Which Retailer Will Be Profitable in the New Year?

The Eurozone is floundering to raise capital, emerging markets are experiencing slowed growth, and the US is struggling to battle unemployment. In the status quo, global markets are unable to turn around and show clear signs of positivity. Global finance is also struggling to keep up with population growth and the lack of productivity across nations is becoming widespread. What does this mean for the investors and the average private citizen?

The majority of people have been trying to save as much money as possible, resulting in certain industries facing downward pressure. For example, luxury items, ranging from jewelry to cars, are experiencing lower turnover compared to the past. However, some industries are not facing as much depression in sales compared to high-end consumer discretionary outlets. Companies like McDonald's MCD have affordable product offerings for all income levels, rendering sales more stable than other companies.

A small-cap retailer that offers affordable products is Fred's Inc FRED. Fred's operates general department stores in 15 states across the southeastern United States, selling items that it deems to have high turnover and are in demand on a constant basis by its customers.

Fred's board of directors appears to be filled with people who are confident in their abilities to steer the company in the right direction. The chairman of the board, Michael Hayes, has been with the company since 1987, serving in senior positions. Before joining Fred's, he was with Oppenheimer & Company, an investment bank, working in its corporate finance and financial services capacities. Another member of the board is Bruce Efird, who is also the president and chief executive officer of the firm. Before Fred's, he used to be the executive vice president of Meijer. Other members of the board have been involved with restaurants and other large consumer retail chains.

At the surface, it appears that the company's operational abilities have been fairly steady. While fluctuations occur all the time, Fred's seems to have not suffered as other retailers out there. For example, its performance in 2011 has closely mirrored 2010. Many companies are unable to claim fairly stable revenues. Cost of goods sold and other operating expenses have been fairly stable as well. Ultimately, it appears that revenues and income numbers are cyclical, as EPS and net income figures are the same in both Q3 2010 and Q3 2011.

Fred's cash situation has been quite positive, with help from positive income, depreciation & amortization, and other working capital items. Interestingly, Fred's has been spending a significant portion of cash on capital expenditures every quarter. This could be a sign of growth, or at least may signal plans to grow in the future. Lastly, cash has been spent consistently on stock repurchase programs as well as cash dividends.

The firm's balance sheet has been a bit turbulent over each quarter, as cash and current assets have fluctuated wildly. Property, plant, and equipment have increased progressively, and so have non-current assets. Current liabilities have fluctuated significantly as well, although the company maintains no short-term debt. Moreover, long-term debt has been fairly consistent. This may or may not be a sign that the company has had problems finding the money to pay off its debt. Ultimately, retained earnings have continuously increased, and can be used as a barometer for a company's ability to tangibly add value to its shareholders.

Fred's appears to be a consistent organization with accomplished senior management. It has been able to weather the economic downturn while many of its competitors have suffered. However, depending on how things go in the world, now may or may not be a good time to purchase the stock. Investors will have to gauge macroeconomic conditions and understand how Fred's performance will correlate to it.

Fred's is currently trading at $14.75, up about 7% for the year.