For the first time, pharmacy sales topped 40% of the quarterly revenue mix at Fred's Inc.

Fred's, pharmacy, Bruce Efird, third quarter, pharmacy sales, pharmacy department, pharmacy sales mix, new pharmacy acquisitions, generic penetration, pharmacy gross profit, Xpress pharmacies, EIRIS Health Services, specialty pharmacy, Diplomat Specialty Pharmacy

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Pharmacy business grows at Fred's

November 26th, 2013

MEMPHIS, Tenn. – For the first time, pharmacy sales topped 40% of the quarterly revenue mix at Fred's Inc.

The discount general merchandise chain said Tuesday that total revenue rose 2% to $460.5 million for the third quarter ended Nov. 2, with pharmacy sales climbing by more than 8%.

Net income came in at $7.3 million, or 20 cents per diluted share, up 11% from $6.6 million or 18 cents per diluted share, a year earlier.

"Our pharmacy department continues to grow and outperform our expectations," chief executive officer Bruce Efird said in a conference call with financial analysts. "Our team drove traffic in the pharmacy department, with a total script increase of 4.4% and sales increase of over 8.2% during the quarter, while maintaining our track record of positive script comps."

The combination of script and new pharmacy acquisitions growth has helped improve overall pharmacy gross profit, according to Efird. "The gross margin improvement in the pharmacy department has continued despite significant third-party reimbursement pressures," he noted.

In additon, increased generic penetration and purchasing productivity has bolstered margins in pharmacy, according to Efird.

"The pharmacy sales mix increased to over 40% of our total sales mix during the quarter. This is the first time in the history of the company that pharmacy sales have exceeded the 40% mark. This has been accomplished despite the top-line pressures from ongoing brand-to-generic conversions," he said.

Fred's also is seeing strong growth in immunizations. "So far this year, we have expanded immunizations given by over 78% during a delayed flu season, on top of a 43% increase during third quarter of last year," Efird said. "Our pharmacy team has done an excellent job of communicating with customers regarding the immunizations available beyond the typical flu shots. We anticipate strong immunizations growth to continue."

During the third quarter, Fred's opened eight new locations and closed four locations. In the year to date, Fred's opened 17 new locations, including seven new stores and 10 new Xpress pharmacies. The retailer also closed 21 stores and seven Xpress locations.

Overall, Fred's operates 701 discount general merchandise stores, including 21 franchised Fred's stores, in the Southeast. About half of the chain's stores have pharmacies.

In the analyst call, Efird also pointed to pharmacy acquisition opportunities and growth in new pharmacy departments.

"The team has completed 19 acquisitions through the third quarter, consisting of 12 new locations and seven incremental acquisitions. We've also opened four cold-start pharmacies through the third quarter. The pharmacy acquisition opportunities continue to look favorable for the foreseeable future, and we remain committed to allocate capital to leverage these growth opportunities," he said, noting that stores with pharmacy departments perform higher than the retailer's 4% operating margin goal.

During the third quarter, Fred's opened EIRIS Health Services, a specialty pharmacy division, which Efird said complements the company's relationship with Diplomat Specialty Pharmacy that began in the first quarter. He reported that with its entry into the specialty pharmacy market this year, Fred's has seen an 8% rise in specialty drug prescriptions and a 13% gain in sales related to those scripts.

"Specialty scripts are the fastest-growing segment within the pharmacy industry, with specialty drug spend anticipated to increase by almost 20% in both 2014 and 2015," Efird said. "Specialty scripts are projected to quadruple and exceed $400 billion by 2020."