance for doubtful
accounts 5,005 4,493
Inventories 92,914 88,505
Deferred income taxes 4,152 4,152
Other current assets 1,386 895
-------- --------
Total current assets 110,998 106,614
Property and equipment, at
depreciated cost 48,355 48,379
Equipment under capital leases, less
accumulated amortization 1,548 320
Deferred income taxes 3,439 3,921
Other noncurrent assets 2,048 1,914
-------- --------
$166,388 $161,148
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 27,353 $ 27,862
Current portion of indebtedness 882 1,278
Current portion of capital lease
obligations 189 363
Accrued liabilities 11,024 8,935
Income taxes payable 2,139 1,648
-------- --------
Total current liabilities 41,587 40,086
Indebtedness - -
Capital lease obligations 1,532 138
Other noncurrent liabilities 1,402 1,345
-------- --------
Total liabilities 44,521 41,569
-------- --------
Commitments and contingencies
Shareholders' equity:
Common stock, Class A voting, no
par value, 9,384,741 shares issued
and outstanding (9,328,822 shares
at February 1, 1997) 63,962 63,369
Retained earnings 58,587 56,364
Deferred compensation on restricted
stock incentive plan (682) (154)
-------- ---------
Total shareholders' equity 121,867 119,579
-------- ---------
$166,388 $161,148
======== =========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
FRED'S, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
--------------------
May 3, May 4,
1997 1996
--------------------
<S> <C> <C>
Net sales $112,668 $101,758
Cost of goods sold 81,594 73,976
-------- --------
Gross profit 31,074 27,782
Selling, general and administrative
expenses 26,807 24,467
-------- --------
Operating income 4,267 3,315
Interest expense (Income), net (21) 94
-------- --------
Income before income taxes 4,288 3,221
Provision for income taxes 1,608 1,169
-------- --------
Net income $ 2,680 $ 2,052
======== ========
Net income per share $ .29 $ .22
======== ========
Weighted average number of common shares
and common equivalent shares
outstanding 9,330 9,326
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
FRED'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
------------------------------
May 3, May 4,
1997 1996
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,680 $ 2,052
Adjustments to reconcile net income
to net cash flows from operating
activities:
Depreciation and amortization 1,600 1,470
Deferred income taxes 482 353
Amortization of deferred compensation on
restricted stock incentive plan 60 30
(Increase) decrease in assets:
Receivables (512) 146
Inventories (4,409) (8,355)
Other current assets (491) 87
Increase (decrease) in liabilities:
Accounts payable (509) (2,281)
Accrued liabilities 2,089 (999)
Income taxes payable 491 823
Other noncurrent liabilities 57 49
--------- --------
Net cash provided by (used in)
operating activities 1,538 (6,625)
--------- --------
Cash flows from investing activities:
Additions to property, equipment and
equipment under capital leases (1,385) (736)
Additions to intangible assets (257) (116)
--------- --------
Net cash (used in) provided by
investing activities (1,642) (852)
--------- --------
Cash flows from financing activities:
Proceeds from borrowings and
increase in capital lease obligations - 3,900
Reduction of indebtedness and
capital lease obligations (458) (441)
Cash dividends paid (466) (467)
--------- --------
Net cash provided by (used in)
financing activities (924) 2,992
--------- --------
Increase (decrease) in cash and cash equivalents (1,028) (4,485)
Beginning of period cash and cash equivalents 8,569 5,496
--------- --------
End of period cash and cash equivalents $ 7,541 $ 1,011
========= ========
Supplemental disclosures of cash
flow information:
Interest paid (earned) $ (36) $ 70
Income taxes paid $ - $ -
</TABLE>
See accompanying notes to consolidated financial statements
<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 into the Company's Annual Report on Form 10-K.
The results of operations for the thirteen week period ended May
3, 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 three months ending May 3, 1997, and May 4, 1996, the
Company's proforma basic earnings per share would have been $.29
and $.22, respectively and its proforma diluted earnings per
share would have been $.29 and $.22, respectively.
