Deep discounter Fred's
But that wasn't enough to offset the charges the company took as it eliminated clothing departments for boys and girls and planned to close down 23 stores and pharmacies. It did see a 2% increase in same-store sales, an important retail metric that has dogged Fred's since the hurricane season of 2005.
Back then, the deep-discount retailer -- based primarily in the Southeast -- witnessed a huge influx of sales in the wake of the devastating storms that passed through the area. People needed to restore their homes and their lives, and with the assistance of federal tax dollars pouring into those states, Fred's benefited from that largesse.
However, that made most of 2006 look sorry by comparison, and Fred's found itself unable to predict how sales would grow. Analysts apparently had some trouble predicting results as well; sales exceeded forecasts, although profits fell short. Adjusted for the department and store closures, earnings would have beat analyst predictions.
Regardless of what the analysts say, the discounter's results seem to suggest that the company may have regained some traction. Sales rose respectably, even without the extra week, and the company was able to increase its comps. Management continues to refresh its stores to lure back customers who have seemingly fled en masse to competing dollar stores like Dollar General
Since those companies aren't as geographically concentrated as Fred's, they're hurt less by any one region's woes. That's why Big Lots
Fred's is still early in its turnaround game. It was able regain control over administrative expenses and inventory in the quarter, but its operating income suffered from the restructuring charges and stock-option expenses. Its comps are expected to grow 2% to 4% in the coming year, with sales growth approaching 11% in the first quarter, and 8% over the course of the year.
There's definitely still money to be found in the deep-discount sector, as Dollar General's pending acquisition would suggest. Kohlberg Kravis & Roberts is buying the dollar store at about 11 times EBITDA (earnings before interest, taxes, depreciation & amortization); Fred's currently sells for around 10 times that multiple, with the latest results built in. Dollar Tree and Family Dollar, however, sell for only around eight times EBITDA, in line with the industry's currently average valuation. KKR's purchase price seems a tad generous, then, but Fred's is also a little pricey, too, considering its performance.
Even with lowered expectations priced into Fred's stock, I'd say it's still too expensive at these levels. To get in line with industry norms, Fred's may still have to shed another 20% from its price.
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Family Dollar is a Motley Fool Stock Advisor selection.