Quarterly results at Fred's (Nasdaq: FRED) mirrored much of its merchandise: discounted. Yet after the earnings report yesterday, the discount retailer's shares closed 2.2% higher. What's up with that?
Well, the gross margin did expand by 30 basis points to 28.6%, and the company announced a share-buyback program. More on that in a moment. Meanwhile, though, sales increased just 4%, largely as a result of new stores, and same-store sales rose just 0.8%. Adding to the tepid numbers, sales, general, and administrative expenses also increased.
Now, fellow Fools, follow me on this: Lower-than-expected sales and higher expenses add up to disappointing earnings. Sure enough, the company earned just $0.08 a share, down from $0.11 a year earlier. Even adding back the extra $0.01 from a higher-than-expected tax rate, earnings still declined.
The gross-margin expansion was caused by a shift toward generic drugs in its pharmacies. But that shift obviously didn't translate into bottom-line earnings, thanks to those aforementioned higher expenses: The operating margin fell 18 basis points to 1.34%.
As I mentioned, the board has authorized the repurchase of up to 4 million shares. This isn't chump change -- it represents 10% of the outstanding shares. While investors seemed to cheer this move, I wonder whether that money would be better spent on improving merchandise and getting more people into the stores. I'm all for buybacks if there's extra cash lying around, but not when a company is struggling.
In all fairness, the company did say that part of its cost increases were designed to raise future sales. It also claimed that its new product categories were doing better than the ones it was exiting. Time will tell whether it's working. It doesn't always. Pier 1 Imports (NYSE: PIR) went through an expensive revamping of its merchandise, with very little to show for it after a couple of years.
I realize the consumer may be hurting, but other discounters such as Dollar Tree (Nasdaq: DLTR) and Big Lots (NYSE: BIG) just reported solid quarterly results. I'd leave these shares to the side for now.
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Dollar Tree is a former Inside Value pick.
Fool contributor Larry Rothman is happy to receive feedback, and he promises to read it when he's not being wrestled by his three children. Feel free to email him at rothmanviews@comcast.net. He doesn't have any positions in the companies mentioned.
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