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
FINANCIAL CONDITION
- -------------------
Fred's operates 217 discount general merchandise stores in ten
states in the southeastern United States. One hundred and five
of the stores have full service 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 $4,408,000 during the thirteen week
period ended May 3, 1997. In addition, cash was used to reduce
balances with trade vendors ($507,000), and fund capital
expenditures ($1,392,000) and cash dividends ($466,000). The
increased inventory levels and other cash outlays were financed
from net income ($2,680,000) 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. At May 3, 1997, no borrowings have been
made under the revolving credit agreement.
During the fourth quarter of 1996, the Company recorded a
$2,860,000 accrual for the closure of certain underperforming
stores and the repositioning of certain merchandise categories.
As of the end of the thirteen weeks ended May 3, 1997, there have
been no material changes in the Company's restructuring plan or
in the estimates of charges accrued with respect to the
restructuring plan as of the end of fiscal 1996.
RESULTS OF OPERATIONS
- ---------------------
Thirteen Weeks Ended May 3, 1997 and May 4, 1996
- ------------------------------------------------
Net sales increased from $101.8 million in 1996 to $112.7 million
in 1997, an increase of $10.9 million or 10.7%. The increase was
attributable to comparable store sales increases of 8.6% ($7.9
million) and sales by stores not yet included as comparable
stores ($3.0 million). Wholesale sales to franchisees and
independents increased $.1 million in 1997.
<PAGE>
Gross profit increased from 27.3% of sales in 1996 to 27.6% in
1997, primarily due to strong quarterly sales in certain seasonal
categories such as lawn and garden which finished with a solid
double-digit increase over the first quarter of 1996. This
combined with the higher margins in the pharmacy segment,
contributed to the overall improved margins. Another factor in
the higher gross margin was an increase in the proportion of
retail sales, which carry higher margins than wholesale sales.
Selling, general and administrative expenses increased from $24.5
million in 1996 to $26.8 million in 1997. As a percentage of
sales, expenses decreased from 24.0% to 23.8%. The improvement
in comparable store sales for the quarter contributed to a 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 higher-than-expected health insurance
costs compared with the first quarter of 1996.
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.
<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 27 - Financial Data Schedule (EDGAR Filing
Only)
Reports on Form 8-K:
Not Applicable.
<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: June 16, 1997 Chief Executive Officer
- --------------------
/s/ Richard B. Witaszak
-----------------------
Richard B. Witaszak
Date: June 16, 1997 Chief Financial Officer
- --------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Financial Statements of Fred's, Inc. 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> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-2-1997
<PERIOD-END> MAY-3-1997
<CASH> 7,541
<SECURITIES> 0
<RECEIVABLES> 5,730
<ALLOWANCES> (725)
<INVENTORY> 92,914
<CURRENT-ASSETS> 110,998
<PP&E> 109,314
<DEPRECIATION> (59,411)
<TOTAL-ASSETS> 166,388
<CURRENT-LIABILITIES> 41,587
<BONDS> 1,532
0
0
<COMMON> 63,962
<OTHER-SE> 57,905
<TOTAL-LIABILITY-AND-EQUITY> 166,388
<SALES> 112,668
<TOTAL-REVENUES> 112,668
<CGS> 81,594
<TOTAL-COSTS> 81,594
<OTHER-EXPENSES> 26,800
<LOSS-PROVISION> 7
<INTEREST-EXPENSE> (21)
<INCOME-PRETAX> 4,288
<INCOME-TAX> 1,608
<INCOME-CONTINUING> 2,680
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,680
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.29
</TABLE>
EXHIBIT 11
FRED'S, INC.
COMPUTATION OF NET INCOME PER SHARE
(unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
May 3, May 4,
1997 1996
-------- --------
<S> <C> <C>
Primary net income per share
Net income $2,680 $2,052
======== ========
Weighted average number of common shares
outstanding during the period 9,330 9,326
Additional shares attributable to common
stock equivalents - -
------- --------
9,330 9,326
======= ========
Net income per share $ .29 $ .22
======= ========
Fully diluted net income per share
Net income $2,680 $2,052
======= ========
Weighted average number of common shares
outstanding during the period 9,330 9,326
Additional shares attributable to common
stock equivalents - -
------- --------
9,330 9,326
======= ========
Net income per share $ .29 $ .22
======= ========
</TABLE>
