Market Overview

Fred's Reports 11% Higher July Sales

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MEMPHIS, Tenn.--(BUSINESS WIRE)--

Fred's Inc. (NASDAQ: FRED) today reported sales for the four-week month of July, which ended August 1, 2015.

Fred's total sales for the month increased 11% to $164.7 million from $148.9 million in July 2014. Excluding $5.6 million from last year's July sales related to 57 subsequently closed locations, total sales increased 16% for the month. Comparable store sales for the month increased 0.7%, the same as in the year-earlier period.

Fred's total sales for the second quarter of fiscal 2015 increased 11% to $545.2 million from $491.2 million for the same period last year. Excluding sales of $19.2 million from stores closed in 2014, total sales increased 16% for the second quarter of 2015. On a comparable store basis, second quarter sales increased 0.9% versus a decline of 0.1% for the year-earlier period.

Fred's total sales for the first half of fiscal 2015 increased 7% to $1.054 billion from $989.4 million for the same period last year. Excluding sales of $39.5 million from stores closed in 2014, total sales increased 11% for the first six months of 2015. On a comparable store basis, year-to-date sales increased 0.7% versus a decline of 1.0% for the year-earlier period.

Commenting on the announcement, Jerry A. Shore, Chief Executive Officer, said, "July sales continued to reflect the solid contribution of our recently expanded specialty pharmacy business, which comprised approximately 12% of our total sales for the month. July's comparable store sales performance, however, did not meet our internal expectations as we continued to confront strong headwinds in retail pharmacy sales caused by several factors. These include an increasing regulation of controlled substances, which indexes higher in our southeast region than in other parts of the country, and a greater uninsured population due to lower-than-average participation in available health insurance alternatives. In addition to the sales impact of these factors, continued pressure on reimbursement rates, especially in the Medicare Part D networks, significantly affected retail pharmacy department gross margins throughout the month and quarter.

"In the general merchandise departments, we continued to see improved sales in July, following the trends earlier in the quarter and reflecting further progress on our initiatives to improve product assortment and expand margins," Shore added. "Despite that headway, general merchandise sales fell short of our expectations due to later school opening dates and a shift in the sales tax holiday in many states, which will push some back-to-school sales into August."

Shore continued, "While our quarter-end balance sheet and quarterly cash flow were both solid and met projections, due to the pressures discussed earlier we now estimate a net loss in the range of $0.10 to $0.15 per share for the second quarter. This includes an unexpectedly large increase in LIFO expense, a non-cash item that accounts for approximately $0.06 of the estimated per-share loss for the quarter that was not in our prior plan. Adjusted EBITDA, which adds back LIFO and stock compensation expenses, is expected to be in the range of $8 to $9 million for the quarter versus a negative $14 million in the year-ago quarter.

"Looking ahead, we expect to see a continuation of improving trends in general merchandise departments as our merchandising and marketing initiatives gain further traction," Shore said. "In addition, our specialty pharmacy business should continue to grow and its profit performance is expected to strengthen further. In our upcoming second quarter earnings conference call, we plan to provide a mid-year update on these initiatives and will outline our strategy that reflects the work completed by our Pharmacy Committee of the Board of Directors and our consultants, A. T. Kearney, to address the industry-wide changes that are taking place in retail pharmacy."

Through the first half of fiscal 2015, the Company added a net two Xpress pharmacy locations. Fred's also acquired two specialty pharmacy-only locations during the first half of fiscal 2015.

Fred's operates 662 discount general merchandise stores and three specialty pharmacy-only locations in the southeastern United States. For more information about the Company, visit Fred's website at www.fredsinc.com.

Comments in this news release that are not historical facts are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. A reader can identify forward-looking statements because they are not limited to historical facts or they use such words as "outlook," "guidance," "may," "should," "could," "believe," "anticipate," "plan," "expect," "estimate," "forecast," "goal," "intend," "committed," "continue," or "will likely result" and similar expressions that concern the Company's strategy, plans, intentions or beliefs about future occurrences or results. These risks and uncertainties include, but are not limited to, those associated with the Company's announced strategic plan, the ultimate terms of the reworked pharmacy distribution agreement, lease buyouts and the underlying assumptions and projections upon which they are based, as well as risks that intended results may not be achieved or may not occur as quickly as expected; the success of announced acquisition activities and future growth trends in businesses acquired; general economic trends; changes in consumer demand or purchase patterns; delays or interruptions in the flow of merchandise between the Company's distribution centers and its stores or between the Company's suppliers and same; a disruption in the Company's data processing services; costs and delays in acquiring or developing new store sites; and the factors listed under "Risk Factors" in the Company's most recent Annual Report on Form 10-K and any subsequent quarterly filings on Form 10-Q filed with the Securities and Exchange Commission. Forward-looking statements speak only as of the date made. Fred's undertakes no obligation to release revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unforeseen events, except as required to be reported under the rules and regulations of the Securities and Exchange Commission.

Fred's Inc.
Jerry A. Shore, 901-362-3733, Ext. 2217
Chief Executive Officer

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