Those whose greenbacks feature George and Abe rather than Andrew and Ulysses may very well shop at Fred's. Generally serving customers with modest or fixed incomes, Fred's operates more than 700 discount stores in some 15 states, primarily in small- to medium-sized towns in the Southeast. The stores carry more than 12,000 brand-name, off-brand, and private-label products, including pharmaceuticals, household goods, clothing and linens, food and tobacco items, health and beauty aids, and paper and cleaning supplies. About half of its stores have full-service pharmacies. The company also provides goods and services to some 20 franchised Fred's stores. Founded in 1947, Fred's is exploring strategic alternatives.
Memphis-based Fred's operates discount general merchandise stores in 15 states, primarily located in the Southeast. More than a third of the stores are in Mississippi and Georgia. The retailer has distribution centers in Memphis, Tennessee, and Dublin, Georgia.
In addition to its main chain, Fred’s opened a specialty pharmacy facility, EIRIS Health Services in 2013. It also operates two smaller retail chains: Getwell Drug & Dollar, with 5 locations across Alabama, Tennessee, Georgia and Mississippi; and Yazoo Trading Co., a new store concept with five locations in Alabama that sell hardware, auto, and pet and animal supplies.
Sales and Marketing
Advertising and promotion costs have averaged about 1% of net sales over the past four years. Fred's relies on direct mail, newspaper ads, email, and social media to get its value message out.
Fred's stores rang up $1.94 billion in sales in fiscal 2014 (ended January), a decline of 1% versus the prior year. Net income fell 12% over the same period to $26 million. The company blamed a disappointing Black Friday and holiday season for the 3% decline in general merchandise sales, including health and beauty aids, cleaning supplies, home furnishings, and electronics, partially offset by increased sales of tobacco, hardware, and beverages. (The retailer's franchised stores performed even worse, posting a 6% decline in year-over-year sales.) The decline in fiscal 2014 sales reversed three consecutive years of growth.
To reverse the slide in sales and profits and regain momentum, Fred's has launched a three-year configuration plan aimed at achieving its goal of a 4% operating margin by aggressively adding pharmacy departments and improving the stores' general merchandise space efficiency and productivity. Fred's stores with pharmacy departments have an operating margin of 4.5% to 5% (above the 4% goal), while the chain's overall operating margin is less than 3%. To support rapid growth of its pharmacy operation, in August 2014 Fred's signed a multi-year agreement with Cardinal Health to be its new supplier of branded and generic drugs to all of Fred's 360-plus in-store pharmacies and EIRIS Health Services. The new supply agreement unseated drug wholesaler AmerisourceBergen, which had provided substantially all of the chain's prescription drugs.
In January 2014 the company announced that it's reviewing strategic alternatives, including a merger or sale of the company, and in October named a new CEO following the resignation of its former chief. In August 2014, Fred's closed 60 stores that did not have pharmacies as it puts more of an emphasis on its higher-margin pharmacy offerings. The company is looking to pharmacy acquisitions to reach its goal ot 65% to 70% of its stores having pharmacies (up from about 50% at present).
Historically, Fred's has looked to combine the appeal of a dollar store, drugstore, and mass merchant, all under one relatively-small roof. (Its full-size stores average about 15,000 square feet.) However, amid intense competition in its core general merchandise category, the company is deemphasizing the mass merchant part of the equation and upping its exposure to pharmacy. To differentiate itself from other small-box discount retailers, including its fast-growing dollar store competition, Fred's looks to five merchandise categories: home, celebration, pet, pharmacy, and paper and chemical. Key among them is pharmacy, a proven driver of customer trips and loyalty for Fred's. Indeed, pharmacy sales accounted for 38% of the chain's total sales in fiscal 2014 (ended January). Pharmacy department sales (up 3% in fiscal 2014) have outperformed overall sales growth in recent years. To grow its pharmacy business, Fred's has been acquiring independent pharmacies and prescription files in markets where it already does business. (It also followed Wal-Mart's lead by lowering prices on generic drugs to $4 a prescription.)
Heartland Advisors and Wellington Management Co. each own about 12% of the company's shares.