The harsh retail environment that began last year took a toll on discount retailer Fred's (NASDAQ:FRED). So much so, in fact, that the company undertook a series of initiatives to freshen up stores, close down underperforming ones, and even consider selling itself to the highest bidder.

The process has been slow, even painful. Until this week, shares had lost nearly 25% of their value since last year. But despite tough times, Fred's reported gains this quarter that have the retailer -- as well as investors -- looking up.

Total sales rose 5% to $464.3 million along with a 2.1% rise in comps. Profits of $7.3 million came in slightly below last year's numbers, but it was still at the high end of guidance management had given last quarter, and it beat analyst forecasts by $0.02 per share.

A higher tax rate played a role in delivering a weaker bottom line, as job tax credits from devastating hurricanes a few years ago ran out. Those credits may have positively affected the store's performance in the past, but it seems the changes the company is undertaking are picking up the slack, even though it's now back to paying full freight.

Yet as decent as the results have been in the discount-store space from competitors such as Big Lots (NYSE:BIG) and Dollar Tree (NASDAQ:DLTR), there still seems to be too much of a premium on Fred's stock price to justify it's current level, even if it is still below its 52-week high.

On a relative basis, Fred's trades at twice the valuation of Big Lots on a trailing earnings basis, two and a half times that of Dollar Tree, and almost three times that of Target (NYSE:TGT). Even if we look to the future, Fred's growth prospects aren't such that it should carry the top premium in the sector.

Company

Trailing P/E

Forward P/E

PEG

Fred's

45.0

17.9

1.38

Target

16.1

15.3

1.05

Dollar Tree

17.7

15.6

1.15

Family Dollar (NYSE:FDO)

14.4

14.1

1.23

99 Cents Only (NYSE:NDN)

91.9

75.2

1.88

Big Lots

19.9

17.1

1.11

Source: Yahoo! Finance and Capital IQ, a division of Standard & Poor's.

The stock got a bit of a boost when the company came clean about the bids to buy it, but with many options still on the table, there doesn't seem to be any reason to think that Fred's price is a discount.

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