Fred's to close another 104 stores

UPDATE: May 16, 2019: Fred's Inc. plans to close an additional 104 stores by the end of June. The decision was made amid ongoing review of the drug store retailer's store portfolio and on top of the nearly 160 closures it announced in April, according to a Thursday securities filing. The new closures were announced in tandem with a forbearance agreement Fred's entered into with a group of lenders.

Fred's CEO Joseph Anto described the additional closures in a press release as a "necessary step in the continued restructuring of Fred's." The retailer has hired Malfitano Advisors and SB360 Capital Partners to help liquidate the stores.

Dive Brief:

Fred's Inc. on Thursday announced it has retained PJ Solomon "to evaluate strategic alternatives to maximize value for all shareholders." The discount retailer also said that it will shutter underperforming and unprofitable stores and has commenced liquidation sales at 159 stores slated for closure by the end of May, following "a comprehensive evaluation of the Company's store portfolio, which examined historical and recent store performance and the timing of lease expirations, among other factors," according to an April 11 filing with the Securities and Exchange Commission. Fred's board approved the closure plan April 5, according to the SEC filing.
Meanwhile, SB360 Capital Partners, on Thursday announced that Fred's Inc. hired the asset disposition firm "as the exclusive consultant to conduct 'Store Closing' Sales and other clearance events." Store closing sales conducted by SB360 in the 159 Fred's stores in 13 states slated for closures as well as "Total Inventory Blowout" Sales in 360 Fred's stores began Thursday, according to an SB360 press release. Fred's in its own press release Thursday said it's also hired Malfitano Advisors to manage the process.
In March, Fred's board approved bonus payments of cash and restricted stock awards to seven senior executives and other employees, according to another SEC filing. Among them, CEO Joseph Anto will receive a cash incentive equal to $190,000 and 124,579 shares of restricted stock, and CFO Ritwik Chatterjee was awarded a payment equal to $120,000 and 52,189 shares of restricted stock, according to the filing.

Dive Insight:

While earlier reports indicated that Fred's would keep most or even all of its stores open, that is clearly not the plan.

"After a careful review, we have made the decision to rationalize our footprint by closing underperforming stores, with a particular focus on locations with shorter duration leases," Anto said in a statement. "Most of these stores have near-term lease expirations and limited remaining lease obligations. Decisions that impact our associates in this way are difficult, but the steps we are announcing are necessary. We will make every effort to transition impacted associates to other stores where possible."

The discounter had already downsized its operations last year after failing to make good on its hopes for a significant expansion as a participant in the eventually defunct Walgreens-Rite Aid merger plan. In a play that some observers said would be out of its financial reach, Fred's had agreed to take on 865 Rite Aid stores for $950 million in cash. That maneuver was designed to assuage antitrust regulators, who ultimately found the tie-up to be anti-competitive, and would have added enough stores to Fred's then-600 store count to become the country's third-largest drugstore retailer. Instead, Fred's unloaded many of its pharmacy operations, last year selling off 185 drugstores, pharmacy patient prescription files and pharmacy inventory to Walgreens.

Now the company's focus is on cost cuts and downsizing. Net sales in its most recent quarter fell 5.5% to $306.4 million as comparable store sales fell, but the retailer narrowed its loss to about $30.8 million from $50.4 million in the previous year's quarter.

Fred's continues to host pharmacies in some stores under the Walgreens banner. That move has a precedent: Target in 2016 sold off its pharmacy operations to CVS Health, which now runs those operations within Target stores.

The Fred's closures add to the year's store shutter count, which have already overtaken all of 2018, according to the most recent tracking from Coresight Research, which was emailed to Retail Dive. "So far this year, U.S. retailers have announced 5,994 store closures and 2,641 store openings," according to Coresight. "This compares to 5,864 closures and 3,239 openings for the full year 2018."