We Are Cautious on Fred's, Given Pharmacy Industry Headwinds

Deutsche Bank Securities said it remains sidelined on Fred's, Inc.

, citing headwinds facing its pharmacy business. That said, the firm noted that the company's front end continues to improve. As such, the firm prefers to see signs of sustainable improvement in pharmacy industry issues before revisiting its Hold rating on the shares of the company. Analyst Paul Trussell expects the numerous top-line and margin opportunities under its new management team to give a real thrust to its performance in fiscal year 2016 and ahead. The analyst expressed comfort with the progress achieved by the company on general merchandise and comp. Deutsche Bank's specialty comp. target for the full year is 0.9 percent relative to the guidance of 1-4 percent. To counter competitive threat from dollar store and discount environment, the firm noted that the company is taking initiatives such as new store prototype, food relaunch and assortment changes. However, pharmacy industry challenges such as script volume and cost, according to Deutsche Bank, will render the road to reverse negative scripts volumes long. The firm has below-consensus bottom line estimates of a loss of 2 cents per share for the second quarter and earnings of 26 cents per share for 2016 and 32 cents per share for 2017. Deutsche Bank has a $15 price target on the shares of Fred's, below its currently traded price.