Shares Of Fred's Tumble Following Q1 Miss & Concerning Guidance

On Thursday, Fred's FRED reported first quarter 2014 results for the period ending May 3, 2014. Shares were down more than six percent amid the first quarter miss and concerning guidance.

Fred's CEO Bruce A. Efird commented, “As we outlined in our April sales release, the first quarter was a challenging period for Fred's due to a number of headwinds. These challenges included intense competitive promotions and poor weather throughout much of the spring, which affected general merchandising.

"In addition to the sales impact of these issues, we also encountered extraordinary inflationary pressures on generic drugs in the first quarter, as we forecasted in our year-end 2013 press release. Third-party payers have been slow to increase reimbursement rates to match higher drug costs, lowering pharmacy margin for the first quarter.

"In addition, typical delays in the approval of Work Opportunity Tax Credits increased our income tax rate for the quarter, which in turn reduced earnings per share for the quarter by $0.01; this tax credit is expected to be renewed retroactively this year.”

Summary of Q1 Results

Fred's reported net total income of $6.1 million, or $0.17 per diluted share. 1Q13 net income totaled $11.4 million, or 40.31 per diluted share.

• Total sales came in at $498.3 million compared with $501.5 million from the same period last year.
• Gross profit decreased to $142.5 million from $151 million in 1Q13.
• Selling and G&A expenses were flat for the first quarter.
• Management reported that earnings before taxes, depreciation and amortization decreased to $19.9 million or four percent of sales from $28.1 million or 5.5 percent of sales from the prior year.
• Operating income came in at $10 million or two percent of sales.

Guidance

Management expects sales to increase one to three percent in the second quarter.

• Second quarter comparable store sales are expected to be within the range of flat to up two percent.
• Fred's sees Q2 EPS to be with $0.04 to $0.09, compared with 0.09 percent.
• 2014 EPS is expected to be within $0.60 and $0.68.

Stock Action

Shares of Fred's closed at $16.00 on Wednesday.

In Thursday's pre-market trading, the stock is down as much as 6.19 percent following the quarter miss and disappointing guidance.

Shares are currently down 1.69 percent at $15.67.