Fred's Down to Strong Sell on Bleak View - Analyst Blog

On Mar 28, 2014, Zacks Investment Research downgraded Fred's Inc. FRED to a Zacks Rank #5 (Strong Sell) following management's tepid outlook for the first quarter of 2014 provided at the fourth-quarter conference call last week.

Why the Downgrade?

On Mar 27, Fred's announced its fourth-quarter fiscal 2013 earnings results. Although fourth-quarter earnings of 17 cents exceeded the guidance range of 13 to 16 cents, we want to remind investors that the range reflects lowered expectations following soft comps announced by the company for the month of January.

Moreover sales slipped 7.2% year over year and missed the Zacks Consensus Estimate by 1% in the quarter. Lower-than-expected sales resulted from store closings following extreme weather conditions especially in the month of January. The company also saw soft margins in the quarter due to merchandise markdown and weak sales.

Management expects these headwinds to continue into the first quarter. In fact, harsh weather heavily affected general merchandise sales during the months of February and March as well – the first two months of the first quarter. Again, lower sales in the fourth quarter of 2013 raised the inventory levels. The company was unable to clear the inventory which delayed spring selling.

For first-quarter fiscal 2014, Fred's expects total sales to be flat compared to an increase of 2% in the previous year. Comparable-store sales are expected to be flat to down 2%, compared to a decline of 1.3% in the previous year. Earnings per share are forecasted in the range of 23 to 27 cents for the first quarter lower than 31 cents in the year-ago quarter.

All the estimates were revised downward following the cautious outlook of the company. The Zacks Consensus Estimate for first-quarter 2014 and fiscal 2014 slipped 21.4% to 22 cents per share and 1.6% to $1.23 per share, respectively, over the last 7 days.

Other Stocks to Consider

Some better-ranked stocks in the consumer staples sector worth considering include Diamond Foods Inc. DMND, Inventure Foods Inc. SNAK and Unilever plc (UL). All these stocks carry a Zacks Rank #2 (Buy).