Discount retailer Fred's Inc. (FRED) on Thursday reported a 9 percent increase in profit for the first quarter as lower costs and wider margins helped offset flat sales. Both revenue and earnings per share beat analysts' expectations.
Looking ahead, Fred's forecast earnings for the second quarter below Street estimates, citing the absence of a tax rate benefit recorded in the prior year. However, the company affirmed its earnings outlook for fiscal 2013.
Bruce Efird, chief executive officer of Fred's, said, "We are very pleased with our first quarter results, which topped the high end of our earnings guidance for the period. These improvements reflected the immediate impact of our recently launched reconfiguration plan, as we outperformed in gross margin results and expense management."
Further, Efird said, "Given the unusual weather conditions that affected top-line growth during the quarter, our team's ability to control expenses was one of the primary reasons we were at the high end of expectations."
Fred's net income for the first quarter rose to $11.41 million or $0.31 per share from $10.46 million or $0.28 per share in the year-ago period. On average, ten analysts polled by Thomson Reuters expected the company to earn $0.27 per share for the quarter. Analysts' estimates typically exclude special items.
Net sales for the quarter edged up 0.2 percent to $501.50 million from $500.51 million in the previous-year quarter. Analysts had a consensus revenue estimate for the quarter of $499.41 million.
Comparable store sales for the quarter declined 1.3 percent, compared to a decrease of 0.4 percent for the prior-year quarter.
Gross margin increased to 30.1 percent from 29.5 percent in the same period last year, primarily reflecting the pharmacy department effect of the brand to generic mix shift.
Looking ahead to the second quarter, Fred's forecasts earnings in a range of $0.06 to $0.09 per share, compared with $0.17 per share in the year-ago period. The company projects total sales to increase in a range of 2 to 4 percent and comparable store sales to be about flat in the quarter.
Analysts expect the company to report earnings of $0.10 per share for the quarter on revenues of $481.59 million.
Efird said, "We are guardedly optimistic about the second quarter and expect that earnings from operations for the quarter will improve in the range of approximately 25% to 75% compared with the same period last year. The $0.12 per share tax rate benefit recorded in the second quarter last year will not be available in 2013."
For fiscal year 2013, Fred's affirmed its outlook for earnings in a range of $0.77 to $0.88 per share. Analysts expect the company to report earnings of $0.82 per share for the year.
Currently, Fred's operates 715 discount general merchandise stores, including 21 franchised Fred's stores, in the southeastern United States.
FRED closed Wednesday's trading at $15.26, down $0.19 on a volume of 132,100 shares.
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