Deep-discount chain Fred's (NASDAQ:FRED) will report first-quarter 2007 financial results on Thursday, May 31. Here's a look at whether "deep-discount" means "deep-fried."

What analysts say:

  • Buy, sell, or waffle? Of the 13 analysts who cover Fred's, 10 of them take a wait-and-see posture with a hold rating, while the other three think the discounter could be a finger-lickin' good buy.
  • Revenue. Revenue is expected to grow 8% to $449.2 million, though analysts haven't had much success anticipating sales.
  • Earnings. Profits, meanwhile, are expected to rise a penny per share, to $0.19 a stub.

What management says:
The 2006 story of Fred's was one of missteps, missed sales, and misery. It wasn't able to hit sales targets, it misjudged how it would perform following the influx of federal grant money into the hurricane-wracked Southeast, and its stock price fell more than 30% over the course of the year.

This year started off much better. Fiscal-year fourth-quarter sales were better than expected, and it had a pretty good string of same-store sales results though April. As with many retailers, April's comparisons were difficult because Easter came in one week earlier. CEO Michael Hayes said, "The combination of the unusually cold weather, the Easter shift, and a rapid rise in gas prices exacerbated our results, with the slowdown affecting mainly our apparel, domestics and lawn and garden categories." Sales will actually be below analyst expectations at $442 million.

What management does:
While April comps were off, quarterly comps came in 1.9% higher, which was better than some competitors like Family Dollar (NYSE:FDO). 99 Cents Only (NYSE:NDN) also posted a 1.9% increase, while Dollar Tree (NASDAQ:DLTR) and Dollar General (NYSE:DG) both experienced a 5% or greater increase in their comps. Expect to see a number of charges this quarter as the deep discounter continues to consolidate its operations.

Margins

01/06

04/06

07/06

10/06

02/07

Gross

28.2%

28.3%

28.3%

28.4%

28.1%

Operating

2.5%

2.5%

2.6%

2.5%

2.6%

Net

1.6%

1.6%

1.7%

1.6%

1.5%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Fred's stock has recovered from the doldrums of last year, rising more than 20% since the low point. While the stock continues to rise as it has received analyst upgrades, it is trading at levels in excess of industry norms without the performance yet to back it. The story is good, but the price seems high -- closer to the rich values Kohlberg Kravis & Roberts is paying for the Dollar General buyout.

Related Foolishness:

Fred's has earned a two-star rating from Motley Fool CAPS, the new investor-intelligence community. You can add your voice to the new stock rating service by joining today. It's free!

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. Family Dollar is a Motley Fool Stock Advisor selection. Dollar Tree is an Inside Value pick. The Motley Fool has a disclosure policy.