Fred’s Pharmacy last week said it is actively pursuing a sale of its specialty pharmacy business and portions of its real estate portfolio, along with various options for the retail pharmacy portfolio. The drugstore retailer is tightening its belt and adjusting its approach in the aftermath of the failed merger of Walgreens and Rite Aid, which would have entailed Fred’s taking on 865 stores across the eastern and western U.S. for $950 million in cash.
The announcement came as the company reported fourth quarter net sales rose 2.1% to $477.3 million year over year, which included an extra week of sales compared to 2016. Same-store sales in the quarter fell 0.9% compared to a 4.8% decline in the year-ago period, according to a company press release. Gross margin in the quarter was down 280 basis points to 24.1%, and the drugstore retailer’s net loss was $22.6 million, compared to a loss of $21.7 million a year ago.
For the year, net sales fell 4.3% to $1.81 billion, which included an extra week compared to the 52 weeks of fiscal 2016. Same-store sales for the year fell 2.5% compared to 2.4% a year ago, as gross margin fell 90 basis points to 25.4%. The company’s fiscal year net loss was $139.3 million in 2017, compared to a loss of $68.1 million in 2016.
A year ago, Fred's was looking at a major expansion — the Walgreens/Rite Aid deal would have positioned it as the third-largest drugstore chain in the U.S. — but now it's undertaking quite a different project, including ditching the pharmacy business.
It's not just a pivot after that failed merger, however, but also a correction to issues that have been problematic for a while. "I have been in situations like this before where the results have been disappointing for too long and a significant reset is needed to get the business back on track," newly arrived CEO Joseph Anto told analysts on Friday, according to a transcript from Seeking Alpha. "That is exactly where we are today here at Fred's. Let me be clear, we are entirely dissatisfied with the results of the company over the last two years."
The sale of real estate and other assets will go to shrinking the company's debt, amid belt tightening that has already begun, he also said, telling analysts that he personally approves every invoice over $5,000 and has learned a lot from that. Fred's runs some 600 stores, mostly in the South and Midwest.
"Our operational turnaround is well underway and we have made significant progress on the expense side of the business with more to come," he said. "We have executed on $30 million to $40 million of expense reduction opportunities for the fiscal year 2018. ... We are going to continue to be maniacal about reducing expenses and capital expenditures in every part of our business, which we expect will help us achieve significant positive [earnings before interest, tax, depreciation and amortization] and free cash flow on a run rate basis by Q4 of 2018."
Taking on all those Rite Aid stores, (a move designed to assuage antitrust regulators to smooth approval of the merger, though regulators ultimately were not to be assuaged) would have been a stretch for Fred's and some analysts were skeptical from the get-go. Now it's left with the tab, but Anto said that the company is finally putting the related professional, legal and banking fees associated with the deal behind it.
Along with expense improvements already evident in the quarter, the company is revamping assortment to nurture a treasure hunt atmosphere. That includes bringing in more beer and wine sales and clearing out stale inventory, a process that Anto said is in the short term is "one of the biggest drags on gross margin."
In its place, Fred's is working on boosting private label brand penetration from its current 12% to over 40% over the next two years, which he said will drive both sales and gross margin. Fred's will become "a much bigger player in closeouts," he said.