Analyst: Fred's Looks Like An Early-Stage Turnaround Story

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In a report published Friday, FBR Capital Markets analysts maintained a Market Perform rating on
Fred's, Inc
FRED
, while raising the price target from $15 to $18. The company announced its 4Q14 EPS at $0.02, excluding $0.24 of non-operational charges, in-line with the FBR estimates but better than the ($0.12) consensus. Fred's guided to EPS of flat to up $0.03 for 1Q15, which was below the $0.27 consensus. The EPS guidance for FY15, at $0.50 to $0.58, implies significant improvement in trends as the year progresses. In the report FBR Capital Markets noted, "The last 90 days have marked a major inflection point in the FRED story, as new CEO Jerry Shore has had remarkable success in assembling a team of highly accomplished dollar/pharmacy veterans, in our view. Clearly the focus going forward is toward the higher margin health/pharmacy side of the business, which we think should help drive both traffic and profit." The company has had several management changes, which appear positive. Fred's has recently named Mike Bloom as COO and Bryan Pugh as Chief Merchandising and Marketing Officer. Bloom was at CVS for two decades, while Pugh was the CMO at Walgreens. "We believe these hirings signal the direction FRED is taking perhaps—deemphasizing some of the more "dollar-store" categories and emphasizing the drug/convenience format with a greater focus on consumables, HBA, and home health. Traffic has been a major problem for FRED over the prior few years, and this reassortment is likely to materially help drive customers to the stores," the analysts said. While Fred's has projected a 6.5% EBITDA margin goal for the long term, it has had a "tough time hitting margin goals in the past." Given the new management team, the recently completed restructuring, and the "renewed focus on pharmacy as the forward-growth vehicle," FBR Capital Markets believes that the company is now in a stronger position to "hit this goal than at any time in recent history." The analysts believe that Fred's could become an "interesting turnaround story" in the latter half of this year. They noted, however, that the shares seem expensive and sentiment on the stock "appears to be weak," while adding, "We are taking a "wait-and-see" approach for now, but we believe shares are beginning to develop the look of an early-stage turnaround story."
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Posted In: Analyst ColorPrice TargetReiterationAnalyst RatingsFBR Capital Markets
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