In reporting second-quarter results, the chief executive officer of Fred's Inc. cited pressure on the pharmacy business that's likely to continue over the next year and a half.


Fred's, pharmacy, Bruce Efird, second quarter, Core 5, Mark Miller, William Blair & Co., Russell Redman, discount general merchandise chain, pharmacy department


































































































































































































































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Fred's CEO: Pharmacy feeling 'headwinds'

August 26th, 2010

MEMPHIS, Tenn. – In reporting second-quarter results, the chief executive officer of Fred's Inc. cited pressure on the pharmacy business that's likely to continue over the next year and a half.

The discount general merchandise chain, whose 674 stores include 312 pharmacies, said Thursday that total sales for its fiscal 2010 second quarter ended July 31 rose 4% year over year to $449.5 million. Same-store sales were up 2.5%, nearly double the gain in the prior-year period. Net earnings also climbed 17% to $5 million, or 13 cents per diluted share.

CEO Bruce Efird pointed to improved customer traffic and comparable-store revenue from Fred's Core 5 store upgrade program as generating momentum for the retailer going forward. However, he gave a guarded outlook for the pharmacy, which accounts for about a third of the chain's sales.

"While our general merchandise departments are building traction, our pharmacy department is now feeling the impact of industry headwinds, in spite of Fred's achieving above-industry comparable-script growth," Efird said in a statement.

"We expect that over the next 18 months," he explained, "the pharmacy industry will wrestle with the forthcoming changes in third-party reimbursement rates, decreasing sales caused by higher generic drug penetration and continued expansion of $4 generic pricing, along with the expanded base of insured [from health care reform] that will phase in between 2011 and 2014."

In a research note released Thursday, analyst Mark Miller of William Blair & Co. referred to Efird's pharmacy outlook in considering reduced guidance for Fred's 2010 earnings.

"Fred's made some cautious comments regarding its pharmacy (33% of sales) over the next 18 months," Miller wrote. "Pharmacy profitability could be squeezed by incremental
pressure on reimbursement rates — including the implementation of AMP [average manufacturer pricing] in 2011 — and the expansion of $4 generics."

Last fall, Fred's announced a major rebranding and remodeling program that would make pharmacy a centerpiece of its stores. The effort, launched this year, is designed to emphasize the key traffic-driving areas of stores, with remodels featuring a larger focus on pharmacy.

Among the changes, the pharmacy department and health and beauty aids section were brought up closer to the front of the store. Plans call for the chain to transition all stores to the new format by 2011.

Fred's said that for the first half of 2010, it opened one new store, upgraded three express pharmacies to full stores and opened five express pharmacies and seven new pharmacies. During the six months, the chain also closed six pharmacies and refreshed 120 stores with the new Core 5 elements.

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