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MEMPHIS, Tenn. — Fred’s Inc. will accelerate its pharmacy acquisitions as the discount retailer shifts to a “convenience and pharmacy-centric model.”
The company said it will close 60 of its stores without pharmacies by year’s end to help pay for the transition.
Fred’s announced the closures August 28 following release of second quarter financial results. The retailer posted a loss of $16.4 million, or 19 cents a share, and said margins were squeezed by “rapid and pronounced” cost increases for generic and branded pharmaceuticals as well as ongoing turmoil in pharmacy distribution channels.
“As a result of our research, we believe that over the course of the next three to five years retailers that meet the need for convenience-driven trips will be more insulated from the Internet migration, and allow Fred’s to increase market share,” Michael Hayes, the company’s chairman, told Wall Street analysts during a conference to discuss second quarter earnings.
Sales rose 2% in the three months through August 2 to $491 million. Sales at stores open at least a year declined 0.1% in the quarter, compared to a 2.2% gain a year earlier.
Comparable-store traffic declined 2.5% from a year earlier while average customer ticket increased 2.5% to $21.14, the company said.
Pharmaceuticals were a bright spot in the period, representing 40.4% of sales, up from 36.4% a year earlier. With the increased emphasis on pharmacies, that proportion should increase to between 65% and 70%, said Bruce Efird, Fred’s chief executive officer.
Additionally, the pharmacy department recently signed a new prime vendor agreement with Cardinal Health Inc. that’s expected to improve margins, he said.
Household goods accounted for 21.9% of sales in the second quarter, down from 22.6% a year earlier, while health and beauty accounted for 6.6% of sales, down 0.4%. Food and tobacco sales were down 0.9% from a year ago to 16.9% of sales.
Fred’s ended the quarter with 704 stores, most of which operate in small and mid-size communities in the Southeast. The company now plans to shutter 70 stores in 2014 as well as 10 pharmacies.
Fred’s expects to open between eight and 12 stores in 2014 and between 38 and 46 pharmacies.
“Our primary focus over the next 12 months will be transitioning Fred’s to a convenience and pharmacy-centric model, driven by data-based inventory management and measured by gross margin return on investment,” Efird said.
