Miami, FL – August 21, 2018 (EmergingGrowth.com NewsWire) — EmergingGrowth.com, a leading independent small cap media portal with an extensive history of providing unparalleled content for the Emerging Growth markets and companies, reports on Fred’s Inc. (NASDAQ: FRED)
Fred’s Inc. (NASDAQ: FRED) Trust the Shorts, Fred’s Turnaround May Not Materialize
It may take a while before the company will be able to reward its loyal shareholder base, as the last four fiscal years were unkind to Memphis-based Fred’s Pharmacy (NASDAQ: FRED), who is currently in the process of ditching the business model it operated since the 1940’s.
“Business Model Transformation”
Thanks to the under performing stores, derived from declining stores traffic, the company reported accumulated net losses of $253 million over the last four years. The story line would have been different, had the Walgreens Boots Alliance (NASDAQ: WBA)and Rite Aid Corp. (NYSE: RAD)transaction materialized. It should be recalled that on June 2017, FRED offered $950 million for the purchase of 865 Rite Aid Stores, but several anti-trust issues ended the transaction. Assuming the transaction consummated, FRED would have secured its position as the third largest drugstore chain, easily devouring competition.
This is all behind now, and the company needs to focus on survival. The first order of business was to install a new guy at the top – the company’s Chief Financial Officer Joseph Anto took over as interim CEO, after Michael Bloom’s resignation last April.
In the initial conference call, Mr. Anto stated that he was “dissatisfied” with the company’s financial performance, and a reset is necessary for the company to thrive. The planned turnaround strategy will revolve around various areas, including revenue and margins enhancement, optimizing cost structure and capital allocation, bringing in new talent, strategic transaction and asset optimization.
The turnaround strategy would result in the shift of the company’s focus from healthcare towards their general merchandise segment. In a twist of event, FRED is gradually returning to the past business model as “pure play” on general merchandise business, after quickly entering the fast expanding healthcare industry two years ago.
As a result, FRED recently sold its specialty business for around $40 million to CVS Health. They are also looking to sell their retail pharmacy portfolio, and have hired investment bankers to determine the value of these pharmacies. Further, they also plan to unload portion of their substantial real estate portfolio. The proceeds of these sales transactions will be used to trim down their sizable bank debt of $176 million, and fund their business transformation.
Conversely, there has been continued emphasis on the beer and wine business, where beer is now sold in 251 FRED’s stores and wine in 81 stores. There have also moved into packaging and redesign for their private labels brands. Hence, it looks like they will be able to totally depart from the retail pharmacy business over the next years, with main focus on general merchandise business.
“Definitely a Long Shot”
While a retail turnaround could be achievable, the odds are not in favor of Fred’s Inc. First, there is the issue of deleveraging their balance sheet against a backdrop of increasing rates. As such, the company is in a capital allocation conundrum: whether to fund expansion or substantially trim down their bank debt. Second, industry experts project a flat growth in the general merchandise industry in the next 5 years; FRED needs to find a smaller market segment offering better business prospects, in order to produce meaningful cash flows. Finally, there is a little room for further business mistakes, and the company’s management needs to act fast in turning around their operations.
The short ratio is seemingly high at 39% of the market float, implying that there are considerable number investors who are betting on the company’s failure. The shorts may be right – there is a high risk that the turnaround will not succeed, and a high probability of a permanent capital loss.
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