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Why Did Fred's, Inc. Stock Gain 12% in April?

By Daniel B. Kline – May 4, 2017 at 4:39PM

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The chain has moved closer to making a major purchase that will transform it.

The drugstore chain Fred's (FRED) reported lower sales and a bigger loss in Q4, but optimism over its potential deal to buy up to 1,200 Rite Aid (RAD 2.84%) stores has left investors confident in its future.

FRED Chart

Image source: YCharts.

What happened

The chain lost approximately $22.5 million or $0.60 per share in Q4, an increase from a loss of $3.9 million or $0.11 per share during the same quarter in 2015, the increase was due to over $23 million in one-time charges the company recorded, about half of which related to the pending Rite Aid deal.

It was not a great quarter by any measure, as net sales decreased 4.5% to $529.7 million from $554.6 million in Q4 2015. Still, the overall optimism surrounding the company was enough to drive its share price higher (though as you can see on the chart above, it was not a steady rise). After closing March at $13.10 shares finished out April at $14.72, a 12% increase, according to data provided by S&P Global Market Intelligence.

A pharmacist hands an order to a customer.

Fred's has been looking to expand its pharmacy business. Image source: Getty Images.

So what

Like many retailers Fred's had a difficult fourth-quarter. Comparable store sales have been moving in the wrong direction, dropping by 3.6% in Q4. Investors are forgiving that because the chain has been working to refocus itself on health and buying 1,200 Rite Aid locations will massively change the company. Fred's laid out what it expects to gain from the deal in its earnings release

The proposed acquisition of the stores, which are based in highly attractive markets, is a transformative event that will add substantial scale to the company and transform Fred's Pharmacy, the largest regional pharmacy player, into an even stronger competitor and the third-largest drugstore chain in the nation. The transaction will accelerate the company's healthcare growth strategy, generating considerable benefits for our customers, patients, payors, supplier partners, team members and shareholders.

The problem, and it's a significant one is that the deal to buy those stores is contingent upon Walgreens receiving federal regulatory approval to buy Rite Aid. That should happen, but there are no guarantees.

Now what

Fred's plays the waiting game. Major acquisitions that shrink the number of choices for consumers move slowly even with the current business-friendly government. In this case, it comes down to whether the Federal Trade Commission (FTC) thinks that Fred's buying 1,200 Rite Aid locations creates enough of a major player to allow the Walgreens purchase to go through.

Daniel Kline has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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